Individuals who had common investments in eight different companies were treated as a single person for purposes of the SBA’s affiliation rules–and the aggregation of those owners’ interests cost one company a small business set-aside award.
In a recent decision, the SBA Office of Hearings and Appeals explained how the little-understood common investments affiliation rule works, and in so doing, provided an important warning to business owners who may not realize that affiliation can result from common investments in multiple entities.
OHA’s decision in Size Appeal of Tenax Aerospace, LLC, SBA No. SIZ-5701 (2015) involved a FBI solicitation for the lease of a Gulfstream 550 aircraft. The Contracting Officer set the procurement aside for small businesses under NAICS code 532411 (Commercial Air, Rail, and Water Transportation Equipment Rental and Leasing), with a corresponding $32.5 million size standard.
After evaluating competitive proposals, the FBI awarded the contract to Tenax Aerospace, LLC. Flight Support, Inc., an unsuccessful competitor, then filed a small business size protest. FSI alleged that Tenax was affiliated with numerous other entities, and therefore was not an eligible small business.
The SBA Area Office determined that Tenax was majority-owned by a holding company, which was in turn majority-owned by a single individual. (In OHA’s size determination, this individual’s name is redacted; he is referred to throughout as “Investor 1.”) The SBA Area Office then found that Investor 1 invested in eight other companies with his brother-in-law, “Investor 4.”
Two of those eight companies were Tenax-Heritage, LLC (“Heritage”) and The Vineyards of Brandon, LLC (“Vineyards”). Although Investor 1 and Investor 4 apparently each owned less than 50% of Heritage and Vineyards, the SBA Area Office aggregated their ownership interests under the SBA’s common investments rule, which provides that “individuals or firms with common investments . . . may be treated as one party with their interests aggregated.” Once the interests were aggregated, the combined interests of Investor 1 and Investor 4 in Heritage and Vineyards exceeded 50%.
For this reason, the SBA Area Office held, Investor 1 “controlled” Heritage and Vineyards within the meaning of the SBA’s affiliation rules; he also controlled Tenax by virtue of his majority ownership in that firm. Because Investor 1 controlled all three companies, the SBA Area Office found Tenax to be affiliated with Heritage and Vineyards. These affiliations (plus others not addressed in this post) caused Tenax to exceed the $32.5 million size standard; the SBA Area Office declared Tenax to be ineligible for the FBI contract.
Tenax filed a size appeal with OHA. Tenax argued, in part, that it should not have been found affiliated with Heritage and Vineyards under the common investments affiliation rule.
OHA explained that “[w]here an identity of interest finding is based on common investments, the presumption is that the investors have a common purpose such that their investments should be aggregated.” However, “based on OHA precedent . . . the common investments of the persons must be substantial, either in number of individual investments, or in total value, in order to find an identity of interest between the investors.” OHA concluded that, because Investors 1 and 4 shared common investments in eight firms, “the Area Office did not err in determining that these ownership interests are sufficiently numerous, such that [Investors 1 and 4] share an identity of interest.”
OHA then addressed Tenax’s contention that there was no affiliation because “it does not share officers, employees, facilities, or equipment with Vineyards and Heritage, does not subcontract or receive financial assistance from them, and is in a separate line of business.” OHA wrote that “[w]here an identity of interest finding is based on common investments, the presumption is that the investors have a common purpose such that their investments should be aggregated.” When determining whether a common purpose exists, “it is not relevant whether the firms they invest in are in fact separate, because investors can share a common purpose even though their investments do not have substantial ties.” OHA continued, “[Tenax] does not argue that [Investors 1 and 4] do not share a common purpose or do not invest together in eight firms. They have thus failed to rebut the presumption that, as common investors, there is an identity of interest between them.”
OHA denied Tenax’s size appeal, and upheld the SBA Area Office’s size determination.
Some of the SBA’s affiliation rules are intuitive. For example, most contractors inherently understand that, if a single individual owns 100% of two companies, those companies are affiliated. But common investments affiliation is not necessarily intuitive, and can trip up even savvy contractors. The Tenax Aerospace size determination offers an important primer on what the common investments affiliation rule is and how it works–and an opportunity for those who might be at risk to take action before a size protest comes along.
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