Tag Archives: SBA size appeals

SBA Affiliation Rules and Control: The Minority Owner Trap

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Does a person who owns a minority share of a company “control” the company under the SBA affiliation rules?  Yes, if the company has no majority owner and the minority share owned by the individual in question is the largest, or is similar in size to, the largest other minority shares.

Get all that?  An example may help.  The decision of the SBA Office of Hearings and Appeals in Size Appeal of Advent Environmental, Inc., SBA No. SIZ-5325 (2012), demonstrates how this rule can be a trap for the unwary.

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

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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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SBA Size Protests and the Ostensible Subcontractor Rule: The Task Order Loophole

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The tax code is famous (or infamous) for perceived loopholes, but the IRS isn’t the only regulatory agency with a loophole in its regulations.   The SBA’s affiliation rules contain—or at least used to contain (more on that later)—a gaping loophole when it comes to Multiple Award Task Order Contracts, or MATOCs, and the ostensible subcontractor rule.

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SBA OHA: Inter-Affiliate Transactions Exception Does Not Apply to a Division

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SBA Office of Hearings and Appeals cases frequently involve contractors trying to argue that they are not affiliated with other entities.  But in Size Appeal of The Associated Construction Co., SBA No. SIZ-5314 (2011), the contractor at issue attempted to argue the opposite—that it was affiliated with another entity, namely, a division of itself.

This strange case came about because the contractor hoped to take advantage of the so-called “inter-affiliate transaction exception” under 13 C.F.R. § 121.104(a), which allows contractors to deduct “proceeds between a concern and its domestic or foreign affiliates” from its average annual receipts for size purposes.  Unfortunately for the contractor, SBA OHA held that a company cannot be affiliated with its own division—meaning that the exception did not apply.

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SBA Affiliation Rules, the Passive Investor, and Weekend at Bernie’s

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Remember Weekend at Bernie’s, the 1980s comedy about a couple of young corporate employees who pretend their murdered boss is still alive?  (Random note: did you know that they made a Weekend at Bernie’s 2 in 1993?  Neither did I, until I was writing this post).

What does Bernie have to do with the SBA affiliation rules?  In the movie, Bernie appears to control his company—even though he is not exactly in a position to make executive decisions.  Like Bernie, in the SBA’s eyes, a person can be deemed to control a company, even if he or she does not actually exercise any power.  The decision of the SBA Office of Hearings and Appeals in Size Appeal of BR Construction, LLC, SBA No. SIZ-5303 (2011) shows that SBA affiliation problems can arise when bylaws and operating agreements contain certain provisions that the SBA will find give legal control to a minority owner, even if that minority owner, in practice, acts as a passive investor.

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The Non-Manufacturer Rule: More Than Employees

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Back in 1976, Boston (the band, not the city), released its self-titled debut album, featuring the hit “More Than a Feeling.”  The tune is still a staple on classic rock stations everywhere.  Before you curse me for getting the song stuck in your head, think of it as an easy way to remember a critical aspect of the “non-manufacturer” size rule.  Simply put, it’s about more than employees.

When an agency issues a solicitation for supplies or products, it’s easy for small businesses to assume that non-manufacturer rule applies, meaning that a business qualifies as “small” so long as it has less than 500 employees.  But, as the SBA’s Office of Hearings and Appeals has confirmed, a company can only submit a valid offer if your company meets all five “prongs” of the non-manufacturer rule.  Having less than 500 employees only gets you part of the way there.

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SBA OHA Dismisses SBA Size Protest Based on Contractor’s CCR Profile

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To survive dismissal, a SBA size protest must be “specific,” that is, it must explain why the protested contractor is not small, and (in many cases), provide third-party evidence supporting the claim.

In Size Appeal of SoftConcept, Inc., SBA No. SIZ-5197 (2011), the SBA’s Office of Hearings and Appeals held that a SBA size protest was insufficiently specific when the protester alleged that the contract awardee did not list the NAICS code in question, NAICS code 541519, in its Central Contractor Registration profile.

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