News
February 9, 2021

Acquiring a Small-Business Government Contractor: Will the Small Business Continue to be Eligible for a Small Business Set-Aside Award Under Pending Bids and Proposals?

Advisory

Strategic acquirors and private equity firms often pursue acquisitions of small-business government contractors with an attractive niche or technology but also understand that, following the acquisition, the small business affiliation rules1 may preclude the business from qualifying as a small business. A recurring issue in these acquisitions concerns the continuing eligibility of the target companies for small business set-aside contracts. Recent revisions to the Small Business regulations and a December 2020 decision by the Court of Federal Claims provide the current answer to the question of what happens to pending bids and proposals.2 Both the revisions to the regulations and the December 2020 decision lead to the same result: small businesses with pending bids and proposals must recertify their size status if an acquisition occurs after the bid or proposal but prior to its award. This means that acquirors of small businesses must consider that the small businesses will not remain eligible for these awards following closing.

The November 15, 2020 revisions to the regulations of the Small Business Administration (SBA) governing small business size and socioeconomic status introduced a new set of requirements for prospective buyers of small-business government contactors with pending bids and proposals.3 SBA regulations (both before and after November 15, 2020) provide that, absent a recertification requirement in a solicitation, an offeror's size status is determined on the date the offeror submits its initial proposal.4 The SBA revisions add a new requirement in 13 C.F.R. § 121.404 that small business offerors must recertify their size status, regardless of an explicit solicitation requirement, within 30 days "of a merger, sale, or acquisition, where contract novation is not required" (which is the old requirement) and, the new requirement, where "the merger, sale or acquisition occurs after offer but prior to award."5 As a result of this change in the regulations, small businesses that can no longer make the small business certification following an acquisition will not remain eligible for a small business set-aside award under a pending proposal.

In a case reviewing a similar issue arising from an acquisition that occurred prior to the effectiveness of these new regulations, in December 2020, the Court of Federal Claims issued its opinion in the HWI Gear, Inc. v. United States6bid protest, which is instructive about how SBA's new recertification requirement will affect buyers and their small business targets with pending bids and proposals. Although the procurement and award decision predated the SBA's revisions, the court applied a similar requirement based on the language of Federal Acquisition Regulation (FAR) 52.219-28, Post-Award Small Business Program Representation, which was included in the solicitation. The court invalidated the award to Mechanix Wear, LLC (Mechanix), based on a finding that the agency's express inclusion of the FAR provision in the solicitation imposed a duty on the offeror to notify the agency of the acquisition and its change of size status and a duty on the contracting officer to inquire into the circumstances of the offeror's organizational change from a corporation to an LLC.

The HWI Gear case involved a Department of the Army 100% small-business set-aside procurement.7 In its proposal, Mechanix self-certified as small under the applicable North American Industry Classification System code. After Mechanix submitted its proposal, but before award, Gryphon Investors (Gryphon) acquired Mechanix.8 After the acquisition, Mechanix informed the contracting officer that it "changed its corporate structure from a standard Corporation to a Limited Liability Corporation."9 Mechanix further stated that "[a]ll other terms and conditions of the Mechanix Wear offer remain unchanged."10 Mechanix did not elaborate on the basis for changing its corporate structure, and the contracting officer did not seek any additional information about the nature of the change.11

The court held that Mechanix's failure to recertify its status, and the agency's failure to require Mechanix to recertify its status, violated FAR 52.219-28.12 That clause requires small business contractors to recertify their "size and socioeconomic status . . . [w]ithin 30 days after a merger or acquisition that does not require a novation." FAR 52.219-28(b)(2). The court recognized that this clause does not typically apply to offerors when the solicitation merely incorporates the clause by reference.13 However, the Army went beyond incorporating FAR 52.219-28 by reference and instead expressly applied the recertification directive to the procurement.14 The court did not explicitly address whether Gryphon's acquisition of Mechanix changed Mechanix's small business status through SBA's affiliation rules, finding that issue to be the subject of ongoing administrative review by the SBA.15 But the court, applying the fundamental precept of federal procurement law that offerors and agencies must comply with terms of solicitations,16 held that the agency's failure to inquire further and to require Mechanix to recertify its size status was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.17

HWI Gear suggests a number of recommended actions for small businesses and their would-be buyers. First, the case turned on the details of the wording of the solicitation itself—the fact that the FAR provision was actually incorporated into the solicitation rather than simply being referenced—illustrating the challenges of diligence in this area. Second, it is important to note that the offeror's notice to the Contracting Officer concerned its change of corporate structure from a corporation to a LLC. Companies typically assume that this is a non-issue because, under state law, converting from a corporation to an LLC generally does not create a new legal entity. GAO recently affirmed this general proposition in DynCorp International.18 Here, however, Mechanix did notify the Contracting Officer of the change, which imposed an additional duty of inquiry on the Contracting Officer. And, because the solicitation expressly included the small business recertification requirement, that duty included inquiry into the offeror's continuing small business status.

As an aside, when assessing this case, we should note the distinction between a corporate conversion and an offeror's failure to recertify. On the surface, Mechanix's notice to the contracting officer suggested that its corporate change was merely a conversion from a corporation to a limited liability company. The Government Accountability Office (GAO) in September 2020 held in DynCorp International, LLC that conversions and pending name change agreements do not, without more, materially impact the validity of an offeror's proposal, particularly where the offeror's CAGE Code does not change. In HWI Gear, however, notifying the contracting officer of the conversion did not satisfy the offeror's duty to reconfirm its size status.

In sum, with the SBA's revisions to 13 C.F.R. § 121.404(g), it is now clearly incumbent on target companies and their acquirors to notify the Contracting Officer of any change in status that could affect target companies' pending bids or proposals. This notice should include any changes in corporate structure, to reduce potential protest risk, and also to advise of change in small business status. Notifying the contracting officer will not, however, obviate bid protest risks where those changes materially affect the offeror's proposal or ability to perform the contract, including in small-business set-asides, where the former small business will no longer be eligible for award. 

© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

  1. 13 C.F.R. § 121.103.

  2. The target will be able to continue performing existing small busines set-aside awards. And, the target will remain eligible for task order awards under existing contracts, but the agency will not be able to take credit for the awards in its annual small business utilization report to Congress, making such awards less likely.

  3. 85 Fed. Reg. 66146 (October 16, 2020) (effective November 16, 2020).

  4. 13 C.F.R. § 121.404(a) ("SBA determines the size status of a concern, including its affiliates, as of the date the concern submits a written self-certification that is small to the procuring activity as part of its initial offer or response which includes price.")

  5. Id. § 121.404(g)(2)(ii)(D) (emphasis added).

  6. HWI Gear, Inc. v. United States, No. 20-930, 2020 WL 7706975 (Dec. 23, 2020), appeal pending, No. 21-1549 (docketed Jan. 14, 2021).

  7. Id. at *1.

  8. Id. at *3 n.1.

  9. Id. at *3.B-417611.7, et al., Sept. 24, 2020, 2020 CPD ¶ 342 strongly

  10. HWI Gear, Inc. v. United States, No. 20-930 at *3.

  11. Id.

  12. Id. at *7.

  13. Id. at *6 ("The court concurs with the government and Mechanix that the regulations themselves do not contain an independent requirement for an offeror to recertify, nor would FAR 52.219-28 require recertification by reference alone. The SBA has repeatedly rejected the argument that 'merely setting the task order aside for small businesses is a request for recertification.'" (quoting See, e.g.Safety & Ecology Corp., SBA No. SIZ-5177, 2010 WL 6576189, at *23 (Dec. 20, 2010))).

  14. Id. ("However, the concern in this case is not with the FAR requirement as it exists in the regulations, but rather with the explicit incorporation of the pertinent mandate into the solicitation.").

  15. Id. at 7 ("It is important to note the limited scope of this decision. The court is not determining Mechanix's size at the time it made its initial offer. That issue is subject to ongoing administrative review by SBA. See generally HWI Gear, Inc., SBA No. SIZ-6072. The court is simply stating that the solicitation, by its very language, required Mechanix to recertify that it was a small business within thirty days of its merger. It did not do so. Once, the contracting officer was alerted to Mechanix's corporate change, the contracting officer should have, at minimum, inquired further in an effort to ensure that Mechanix was complying with the solicitation requirements. Because no inquiry occurred and Mechanix no longer qualified, the agency failed to comply with the terms of its solicitation."); see also 13 C.F.R. § 121.103 (SBA's affiliation rules).

  16. HWI Gear, Inc. v. United States, No. 20-930 at *5 ("Offerors must comply with the requirements of the solicitation, and the agency must manage the procurement in accordance with its own solicitation.").

  17. Id. at 8. The court likely would have reached a similar outcome under a material misrepresentation theory. See, e.g.Planning Research Corp. v. United States, 971 F.2d 736, 741 (Fed. Cir. 1992) ("{T}he submission of a misstatement . . . which materially influences consideration of a proposal should disqualify the proposal. The integrity of the system demands no less."). As the court explained, "Mechanix's representation that the terms and conditions of its offer were unchanged was in fact not correct, because the condition that Mechanix remained a small business was not true. The contracting officer's failure resulted in the agency violating its solicitation requirements. That omission was prejudicial because if the contracting officer had inquired, he would have learned that Mechanix failed to remain a small business." HWI Gear, Inc. v. United States, No. 20-930 at *5.

  18. DynCorp Int'l, LLC, B-417611.7, et al., Sept. 24, 2020, 2020 CPD ¶ 342.

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