SBA OHA Clarifies Present Effect of “Indications of Interest” When Determining Size Status

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Bass, Berry & Sims PLC

Late last month, the Small Business Administration’s (SBA) Office of Hearings & Appeals (OHA) issued a decision adhering to its prior line of cases discussing when present effect will be given to an indication of interest (IOI) between a small business and its potential large business acquirer for size determination purposes.  As with prior cases, OHA conducts a fact-intensive analysis to determine whether the parties had an agreement in principle at the time the small business submits its bid on a federal procurement.  The case, Size Appeal of Enhanced Vision Systems Inc., SBA No. SIZ-5978, offers some helpful tips on how to avoid an affiliation finding when negotiating an IOI and still pursuing small business set-aside opportunities.


On October 5, 2017, the U.S. Department of Veterans Affairs, Office of Acquisition Operations – Strategic Acquisition Center (VA) issued a small business set-aside RFP for in-home video magnification closed-circuit televisions.  The solicitation had a 1,250 employee size standard.  Proposals were due on December 12, 2017.  Enhanced Vision Systems, Inc. (EVS) timely submitted its proposal and was subsequently acquired by Freedom Scientific, Inc., a subsidiary of VFO Holdings, BV.  The contracting officer notified bidders that EVS was the apparent successful offeror.  In response, FedBiz IT Solutions LLC (FedBiz), an unsuccessful offeror, challenged the awardee’s size arguing that EVS had already entered into negotiations at the time of its initial offer, and therefore should be considered affiliated with VFO, the acquiring large business.  The Area Office sustained the protest, finding EVS and VFO affiliated, and therefore exceeded the employee size standard for the procurement.

EVS appealed the Area Office decision to SBA OHA.  After review, OHA denied the appeal and held that the totality of the circumstances clearly indicated that the parties had committed to the acquisition before EVS had submitted its proposal for the solicitation at issue, therefore EVS was considered “other than small” as of the date of proposal submission.

Timeline of Negotiations and Acquisition

As part of OHA’s fact-intensive inquiry, it thoroughly discussed the nature and timeline of the parties’ acquisition negotiations as reasoning for its determination.

For instance, VFO had apparently been interested in acquiring EVS since 2015 and finally approached them regarding a potential acquisition in Spring 2017, about six months prior to proposal submission.  VFO and EVS signed a Mutual Non-Disclosure Agreement in July 2017 to facilitate acquisition talks.  In the fall of 2017, VFO made EVS an offer, which it rejected for being too low.  After VFO’s proposed price was rejected, the parties’ negotiations stalled, until VFO sent EVS a “Non-Binding Indication of Interest” (IOI) on November 16, 2017.  This letter included a 30 business day exclusivity period, breakdown of equity value that EVS would receive, an insurance policy governing indemnification, and other representations and warranties.  The IOI also included confirmatory due diligence, including a duty to review historical financial performance, legal and tax diligence, and reference calls.  The parties attempted to reach an agreement through December 2017 to no avail, allowing the exclusivity period to expire without the parties reaching any meaningful agreement regarding the acquisition.

EVS then submitted its proposal in response to the solicitation at issue on December 7, 2017.  EVS maintained that VFO had no input or role in the discussions with respect to any business proposal prepared during the negotiation period, including that proposal.  VFO subsequently contacted EVS to restart negotiations in January 2018, and a purchase agreement was finalized on January 18, 2018.

FedBiz’s Size Protest

FedBiz filed a protest challenging EVS’s size on August 13, 2018, alleging that it was not a small business because it had already entered into an agreement to be acquired by VFO, a large business, at the time of its initial offer.  FedBiz argued that the IOI created an affiliation between EVS and VFO (as well as the companies owned by VFO).  Based on FedBiz’s calculations, this affiliation would put EVS at 9,850 employees, far exceeding the 1,250 employee size standard for the procurement at issue, and rendering EVS other than small.

FedBiz argued that it was clear that EVS and VFO had reached an agreement in principle concerning the acquisition prior to the time EVS submitted its proposal.  FedBiz also pointed to the fact that EVS had failed to recertify its size within 30 days of its acquisition by VFO as required pursuant to 13 C.F.R. § 121.404(g)(2).

OHA Decision

As an initial matter, OHA found that EVS was not required to recertify its size, because clarifying language in the regulation that would have required EVS to recertify did not take effect until nine months after the RFP was issued.

OHA then turned to whether the IOI in question had in fact constituted an agreement in principle that had to be given present effect.  OHA quoted the governing rule at 13 C.F.R. § 121.103(d) which states:

Affiliation arising under stock options, convertible securities, and agreements to merge.

  1. In determining size, SBA considers stock options, convertible securities, and agreements to merge (including agreements in principle) to have a present effect on the power to control a concern. SBA treats such options, convertible securities, and agreements as though the rights granted have been exercised.
  2. Agreements to open or continue negotiations towards the possibility of a merger or a sale of stock at some later date are not considered “agreements in principle” and are thus not given present effect.
  3. Options, convertible securities, and agreements that are subject to conditions precedent which are incapable of fulfillment, speculative, conjectural, or unenforceable under state or Federal law, or where the probability of the transaction (or exercise of the rights) occurring is shown to be extremely remote, are not given present effect.
  4. An individual, concern or other entity that controls one or more other concerns cannot use options, convertible securities, or agreements to appear to terminate such control before actually doing so. SBA will not give present effect to individuals’, concerns’ or other entities’ ability to divest all or part of their ownership interest in order to avoid a finding of affiliation.

The Area Office had determined EVS to be other than small based on the fact that it had executed the IOI on November 17, 2017, weeks before it had submitted its proposal.  The Area Office found that the IOI was an agreement in principle to merge with VFO that had to be given present effect.  Relying on this, the Area Office deemed EVS and VFO affiliated as of November 17, 2017, thus other than small at the date of proposal submission and ineligible for award.

OHA’s Prior Decisions Provide Guidance on Terms that Create Present Effect

“An analysis of cases involving a potential agreement in principle are fact-intensive and rely on a review of the totality of the circumstances in order to make a final decision on whether the document in question is an agreement in principle.”  OHA looks to the conditionality of the agreement’s terms and price, and the parties’ ability to withdraw from negotiations, in making its “agreement in principle” determination.

The Area Office relied on Size Appeal of WRS Infrastructure and Environment, Inc., SBA No. SIZ-5007 (2008) for the principle that conditional letter of intents (LOIs) with no set price offer (or a price offer contingent upon certain conditions precedent being met) will not constitute an agreement in principle.  There, OHA found that an LOI that included a proposed price, escrow provisions, indemnification rights, a stock purchase agreement, and an exclusivity clause, to be an agreement in principle that had to be given present effect, even though it included language stating that it was non-binding.  OHA also found that the parties executed the acquisition in accordance with the terms of the LOI, further demonstrating that the LOI was an agreement in principle.  OHA also explicitly held that an agreement need not be legally binding to be found to be an agreement in principle.

OHA noted that not all agreements leading toward an agreement to merge should be given present effect and treated as an agreement in principle.  OHA found no agreement in principle in circumstances where there was no document memorializing any agreement, and the parties confirmed with the Area Office that no agreement had been reached at the time the concern submitted its offer for the subject procurement.  OHA also noted that it held that a non-binding tentative proposal that did not include a price, was subject to numerous conditions, had further due diligence required, and no evidence existed proving that the other party had accepted the letter, was not an agreement in principle.  OHA also noted that the eight-month time span separating the initial proposal and final agreement further supported a finding that no agreement in principle existed.

OHA cited to its decision in Size Appeal of the W.I.N.N. Group, Inc., SBA No. SIZ-5360 (2012), where it found that “a non-binding offer that did not include a set price, did not require exclusivity, and was carefully conditioned on extensive due diligence was not an agreement in principle.”  OHA also cited to Size Appeal of Telecommunication Support Service, Inc., SBA No. SIZ-5953 (2018), where it found that the Area Office erred in determining an explicitly non-binding offer subject to multiple conditions was an agreement in principle.  In determining that the LOI was not agreement in principle, OHA noted that “it would confound logic to hold that an agreement in principle existed at the time to determine size, yet that same agreement could fall apart after the date to determine size based on the unilateral actions of one of the parties,” highlighting the conditional nature of the LOI and the parties’ ability to end negotiations.

OHA Determined that IOI was an “Agreement in Principle”

Here, OHA rejected EVS’s argument that the IOI was merely a non-binding agreement to “engage in exclusive negotiations,” finding that the IOI constituted an agreement in principle for multiple reasons.  First, OHA noted that because the IOI included a “previously negotiated definite set price, without any conditions that could vary that price, supports a finding that the LOI is an agreement in principle.”  Second, OHA noted that an agreement described as non-binding does not on its own establish that an IOI is not an agreement in principle.  OHA will not defer to an agreement’s self-categorization, but rather will perform a fact-intensive analysis to determine whether the agreement really is non-binding with room for further negotiations. Third, OHA rejected EVS’s argument that because more due diligence was required under the IOI that it could not have possibly been binding.  OHA found that the required due diligence here was merely confirmatory, rather than a “more extensive intelligence review.”  OHA also highlighted that considering VFO proposed a price to purchase all of EVS’s equity, it was “reasonable to conclude that at the time of the execution of the LOI, VFO had previously completed some level of review of Appellant’s valuation in order to propose the multiple purchase prices offered to Appellant.”

OHA also rejected EVS’s argument that the IOI could not be an agreement in principle because it did not contain all of the necessary and essential terms of a purchasing agreement.  OHA explicitly rejected this, stating that “an agreement need not rise to the level of detail provided in a final purchase agreement to constitute an agreement in principle,” but rather there only needs to be “sufficient evidence that the parties have agreed that a transaction to merge is to take place at some time in the future.”  OHA also explained that breakdowns in negotiations or “cooling off” periods in the process are not enough on their own to preclude finding of an agreement in principle.

OHA concluded that the IOI, in this case, was, in fact, an agreement in principle that had to be given effect as of November 17, 2017 when the IOI was signed and executed.  Resultantly, EVS and VFO were found affiliated as of December 7, 2017, the date of proposal submissions, and EVS was found to be ineligible for award.


OHA’s decision in Size Appeal of Enhanced Vision Systems Inc., highlights that no matter if you call the agreement an Indication of Interest or a Letter of Intent, the analysis is the same – do the terms of the document constitute an agreement in principle to conduct a transaction in the future that should be given present effect.  If so, the parties will be deemed affiliated and any small business set aside bid submitted after agreement execution is likely to be at risk.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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