By Kimi Murakami
Over the past several months, our firm has been approached by Section 8(a) companies throughout the country who have been advised by their SBA district offices that their 8(a) joint ventures would not be approved by the SBA. This disappointing news came in spite of the fact that the 8(a) company felt it had met the requirements for 8(a) joint ventures in the SBA rules (see 13 C.F.R. § 124.513).
Based on the varied reasons for these denials, it is prudent for 8(a) companies to contact their district office prior to establishing the joint venture in order to understand whether that district office has any specific requirements for joint ventures. Each district office has taken it upon itself to somewhat modify the regulations with additional requirements beyond the four corners of what is set forth in the SBA’s rules.
This trend of SBA district offices asserting their own individual requirements with respect to joint ventures has been noted by our clients before. The ramifications for violations of these area-specific requirements, however, are having an adverse impact on small business concerns desiring to pool their complementary resources with other businesses in a joint venture arrangement. Take last year’s case of Kisan-Pike as an example.
In the case of Size Appeal of Kisan-Pike, a Joint Venture (SBA No. SIZ-5618, Nov. 24, 2014), the Office of Hearings and Appeals (OHA) affirmed the SBA’s size determination that the joint venture was not small because the joint venturers, Kisan Engineering Company, P.C. (Kisan), a participant in the SBA’s 8(a) Business Development Program, and its joint venture partner, The Pike Company, Inc. (Pike), a large business and Kisan’s SBA-approved mentor, were found to be affiliated thereby causing the joint venture to exceed the applicable size standard. The most offending violations OHA found were the joint venture agreement’s failure to meet the requirements of 13 C.F.R. § 124.513(c)(6) and (7), and 13 C.F.R. § 124.513(d).
A joint venture agreement under 13 C.F.R. § 124.513(c)(6) and (7) must:
(6) Itemiz[e] all major equipment, facilities, and other resources to be furnished by each party to the joint venture, with a detailed schedule of cost or value of each, [and]
(7) Specify the responsibilities of the parties with regard to negotiation of the contract, source of labor, and contract performance, including ways that the parties to the joint venture will ensure that the joint venture and the 8(a) partner(s) to the joint venture will meet the performance of work requirements set forth in paragraph (d) of this section.
13 C.F.R. § 124.513(c).
In Kisan, OHA found the joint venture agreement deficient with respect to both requirements where the agreement simply stated that the venturers “will provide equipment, facilities and other resources to the joint venture required to execute the contract.” Kisan, supra. Although the design had not yet been approved for this design-build contract, OHA agreed with the SBA’s rejection of this explanation for the lack of detail submitted because the proposal had contained design drawings and a detailed construction schedule. Id. All of that detail should have been set forth in the joint venture agreement to meet the requirement to “itemize” the resources to be contributed.
Further, OHA agreed with the SBA that merely stating and confirming that the joint venture would meet the performance of work requirements was insufficient to meet the SBA rules. The joint venture agreement, OHA found, “must specify the roles and responsibilities of the joint venture partners, including how the joint venture will comply with the requirement of 13 C.F.R. § 124.513(d)” regarding the performance of work requirements. Id. The “joint venture agreement falls short” because “it does not designate specific tasks or responsibilities to Kisan and Pike.” Id. As a result of such deficiencies, OHA agreed with the SBA’s finding that the joint venture could not avail itself to the mentor- protégé affiliation exemption under 13 C.F.R. § 121.103(h)(3)(iii). Id.
In light of Kisan-Pike and based on a sample review of guidelines from several SBA district offices we have identified several provisions which seem to be handled differently depending on the district office:
- Actions requiring unanimous consent
- Presence of management committees
- Specific details describing equipment, facilities, and resources to be contributed, and manner of meeting performance of work requirements by each venturer (see discussion of Kisan-Pike above)
- When bidding on future procurements, requirements for addendums to joint venture agreement
- 8(a) joint venturer’s contribution of work must be more than ministerial or administrative
- Dispute resolutions provisions
- Supplemental documents and additional information that must be submitted
- If separate corporate entity from the joint venture is formed such as a limited liability company (LLC) determination of whether separate joint venture agreement and operating agreement must be entered into or whether a single document is acceptable
Confirming the specific requirements and preferences of the individual SBA district office with respect to 8(a) joint ventures beyond what is set forth in the federal regulations promulgated to implement the law will hopefully save businesses the disappointment of a denial from the SBA district office for your 8(a) joint venture.
About the Author: Kimi Murakami is counsel with PilieroMazza and focuses her practice on corporate transactions with an emphasis on mergers and acquisitions of government contractors. She also has experience advising on intellectual property matters including trademarks and trade secrets. She can be reached at [email protected].