Following SBA's Joint Venture Agreement Template Not a Free Pass, and Don't Ignore the Footnote Comments
February 28, 2019
The Small Business Administration (SBA)’s Office of Hearings & Appeals (OHA) recently reiterated that SBA Joint Venture Agreements (JVAs), including those entered into under SBA’s new All-Small Mentor-Protégé Program (ASMPP), must include adequate specific detail as to the respective responsibilities of the parties with regard to, inter alia, performance of the proposed contract, and how the parties will satisfy SBA’s performance of work requirements and the limitations on subcontracting restrictions. Failure to include such specific details risks the JVA being determined unacceptable and the JV not qualifying for the Mentor-Protégé (M/P) exception to the general affiliation rules, and the Venturers thus being deemed affiliated and the JV ineligible for award. Interestingly, OHA rejected the Appellant’s argument that the JVA followed SBA’s standard JVA template, stating that such template provides merely “informal guidance,” and that the Appellant failed to establish that it could properly rely upon such informal guidance “in lieu of specific regulations and without seeking further clarification.” OHA further determined that the Appellant in any event did not adhere strictly to the SBA template, because Appellant failed to heed and comply with the template’s Footnote direction to “spell out specifically by task” the performance of work, “to demonstrate that the small business is doing more than mere ministerial or administrative functions.” Size Appeal of STAcqMe, LLC, SBA No. SIZ-5976, decided Dec. 10, 2018.
Turning to the latter issue first, SBA has long provided various template JVAs, the current version of which may be found on SBA’s website here. Over the years these templates have been treated differently by various SBA District Offices, with some requiring strict adherence to the template, while others explicitly forbade parties from using the same. The templates also have been criticized for their understandable focus on SBA’s regulatory requirements, while not giving sufficient attention to state and local law requirements and standard commercial terms and practices that parties also should address in entering into a JVA.
In implementing the new ASMPP, SBA has updated the template JVA and issued a Mentor-Protégé Program Joint Venture Guide (Guide). This Guide, and the accompanying JVA Sample Template, both by the Guide’s name and its text, are explicitly provided solely as “a guide to assist in developing a comprehensive joint venture agreement in compliance with [SBA’s 8(a) Business Development Program and Service-Disabled Veteran-Owned Small Business (SDVOSB), HUBZone and Women-Owned Small Business (WOSB) Programs].” (Emphasis added.) Indeed, the Guide explicitly cautions that “any agreement, amendments, or addendums to the [JVA] must comply with the Small Business Act, SBA Regulations, information notices or other guidance governing and/or controlling the mentor-protégé program,” and states that, “[w]hen drafting a JVA, it is the responsibility of the parties to the joint venture to fully understand the agreement being entered into,… and compliance with the applicable rules and regulations.” However, at the same time the Guide explicitly states that the template provisions, while “not mandatory,” provide “examples of provisions SBA would deem to be compliant with SBA’s applicable rules and regulations.” The bottom line is that, notwithstanding the various caveats, the Guide is ambiguous as to whether following the JVA template provides some safe harbor or assurance of JVA compliance and approval, creating the risk of confusion and potential over-reliance by erstwhile joint venturers.
In language anticipating the situation in STAcqMe, the Guide explicitly notes that SBA does not approve JVAs created pursuant to an approved M/P Agreement, whether approved through the ASMPP or 8(a) Program, unless the JV is pursuing an 8(a) contract. The Guide, however, cautions that “[s]hould there be any type of size protest, SBA will scrutinize all JVAs …, including the specificity of the provisions, to make sure they comply with SBA regulations and the intent of the mentor-protégé program,” and that “[n]on-compliant agreements could result in a finding of affiliation between the parties.” (Emphasis added.)
STAcqMe involved a 51%/49% M/P JV between AcqMe, LLC, a SDVOSB, and its SBA-approved ASMPP Mentor, Sonoran Technology and Professional Services, LLC (Sonoran). AcqMe and Sonoran entered into a JVA dated April 24, 2017, stating that the JV planned to compete for five contract awards, not including the instant RFP, which had not been issued at that time. The JVA “mirrored” SBA’s template JVA, and explicitly stated, in virtually identical language to the SBA template, that AcqMe “shall perform at least 40% of the work, which must be more than administrative or ministerial in nature,” and that the JV would comply with the limitations on subcontracting requirements.
The instant RFP was issued more than a year later, on June 22, 2018, by the U.S. Air Force, Air Mobility Command, on a 100% SDVOSB set-aside basis, for Squadron Operations Support at MacDill Air Force Base in Florida. Proposals were due July 30, 2018. On August 16, 2018 – more than two weeks after proposal submission, and after the filing of size challenges – AcqMe and Sonoran signed a one-page “Addendum to JV Agreement.” This Addendum added a new “Business Development List” of potential contract opportunities, including the instant RFP, which, according to the Addendum, was “[a]dded to” the JVA effective June 22, 2018 – the date of the RFP issuance, almost eight weeks earlier. The Addendum did not otherwise alter the JVA. The parties subsequently prepared a “Work Assignment Memo” on August 23, 2018, attempting, belatedly, to define their respective responsibilities as to the proposed contract.
The JV timely submitted its proposal responding to the RFP. The Air Force subsequently announced that the JV was the apparent awardee, on August 3, 2018. Two unsuccessful offerors filed timely size protests, challenging the JV’s size, on August 12, 2018. The SBA Area VI Office of Government Contracting issued two companion decisions on September 12, 2018, sustaining the size protests and finding the JV to be other than small. Area VI declined to consider the “Work Assignment Memo,” since such was prepared after the July 30, 2018 proposal submission and size certification. The Area Office determined that the JVA met the SDVOSB JVA requirements in 13 C.F.R. § 125.18(b)(2)(i)-(vi) & (viii)-(xii). However, the Area Office determined that the JVA did not meet (1) the requirements of Sections 125.18(b)(2)(vii) & 125.18(b)(3), requiring the JVA to specify the parties’ responsibilities with respect to performance and the ways in which the parties will meet the performance of work and limitations on subcontracting requirements. The Area Office therefore found that JV did not qualify for the M/P affiliation exception, and thus was other than small.
STAcqMe timely appealed this adverse size determination to OHA. STAcqMe argued, among other things, that (1) the JVA “mirrored” SBA’s JVA template, including that STAcqMe would perform at least 40% of the work that must be more than administrative or ministerial in nature, and that the JV would comply with the limitations on subcontracting requirements, and (2) the Area Office had elevated “form over substance” and required an “unreasonable level of detail” beyond the JVA’s clear commitment to comply with the applicable requirements.
As discussed at the outset above, OHA found Appellant’s SBA JVA template arguments “unpersuasive” for two reasons. First, OHA stated that the SBA template merely provided “informal guidance,” and Appellant had failed to establish that it “could properly rely [thereon] in lieu of specific regulations and without seeking further clarification.” Second, OHA stated that “even assuming that reliance on informal guidance was appropriate,” Appellant had failed to “strictly adhere to the SBA template” by failing to comply with the template’s direction that “[p]erformance of work should be spelled out specifically by task, to demonstrate that the small business is doing more than mere ministerial or administrative functions.” In short, professing or asserting an intent or commitment to comply is not the same as providing specific detail that a reviewing entity can reasonably assess and form its own confident determination that the parties understand the proposed work and have a realistic plan to perform such in a compliant manner.
OHA further stated that demanding the detail and specificity required by SBA’s regulations does not put form over substance. OHA pointed out that the JVA here, which was prepared long before the subject RFP was issued, perforce did not, and indeed could not, designate “specific contractual tasks and responsibilities,” nor “explain how Appellant will fulfill the performance of work requirements” in the subject contract context. OHA stated that “absent such information, a mentor-protégé joint venture cannot avail itself of the exception to affiliation,” citing OHA’s earlier decisions in IEI-Cityside, JV and Kisan-Pike, A Joint Venture (SBA Nos. SIZ-5664 (2015) & SIZ-5618 (2014) respectively).
OHA’s decision certainly is not surprising in either regard, particularly in view of the underlying facts in STAcqMe, where (1) the challenged JVA was prepared more than a year before the subject RFP was even issued, and thus contained no information as to how the parties would perform the subject work, and (2) the parties failed to timely amend the JVA and include such details in an Addendum to the RFP prior to submitting the JV’s proposal and certifying as to the JV’s size status. Moreover, the parties compounded these failures by also not specifying their respective responsibilities in the submitted proposal or in any other contemporaneous document.
However, the decision ultimately ducks and does not resolve whether strict compliance with the SBA JVA template would assure approval and provide, in effect, a safe harbor. Moreover, the decision’s language as to “seeking further clarification” is confusing without some explanation, as there is no established process for seeking or obtaining “clarification,” and it is unclear, in any event, how any “clarification” could override or excuse compliance with specific regulatory requirements.
The decision nevertheless provides a number of useful lessons for erstwhile joint venturers to consider in entering into a JVA, whether under the ASMPP or 8(a) Program, or any of SBA’s other specific JV opportunities.
1. SBA’s JVA template and Guidance provide a useful starting point in negotiating and preparing a JVA; however, such should not be followed slavishly, and do not provide, at least for now, an assured “free pass” or “get out of jail” card, and the parties need to carefully review and consider the applicable regulations, and provide the specificity and detail required in the regulations and referenced in the SBA template footnotes and commentary;
2. The JVA (and the JV’s submitted proposal) need to detail, with at least a reasonable degree of specificity and conformity, the parties’ respective responsibilities as to performance of the various proposed contract tasks, including the ways in which the parties will meet the performance of work and limitations on subcontracting requirements; mere blanket assertions of compliance will not suffice;
3. If the particular proposed opportunity did not exist, or was not explicitly addressed in the original JVA, then the parties need to timely amend or prepare an Addendum to the JVA – prior to proposal submission – explicitly detailing the required information as to the specific proposed opportunity and RFP; the parties also should ensure that the JV’s submitted proposal is consistent with, and does not contradict, what is set forth in the JVA Amendment or Addendum.
The bottom line is that compliance with the SBA regulations’ demand for specificity is critical if the parties want to achieve and maintain the benefits of the M/P program and opportunity to JV thereunder, or to enter into viable JVs under SBA’s other programs. One does not want to be in the position of the parties in STAcqMe, and lose one or more substantial contract opportunities merely because of drafting short-cuts and failures. An important point to keep in mind in dealing with size issues is that the die essentially is cast as of proposal submission and size status certification. There is little that can be done thereafter to correct the situation and save the day. Parties therefore need to focus on and adequately address these issues up-front. While time may be short to prepare and submit a proposal, cutting corners as to these issues may undermine and vitiate the entire rest of the effort.
One final JVA drafting tip to keep in mind – erstwhile joint venturers should closely heed the SBA Guide’s admonition to consider applicable local law and regulations, in addition to complying with SBA’s requirements, in structuring, negotiating and entering into joint ventures. They also should carefully consider standard commercial practices and safeguards, as well as the practical implications and effects of the various JV provisions. A JVA will govern the parties’ business relationship for years, and far more is at stake than just complying with SBA’s rules and regulations. However, as demonstrated here, if the parties don’t get over the threshold SBA regulatory compliance hurdle, then all else is moot and lost.
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© Jackson Kelly PLLC 2019