On April 19, 2011, the General Services Administration’s Small Business Governmentwide Acquisition Contract (GWAC) Center emailed a document titled “Industry Partner Advisory” to the holders of three GWACs managed by the Center: 8(a) STARS, VETS and Alliant Small Business. (The title is “MA Advisory” – the MA presumably referring to Mergers and Acquisitions). The stated purpose of this Advisory is to inform these GWAC holders of an important policy decision made by the Center with respect to these GWACs. According to the Advisory, GSA has decided that it will terminate any of these GWACs if the contractor becomes other than small as a result of a merger or acquisition. It states:

If a prime contractor on one of the Small Business GWAC Center’s small business GWACs becomes other than a small business concern as a result of a merger or acquisition, with or without novation, the responsible contracting officer shall take prompt action to ensure the contract holder is removed from the GWAC.1

The Advisory further states that the policy decision will not affect either task orders issued by an ordering agency or task order proposals submitted by the contractor prior to a merger or acquisition – only the underlying indefinite-delivery, indefinite-quantity contract is affected.2

GSA’s Decision Could Affect Many Small Business GWAC Holders

The Center’s decision could affect any small business holding one of these GWAC contracts that is contemplating a sale of its company or the portion of the company that holds the GWAC in question. While a potential buyer would necessarily not lose the so-called “contract backlog” (i.e., the pre-existing task orders), the buyer must consider the fact that it may lose the ability to compete for future task orders under the GWAC if the transaction negates the contractor’s small business status. Because these GWACs have numerous contract holders, many small business government contractors could be affected by the decision.

SBA’s 2007 Re-representation Rule

The GWAC Center’s decision is a reminder of what many small business government contractors, and potential buyers of such businesses, feared when the U.S. Small Business Administration (SBA) changed its regulations effective June 30, 2007, to require that contractors re-represent their size status within 30 days after a merger or acquisition, whether or not the transaction involved a novation agreement. This regulatory change is implemented by Federal Acquisition Regulation (FAR) clause 52.219-28, “Post-Award Small Business Program Rerepresentation,” which now appears in almost all government contracts, large or small.

Under the SBA’s 2007 rule change, if the contractor re-represents itself as other than small as a result of a merger or acquisition, “the agency can no longer count the options or orders issued pursuant to the contract, from that point forward, towards its small business goals.”3 The stated purpose of the SBA’s rule change was to ensure that contracting agencies did not continue to take “small business credit” for small business set-aside contracts that had been acquired by a large business, either through a stock or asset purchase. The rule change was prompted by articles in the Washington Post and elsewhere criticizing the government for taking small business credit for contracts awarded to firms that had outgrown their size status or been acquired by larger firms.4

The SBA rule change and implementing FAR clause (52.219-28) do not prohibit the contracting officer from exercising an option or issuing orders where a contractor no longer qualifies as a small business, nor do they require the contracting officer to terminate the contract for convenience. Indeed, in its discussion of the final rule, SBA emphasized that the decision of whether to exercise an option where the contractor no longer qualifies as a small business is best left to the discretion of the contracting officer, who should consider a variety of issues such as the agency’s small business contracting goals, the contractor’s past performance, the existing competition, etc.5 The GWAC Center’s MA Advisory effectively “pre-exercises” the GWAC contracting officer’s so that, upon receiving a re-representation by the contractor that it is other-than-small as a result of a merger or acquisition, the contracting officer must immediately terminate the GWAC.

GSA’s Decision Eliminates Some Uncertainty in M&A Transactions

The Center’s policy decision is actually good news in that it removes much of the uncertainty and risk that a potential buyer would otherwise face as to whether the GWAC in question or outstanding task orders or task or proposals under the GWAC will survive the transaction. GSA’s GWAC Center deserves credit for being proactive and up-front with its small business contractors and potential acquirers of such contractors. If the subject GWACs are viewed as critical to the future success of the seller’s business, potential acquirers may want to consider structuring the transaction as a minority investment that would not impact the seller’s small business status.

A lingering question is whether any other contracting agencies managing multiple-award GWACs or IDIQs that were initially set aside for small businesses will follow GSA’s example.