Under the SBA affiliation rules, the SBA will apply the so-called “present effect rule” when it examines an agreement for a merger or acquisition, including an agreement in principle.  Under the present effect rule, such an agreement is presently effective with respect to the question of control–which can present a big problem under the SBA affiliation rules.

For example, if Company A has agreed to purchase Company B, the SBA deems Company A to control Company B from the moment the agreement is reached, even if the deal does not close until months later.  This makes Companies A and B affiliates from the date their agreement is reached for purposes of the SBA affiliation rules.

The present effect rule makes sense, but when does an “agreement” arise for purposes of the  rule?  The SBA Office of Hearings and Appeals examined this issue in Size Appeal of Nuclear Fuel Services, Inc., SBA No. SIZ-5324 (2012).   If you are in discussions or negotiations for a merger or acquisition, and are worried about potential affiliation, SBA OHA’s decision will leave you breathing a sigh of relief.

In the Nuclear Fuel Services SBA size appeal, the small business awardee, Nuclear Fuel Services, Inc., signed an agreement to be acquired by Babcock & Wilcox, Inc. just three weeks after it submitted its size certification.  Although size is determined as of the date of the size certification, the SBA Area Office wasn’t buying it.  It held that NFS and B&W had been engaged in negotiations for months before the self-certification and had reached an agreement in principle to merge before it actually signed the agreement.  The SBA Area Office found NFS affiliated with B&W, and ineligible for the procurement.

SBA OHA reversed the size determination.  It held that “it is improper to assume that, merely because a deal is complex or time-consuming, an agreement in principle must have been reached at an earlier point in the process.”  SBA OHA found that despite the months of discussions and negotiations, nothing in the record indicated that the parties had actually reached a deal before they signed on the dotted line, three weeks after NFS submitted its proposal.  SBA OHA held that NFS was not affiliated with B&W as of its self-certification date, making it eligible for award.

Looking at the black letter of the law, it seems SBA OHA got it right.  After all, size is determined as of a specific date (the self-certification) and NFS, apparently, had not yet committed to the acquisition on that date.  The rules are the rules, right?  And SBA OHA’s job is to enforce them.

Still, it’s hard not to sympathize with the SBA Area Office’s size determination.  When it submitted its proposal, NFS was likely all-but-certain to be acquired, in the very near future, by a company it had been negotiating with for months.  And in fact, a deal was struck just three weeks later—rendering the combined B&W/NFS entity “other than small” very, very soon after it had self-certified as small.  From a regulatory perspective, everything NFS did appears to be perfectly fine, but the result still leaves me feeling a little uneasy.

My stomach issues aside, the SBA OHA decision does give some welcome clarity to the present effect rule.  If you are in negotiations, you can feel more comfortable conducting them without fear of the SBA affiliation rules, at least until you sign on the dotted line.