Recent SBA OHA Ruling Could Heat Up M&A Marketplace for Small Business Government Contractors
UPDATE: Effective May 25, 2018, the SBA updated its regulations in an apparent attempt to invalidate the holding in Analytic Strategies. However, because the SBA termed this update a “technical correction,” which is a designation reserved for non-substantive matters, and because the update might not address the entirety of the holding in Analytic Strategies, it is not clear whether the update will result in the case being overturned. Nonetheless, the law in this area has once again returned to a state of uncertainty. It will likely take a court challenge (or another OHA Appeal) to settle the matter. Stay tuned for future reporting on this subject
Earlier this year, the Small Business Administration’s (“SBA”) Office of Hearings and Appeals (“OHA”) ruled that recertification by a Service-Disabled Veteran-Owned Small Business (“SDVOSB”) following its acquisition by a large company did not make that SDVOSB ineligible for future task orders set aside for SDVOSBs under a multiple award contract.
This case—Matter of Analytic Strategies, Inc., SBA No. VET-268 (Jan. 29, 2018)—was a matter of first impression for OHA. It settled a regulatory uncertainty in favor of small business contractors who have been or will be acquired by large businesses. As discussed below, this holding could heat up an already warm government contracts M&A market by boosting the market value of small business contractors. Also, the case saw OHA roundly reject SBA’s preferred interpretation of the recertification rule; as a result, in the near future, we may be looking at a proposed rulemaking or even renewed congressional attention on this subject.
The SBA regulations and the Federal Acquisition Regulation (“FAR”) require small business contractors that undergo a merger, acquisition or sale to recertify their size status on SAM.gov and to inform the procuring agency, within 30 days of the transaction, whether the transaction has changed their socioeconomic status or made them “other than small.” 13 C.F.R. § 121.404(g) (general small business recertification requirement); see 13 C.F.R. § 125.18(e) (SDVOSB recertification requirement); FAR 52.219-28 (FAR implementation of the foregoing). The stated effect of this recertification is: “If the contractor is other than small, the agency can no longer count the options or orders issued pursuant to the contract, from that point forward, towards its small business goals.” 13 C.F.R. § 121.404(g)(2)(i).
Notably, recertification does not result in contract termination. Of course, a contracting officer always has the right to terminate a contract for convenience, but the logistical burden of early termination and resolicitation almost always outweighs the agency’s interest in continuing to count the contract towards its small business goals. In other words, while a transaction may prevent a contractor from pursuing new set-aside work, the contractor usually keeps its existing set-aside work.
However, historically, the post-transaction fate of the contractor’s multiple award contracts has been less certain. SBA regulations state that when a transaction makes a contractor “other than small,” with regard to multiple award contracts, “the agency cannot count any new orders issued pursuant to the contract, from that point forward, towards its small business goals.” 13 C.F.R. § 121.404(g)(4). This sounds a lot like the rule for single award contracts (see § 121.404(g)(2)(i), discussed above), so virtually all legal practitioners and contracting officers have interpreted the rule the same way—to allow contractors to continue to win task orders under multiple award set-aside contracts, even after a transaction. However, SBA has vocally disagreed with this interpretation. SBA’s position has been, essentially—contractors who recertify as “other than small” should not be able to compete for task orders set aside for small businesses, because interpreting the rule otherwise would effectively allow large businesses to win new set-aside work, which is not possible in the single award context and, according to SBA, would undermine the purpose of the set-aside programs.
Until the Analytic Strategies case, there was no clear answer to this disagreement.
Matter of Analytic Strategies, Inc., SBA No. VET-268 (Jan. 29, 2018), involved a status protest of Analytic Strategies, Inc. (“Analytic Strategies”), which was an SDVOSB awardee of an SDVOSB set-aside task order under the multiple award One Acquisition Solution for Integrated Services (“OASIS”) contract. The protest alleged that while Analytic Strategies had been an SDVOSB at the time of proposal and award of its OASIS contract, it had undergone an acquisition causing it to lose its SDVOSB status for the set-aside task order in question and thus should have been deemed ineligible for the task order award. SBA’s Director of Government Contracting (“D/GC”) concurred with the protest, finding that Analytic Strategies was not eligible for the award, and the matter was subsequently appealed to OHA.
OHA overturned the D/GC’s ruling, finding that the task order award to Analytic Strategies was proper, even though the contractor had recertified as a non-SDVOSB before bidding on the task order. The holding in Analytic Strategies touched on several themes well known to aficionados of prior OHA case law. First, OHA emphasized that there is a difference between credit and eligibility for set-aside awards. OHA rejected SBA’s arguments that the regulation was ambiguous—and that, therefore, SBA’s interpretation should be given deference—and instead concluded that the regulatory consequences for undergoing an acquisition are “clearly” limited to agency credit for small business utilization, and that “[t]he regulation does not prohibit the procuring agency from exercising these options or issuing orders, and does not otherwise deem the concern ineligible for award.” Analytic Strategies, SBA No. VET-268, at 16. The second familiar theme is that the contracting officer for this task order, despite setting aside the task order for SDVOSBs, did not request recertification with respect to this task order. In Analytic Strategies, OHA confirmed that in the absence of such a request, the contractor’s status is determined by its initial certification for the multiple award contract, and any recertification following a merger, sale or acquisition does not supersede that initial certification. Id. at 17.
Accordingly, Analytic Strategies was eligible for this SDVOSB set-aside task order because it had qualified as an SDVOSB when it proposed for the OASIS contract, and because the contracting officer did not request recertification with respect to this task order.
Effects of the Case
The most immediate consequence of Analytic Strategies is that buyers may now have enhanced confidence that small business contractors should be able to continue to compete for set-aside task orders under their multiple award contracts, even after they are acquired and have to recertify as “other than small.” This could cause an increase in the transaction value ascribed to these multiple award contracts. Until now, buyers and sellers have had to rely on grey-area legal opinions and the untested positions of contracting officers, which without case law backing, often led to lower market valuations.
However, this case has not eliminated all uncertainty.
First, it must be noted that Analytic Strategies interpreted the SDVOSB recertification rules. The holding does not apply explicitly to the rules governing SBA’s other socioeconomic programs, including regular small business set-asides. However, the language used by OHA was so broad, and the regulations across all programs are so consistent (note: except the 8(a) business development program, which has different rules for acquisitions) that one could argue easily that the Analytic Strategies holding should apply to all task order set-asides. This conclusion is bolstered by OHA’s frequent discussion, in Analytic Strategies, of 13 C.F.R. § 121.404(g), which is the recertification rule for regular small business set-asides. Thus, while there is some uncertainty regarding the applicability of Analytic Strategies in the non-SDVOSB context, that uncertainty may be minimal.
Second, and more significant, SBA has the motivation and arguably the ability to issue new rules superseding OHA’s holding in Analytic Strategies. Whether SBA has the statutory leeway to amend its regulations without a new congressional directive is an open question, but based on the agency’s strongly held opinion in this case, no one would be surprised if it tried. Accordingly, while buyers and small business sellers can take advantage of the holding in Analytic Strategies, they should also look out for any movement toward regulatory change at SBA.
This blog was written by Stephen Ramaley at Miles & Stockbridge.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.