On May 16, 2012, the U.S. Small Business Administration (SBA) issued a lengthy set of proposed regulations implementing various sections of the Small Business Jobs Act of 2010. Most of the proposed regulations are devoted to the process of setting aside and awarding task and delivery orders in multiple-award IDIQ contracts. This process was also the subject of an interim rule issued by the Federal Acquisition Regulation (FAR) councils on November 2, 2011.
Tucked into the SBA’s May 16 proposed regulations are various provisions having nothing to do with the Jobs Act. One such provision, if finalized, could have an impact on government contractors on either the buy or sell side of a merger or acquisition. Specifically, SBA proposes to expand the circumstances in which contractors will be required to recertify their size status after a merger or acquisition.
As background, effective June 30, 2007, SBA changed its regulations to require that contractors recertify their size status within 30 days after a merger or acquisition, whether or not the transaction involved a novation agreement. Recertification does not necessarily affect the contractor’s eligibility to win or keep a small business set-aside contract, but if the contractor recertifies itself as 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); see also The W.I.N.N. Group, Inc., SBA No. SIZ-5360 (June 6, 2012). SBA’s recertification rule is implemented by FAR clause 52.219-28, “Post-Award Small Business Program Rerepresentation,” which now appears in almost all government contracts.
SBA’s May 16, 2012 proposed regulation “clarifies” the recertification rule in two respects. First, the proposed regulations would require both the acquiring firm (e.g., the buyer) and the acquired firm (e.g., the seller) to recertify their size status within 30 days after a merger or acquisition. Second, SBA proposes to require a joint venture to recertify its size status when a participant in the joint venture is either the acquiring or the acquired entity in an M&A transaction.
In both instances, SBA’s purported clarification actually broadens the scope of the existing recertification rule. To date, most in the M&A community have assumed that only the acquired firm is required to recertify its size status. With regard to joint ventures, it has been assumed that recertification is required by the joint venture only when the firm upon which the joint venture based its size status -- for example, the 8(a) protégé in a mentor-protégé joint venture -- is acquired.
In short, in an acquisition of a government contractor, an important consideration is the effect the transaction may have on the target firm’s small business set-aside contracts. If SBA’s May 16 proposed rule becomes final, the parties will need to consider the transaction’s effect on both parties’ small business contracts.
Comments on the proposed rule are due on July 16, 2012.