On December 23, 2015, the SBA's Office of Hearings and Appeals (OHA) issued a decision in the Matter of: Size Appeal of Tenax Aerospace, LLC. (Tenax) This appeal, fiiled by Tenax Aerospace, LLC, arose out of a size protest filed by Flight Support, Inc. (FSI) (an unsuccessful offeror) and subsequent size determination by SBA that Tenax was not an eligible small business for purposes of the procurement at issue.
The procurement in this case was issued by the Federal Bureau of Investigation (FBI) and was set aside for small businesses under NAICS Code 532411 (Commercial Air, Rail, and Water Transportation Equipment Rental and Leasing) which has a corresponding size standard of $32.5 Million. Appellant Tenax Aerospace submitted a proposal certifying that it was a small business.
Thereafter, the FBI notified unsuccessful offerors that the contract had been awarded to Tenax. Within the appropriate time period, FSI protested Tenax' status as a small business for purposes of the procurement at issue. In response, the SBA Area Office issued its decision that Tenax was not an eligible small business and Tenax promptly appealed the SBA's decision.
The specific facts and basis for finding Tenax to be other than small were:
- Tenax is majority owned by TAH, a holding company which is in turn majority owned by Investor 1.
- TAH is a minority owner (33.33%) in a company called Tri-Jet.
- Investor 1 and Investor 4 have common ownership in eight (8) companies.
- The combined revenues of Tenax and its affiliates (Tri-Jet and the 8 other companies commonly invested in by Investor 1 and Investor 4) exceeded the $32.5 million size standard.
In response, Tenax argued the following:
- There is no evidence Tenax can control the other entities.
- Tenax had established a clear fracture with the other companies because it does not share facilities, employees or equipment with the other firms; it is in a separate line of business from the other firms; and no financial assistance, loans or subcontracting has taken place between it and the other firms.
SBA OHA's Decision
In denying Tenax' appeal and upholding the SBA's size determination that Tenax was not an eligible small business because of its affiliation with other firms which caused it to exceed the applicable size standard, the OHA made the following relevant points:
- When the basis for a finding of affiliation is common investments, whether the firm at issue has established a clear fracture with the other alleged affiliate firms is irrelevant, as clear fracture applies when identity of interest is based on familial relationships.
- A finding of affiliation based on common investments presumes that the investors have a common purpose. In order to rebut the presumption, it must be established that the parties do not have a common purpose.
- In this case, Tenax had failed to establish that Investor 1 and Investor 4 did not have a common purpose or did not invest together in 8 firms.
This case is significant because it provides guidance on what might implicate common investment affiliation (i.e., how many companies might trigger affiliation), an area that generally does not get a lot of attention or discussion in OHA decisions presumably because it does not occur that often.
Significantly, companies owned by Native Hawaiian Organizations (NHOs), Tribes and Alaska Native Corporations (ANCs) enjoy an exception to affiliation. However, the companies at issue must all be majority owned by the same NHO, Tribe or ANC in order to take advantage of the exception. We do a significant amount of work with NHO-owned and individual-owned 8(a) companies and we consistently advise them to be mindful of the ownership that minority owners have in other entities. While we may sometimes sound like a broken record, we believe this OHA decision reinforces our words of caution and serves as a reminder of the importance of maintaining this exception.
For questions on affiliation and/or the exception to affiliation provided to NHOs by regulation and SBA interpretation, please contact us at: (808) 369-9710 or firstname.lastname@example.org.