The Small Business Administration (“SBA”) has issued two more regulations that will require that small businesses recertify their size when they engage in a merger and/or acquisition (“M&A”). The regulations, published in conjunction with the final limitation on subcontracting regulation and the new mentor-protégé program, further limit the ability of small businesses to engage in acquisitions that could impact their continued performance of small business set-aside contracts. Both are certain to make it more difficult for small businesses to engage in M&A deals.
The first of these new recertification rules has been implemented through the SBA’s final regulation, issued on May 31, 2016, regarding the subcontract limitation requirements applicable to small businesses. Buried within this final rule was a regulation with regard to recertification of size prior to contract award. Specifically, under this new size recertification rule, firms that are bidding on small business set-aside contracts, including set-asides under socio-economic programs, will need to recertify their size prior to a contract award if they engage in an M&A transaction during the time between the submission of the proposal and the award.
As published, the final rule should only impact an agency’s ability to take small business credit for an award to a firm that can no longer recertify to being small because of an M&A; nothing in the regulation indicates that the size eligibility of firms will be impacted on those contracts prior to award, even though they may no longer qualify as small. However, as drafted, the final regulation suggests that a firm’s size may now be determined at the time of contract award for firms that engage in M&A deals. The ambiguity as to when size may be determined heightens the risk that size protests will be filed when awards are made to such firms. Indeed, many contracting officers may question whether to move forward with an award to a company that does not allow the agency to take small business credit on procurements set aside for that purpose, leading them to protest the awardee’s size.
The second recertification rule was issued on July 25, 2016, in connection with the new regulation establishing a governmental-wide mentor-protégé program for all small businesses. Within the new mentor-protégé regulation, the SBA issued a rule regarding recertification when an affiliate of a small business acquires another concern. This rule was prompted by a recent SBA Office of Hearings and Appeals decision which held that the size recertification requirements did not apply to transactions by an affiliate of a company performing government contracts because the recertification rule only applied to the contractor in question, but not its affiliate. The SBA’s new rule provides that an acquisition by an affiliate must be deemed an acquisition by the contractor, triggering recertification by the firm performing the government contract(s).
With these two new rules, the SBA has broadened the recertification requirement to cover any small business, including affiliates that acquire another concern, or are acquired by another concern, not only when performing a contract but also when bidding on small business set-asides. Although the SBA has consistently taken the position that recertification should not impact a firm’s eligibility for the continued performance of contracts set aside for small businesses (unless recertification is required for options and task orders), it still makes it much more difficult for small businesses to grow through M&A transactions. Not being able to take credit for work performed by firms engaged in M&A deals seeking to grow, many procuring agencies will look for other vehicles to help them meet their goals. The new regulations will also require that small businesses with affiliates carefully monitor the M&A transactions related companies may be pursuing. With different management teams often running affiliates, there is a risk that an affiliate’s deals will impact the contracting firm’s eligibility on new and existing contracts.
About the Author: Tony Franco is a senior partner with PilieroMazza and oversees the Government Contracts and Small Business Programs Groups. He may be reached at [email protected].