SBA Affiliation Rules and the Present Effect Rule: When Does an Agreement Arise?

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.

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