Joint ventures created between a small business protégé and a large mentor are without a doubt a very alluring and popular aspect of the SBA’s Mentor-Protégé Program. It provides an incentive to potential mentors to share their connections, resources, experience, and industry knowledge with small businesses, many of whom are not only small, but participants in one of the various SBA programs such as the 8(a) Program and Woman-Owned Small Business Program, to name a couple. But, as appealing as mentor protégé joint ventures are, a recent decision demonstrates (yet again) there are a number of joint venture requirements that must be met if you want to experience their benefits. And failure to do so can result in some undesirable consequences.
Multimedia Environmental Compliance Group, JV, SBA No. SIZ-6354 (May 12, 2025) considered a size determination in which the joint venture agreement (JVA) was found deficient because the non-managing venturer had negative control over actions that were considered day-to-day contract administration, which is improper under 13 C.F.R. § 125.8(b)(2)(ii). That regulation states that a small business joint venture agreement must have a provision:
Designating a small business as the managing venturer . . .and designating a named employee of the small business managing venturer as the manager with ultimate responsibility for performance of the contract (the “Responsible Manager”).
(A) The managing venturer is responsible for controlling the day-to-day management and administration of the contractual performance of the joint venture, but other partners to the joint venture may participate in all corporate governance activities and decisions of the joint venture as is commercially customary. The joint venture agreement may not give to a non-managing venturer negative control over activities of the joint venture, unless those provisions would otherwise be commercially customary for a joint venture agreement for a government contract outside of SBA’s programs. A non-managing venturer’s approval may be required in, among other things, determining what contract opportunities the joint venture should seek and initiating litigation on behalf of the joint venture.
Also relevant here, SBA’s small business joint venture rules require a provision “[o]bligating all parties to the joint venture to ensure performance of a contract set aside or reserved for small business and to complete performance despite the withdrawal of any member” per 13 C.F.R. § 125.8(b)(2)(viii).
Background
There is a lot of background information included in this decision, so I will try to keep this information short and sweet. Multimedia Environmental Compliance Group, JV (the MECG JV) is a joint venture between Nicklaus Engineering, Inc. (NEI or protégé) and Wood Environment and Infrastructure Solutions, Inc. (WEIS). Additionally, NEI and WEIS were participants in the SBA’s Mentor-Protégé Program, with NEI being the small business protégé and WEIS as the large mentor. In addition to the MECG JV, NEI, the protégé, had many other joint ventures.
The MECG JVA
As relevant here, the JVA stated: “[e]ach RFP and proposal will be reviewed by the Responsible Manager, an NEI employee, and the Program Manager, a WEIS employee.” NEI’s President was identified as the Responsible Manager. The Program Manager remained unnamed. The Responsible Manager and Program Manager were tasked with the “ultimate responsibility for contract performance and will supervise the Task Order Managers who will report to her” and would “administer the ordinary day-to-day business of the Joint Venture.” The Responsible Manager and Program Manager would “jointly lead contract negotiations.” Additionally, NEI was appointed as the Managing Party, which was “responsible for conducting the Joint Venture’s business affairs.”
The JVA also created an Executive Committee for “certain designated matters,” which would have one member from each venturer, each with an equal vote, and all decisions must be unanimous. The Executive Committee was responsible for the following actions, including:
(i) To make decisions on general policy matters related to the Joint Venture which are not specifically delegated to the Managing Party or the Responsible Manager or the Program Manager, as defined in Subsection 6, hereof;
(ii) To approve any extraordinary extension to the Scope of Services;
(iii) To receive and review reports on the progress of the Services. The Responsible Manager and/or Program Manager shall meet with the Executive Committee when requested by said Committee;
(iv) To approve all expenditures of the Joint Venture not billable to NAVFAC;
(v) To provide other services as set forth elsewhere in this Agreement;
(vii) To issue any public release or advertisement regarding this Agreement or the Contract such approved public release or advertisement shall mention both Parties; and
Further, the JVA stated that if either party defaults its obligations under the contract, the remaining party may, if it elects to, complete performance of the contract.
OHA Opinion
The Area Office determined that MECG’s JVA met the requirements of 13 C.F.R. § 125.8(b) and (c). Following the size determination, Acacia7, the protester turned appellant, appealed the Area Office’s decision at the SBA’s Office of Hearings and Appeals. The appeal argued that the MECG JVA did not meet the joint venture regulatory requirements in 13 C.F.R. §125.8(b) because the non-managing venturer/mentor was a part of the Executive Committee. And not just any part of the Executive Committee. Acacia7 pointed to 13 C.F.R. § 125.8(b)(2)(ii), stating that the JVA failed to designate the small business as the managing venturer responsible for controlling the day-to-day management and administration because WEIS’s position in the Executive Committee granted it negative control of the joint venture. Finally, Acacia7 asserted that the JVA did not obligate parties to ensure performance if a contract set aside for small businesses despite the withdrawal of a member of the joint venture as required by 13 C.F.R. § 125.8(b)(2)(viii).
Analysis
OHA found that MECG’s JVA complied with 13 C.F.R. § 125.8(b)(2) in all aspects but two. First, OHA held that the Area Office erred when finding that the JVA complied with 13 C.F.R. §125.8(b)(2)(viii), which requires the parties to a joint venture to ensure performance despite the withdrawal of any member. MECG’s JVA gave the non-defaulting party the right to elect to complete the contract, not an obligation to do so, which is required per 13 C.F.R. § 125.8(b)(2)(viii).
OHA also held that the JVA failed to comply with 13 C.F.R. § 125.8(b)(2)(ii). This requires a JVA to appoint a Managing Venturer and a Responsible Manager who have control of the “day-to-day management and administration of the contractual performance of the joint venture.” Although the JVA did appoint a Managing Venturer and a Responsible Manager, the Executive Committee outlined in the JVA had one representative from both NEI and WEIS, each with an equal vote. Additionally, the Program Manager, a WEIS employee, was given negative control over many of the duties that are generally considered day-to-day management and contract administration, of which the Managing Venturer and Responsible Manager should retain control of. Thus, the JVA failed to comply with the requirements at 13 C.F.R. § 125.8(b)(2)(ii) because the Managing Venturer was required to share authority with the non-Managing Venturer, usurping its control.
The Lesson
So, what can a non-Managing Venturer have negative control over? Commercially customary actions , which the SBA also confusingly calls extraordinary actions. This decision specifies that the following actions all constitute extraordinary actions that may require the minority shareholder’s input, but do not create negative control:
- Participate in corporate governance as is commercially customary;
- Have negative control over certain decisions if those would be commercially customary for a joint venture agreement for a government contract outside of SBA’s programs;
- Institute litigation;
- Require approval of which contract opportunities the joint venture should pursue;
- Have the ability to block certain extraordinary actions via supermajority provisions if those supermajority provisions are crafted to protect the investment of the minority shareholders and do not to impede the majority’s ability to control the concern’s operations or to conduct the concern’s business as it chooses;
- Dissolve the concern;
- Approve the addition of any new members or the withdrawal of any old members;
- To increase or decrease the size of the Board;
- To increase or decrease the number of authorized interests;
- To reclassify interests;
- Sell or otherwise dispose of the firm’s assets;
- Admit new members;
- Amend the JVA in any manner that materially alters the rights of existing members;
- File for bankruptcy.
OHA found that actions outside of those listed above fail to comply with the SBA’s joint venture regulations and interfere with the small business’s ability to control the contract administration and day-to-day management of the joint venture.
Conclusion
The case discussed here is one of vital importance. The SBA’s joint venture regulations contain what can be confusing requirements related to control by the small business or managing venturer. Failure to follow those provisions can result in a a noncompliant joint venture and loss of award. And recent regulatory updates and administrative decisions make it a subject matter that is still evolving, emphasizing the importance of staying up to date.
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