On January 13, 2016, the SBA's Office of Hearings and Appeals (OHA) issued a decision in the Matter of: Size Appeal of Government Contracting Resources, Inc. This appeal, filed by Government Contracting Resources, Inc. (GCR) arose out of a size protest filed by two unsuccessful offerors and the subsequent size determination that GCI was not a small business due to its affiliation with Valley Indemnity, LTD. (Valley).
The procurement in this case was issued by the Naval Facilities Engineering Command SW (NAVFAC) for base operating support services and was set aside for Service-Disabled Veteran-Owned Small Businesses under NAICS Code 561210 (Facilities Support Services), which has a corresponding size standard of $38.5 Million. Appellant GCR submitted a proposal certifying that it was a small business under the applicable size standard.
After GCR was announced as the apparent awardee, two unsuccessful offerors filed a protest of GCR's size. Subsequently, the SBA's Area Office issued a size determination concluding that GCR was not a small business under NAICS Code 561210 based on its affiliation with Valley. Specifically, the SBA found that because Valley is owned by GCR and approximately twenty (20) other companies each with an equal minority interest, each of the owners of Valley is presumed to have control over Valley. In addition, SBA based its decision on the fact that the GCR's President and Majority owner, Jeffrey Don Albritton, is on Valley's Board of Directors.
In arguing against affiliation, GCR argued the following: (1) GCR only holds a 4.16% ownership interest in Valley and this interest is not large enough to establish quorum, prevent a quorum, cause any vote to pass, or block any vote; (2) Valley's Executive Committee (which Mr. Albritton is not on) controls Valley and therefore they have met their burden of showing that someone other than GCR controls Valley; and (3) Mr. Albritton is just one of twenty-six (26) directors.
Multiple Owners: OHA has held that where a firm is owned by multiple owners each with equal minority interests, each of those minority owners is presumed to control the concern. This presumption is rebuttable, but "the mere fact that a minority shareholder cannot individually control a concern is not sufficient to overcome the presumption." This presumption can be overcome by showing that a party other than the minority shareholder at issue has the power to control.
SBA OHA's Decision
The OHA ultimately upheld the size determination that GCR was not a small business due to its affiliation with Valley. As noted, GCR held only a 4.16% ownership interest in Valley which was sufficient to trigger the presumption of control. Further, although GCR argued that the Executive Committee actually controlled Vallley, the OHA rejected this argument because the Board of Directors always has ultimate control, even over the decisions of the Executive Committee. Essentially, the OHA found that GCR had not met its burden of rebutting the presumption of control.
Similar to the decision in Tenax Aerospace, LLC which we previously reported on, this case is significant in that it shows that very small ownership in another entity can lead to affiliation. The two decisions seem to indicate the OHA's current views on affiliation as it relates to ownership in multiple entities. As we previously reported, companies would be wise to seriously consider the relationships it has with other entities, particularly large businesses prior to making any size certifications.
If you have any questions about affiliation and/or corporate structuring in order to minimize affiliation, please contact us at: (808) 369-9710 or firstname.lastname@example.org.