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As many contractors have known for quite some time, the U.S. Small Business Administration (“SBA”) regulations provide detailed requirements for joint venture agreements, and failure to meet any of the regulatory requirements can disqualify a joint venture entirely. As for the practical ramifications for this failure, if a joint venture with a deficient joint venture agreement wins an award, but a protestor challenges its size or status, the joint venture can be stripped of its award. Given the burden that SBA’s regulations impose on joint venturers, it is imperative that small businesses review their joint venture agreements to ensure that it complies not only with current SBA regulations but also with the SBA Office of Hearings and Appeals (“OHA”) and U.S. Court of Federal Claims decisions which interpret them.
On October 16, 2020, the SBA issued a final rule that modified regulations affecting its small business programs and all joint-venture entities (including as expanded in its January 2021 correcting amendment). The final rule included several seemingly small changes that have raised the importance of double-checking all joint venture agreements. The timing now is particularly critical as we are just past the two-year mark since the final rule took effect. That is, some contractors may be considering a second joint venture with a company (or mentor) because their prior joint venture eclipsed its 2-year durational limit or are considering a joint venture but haven’t formed one since before the rule change. In either case, copying your previous joint venture agreement, without more, could prove fatal given that the final rule revised several items, including the Project Manager, managing venture control, and reporting.
Responsible Manager
One critical area that needs to be updated relates to the appointment of a “Responsible Manager” as opposed to a “Project Manager.” The SBA reasoned that some contracts don’t call for “project managers,” but might instead require a program manager, program director, or some other position. To the SBA, the title of the manager was never as important as the function, so the regulations now instead require the joint venture to designate a “Responsible Manager.” As such, the regulations now read that a joint venture agreement must contain a provision designating a named employee of the managing venturer as the “Responsible Manager” with ultimate responsibility for performance of the contract. Therefore, any joint venture agreements without this new language could find itself at risk.
Joint Venture Control
Before the final rule, SBA’s regulations were interpreted to mean that the managing venturer had to exercise nearly unfettered control over the joint venture. After the final rule, joint venturers may now “participate in all corporate governance activities and decisions of the joint venture as is commercially customary.” So, while the managing venturer must still be in the driver’s seat, there appears to be a greater opportunity for managerial and corporate input from the other joint venture members. Unfortunately, it remains unclear what the boundaries are with regard to minority member participation. For instance, OHA recently affirmed the decision to disqualify an awardee as a joint venture for delegating too much control to a minority member. Strategic All. Sols. LLC, SBA No. VET-277, 2022 (S.B.A. Sept. 22, 2022). In that case, an award was lost simply because unanimous consent was required by all joint venture members to initiate a claim or litigation under contracts and OHA ruled that the joint venture agreement gave negative control to minority joint venture members over an action “important to the day-to-day operation of the company.” Id. at *13. The case is now before the U.S. Court of Federal Claims, so there may be future developments on this issue.
Reporting Requirements and Return of Funds
Finally, the new rule changed the reporting requirements related to all small mentor-protégé joint ventures under 13 C.F.R. § 125.8(b)(2)(xi) and (xii) and the return of funds at 13 C.F.R. § 125.8(b)(2)(iv).
First, all small mentor-protégé joint ventures must include language relating to performance reports as opposed to financial reports. Although this is a seemingly small change, the problem stems from the fact that the SBA did not make corresponding changes to its separate joint venture regulations for the 8(a), SDVOSB/VOSB, HUBZone and EDWOSB/WOSB programs. All four socio-economic joint venture regulations include requirements for financial statements and profit-and-loss statements, as opposed to the performance report language found under 13 C.F.R. §§ 125.8(b)(2)(xi) and (xii). Given that socio-economic mentor-protégé joint ventures can bid on both total small business contracts and socio-economic set-aside contracts, those socio-economic mentor-protégé joint ventures should be sure to cover both rules to avoid issues in the event of a protest.
Second, the all small mentor-protégé joint venture regulation contains a provision stating that “any funds remaining in the joint venture bank account shall distributed at the discretion of the joint venture members according to percentage of ownership.” The four socio-economic regulations, again, do not include a corresponding change. Thus, a mentor-protégé joint venture agreement that complies with the socio-economic joint venture regulations – 8(a), SDVOSB/VOSB, HUBZone and EDWOSB/WOSB – may not comply with the all small mentor-protégé joint venture regulation, so beware.
Conclusion
The SBA appears to have recently been more active in their enforcement of the regulations affected by the 2020 final rule. As such, it has never been more imperative for joint venturers to revisit their joint venture agreements with a fine-tooth comb. Even one small hiccup could result in the loss of millions in revenue, vital past performance and experience, and an important government relationship.
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Please reach out to a member of Maynard Nexsen Cooper’s Government Solutions Group if you have any questions or need assistance.