GeoSyntec Consultants, No. 4277 (November 7, 1997). Docket No. SIZ-97-9-22-41 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. _______________________________ ) SIZE APPEAL OF: ) ) GeoSyntec Consultants ) Docket No. SIZ-97-9-22-41 ) Appellant ) Decided: November 7, 1997 ) Re: Versar, Inc. ) ) Solicitation No. ) F41624-97-R-8003 ) Department of the Air Force ) _______________________________) APPEARANCES Thomas N. Sargent for Appellant Eric M. Dattell, Esq. for Versar, Inc. DIGEST The "present effect" rule, 13 C.F.R. Section 121.103(d), does not apply where the record fails to show that, on the date the challenged firm self certified, no agreement in principle existed whereby the challenged firm would acquire another firm, thus rendering it other than small. DECISION BLAZSIK, Administrative Judge: Jurisdiction This appeal is decided under the Small Business Act of 1958, 15 U.S.C. Sections 631 et seq., and 13 C.F.R. Parts 121 and 134 (1996). Issue Whether the "present effect" rule applies where the record fails to show that, on the date the challenged firm self certified, no agreement in principle existed for a challenged firm to acquire its alleged affiliate. Facts On March 28, 1997, the Contracting Officer for the Department of the Air Force, Brooks Air Force Base, Texas, issued this negotiated procurement for "Worldwide Full Service Remedial Action" services, and classified it under Standard Industrial Classification code 8744 (Environmental Remediation Services), with a 500-employee size standard. The procurement was a small business set aside, and initial proposals were due on April 28, 1997. Versar, Inc. (Versar), the challenged firm, self certified on April 28, 1997. The Contracting Officer notified offerors on August 18, 1997, that Versar had received the contract. On August 20, 1997, GeoSyntec Consultants (Appellant) filed a timely protest against Versar. 13 C.F.R. Section 121.1004(a)(1). On August 22 and 25, 1997, respectively, Peer Consultants and Environmental Quality Management, Inc., also filed timely protests against Versar. All three protests asserted that, based on Versar's recent acquisition of Science Management Corporation (SMC), announced in a May 5, 1997 press release, Versar was an other-than-small business. On August 21, 1997, the Contracting Officer forwarded the protests to the Small Business Administration's King of Prussia Office of Government Contracting, Area II (Area Office) for a size determination. The Area Office Determination The Area Office file contains Versar's SBA Form 355, Articles of Incorporation, bylaws, and affidavits regarding Versar's acquisition of SMC. The documents show Versar has seven subsidiaries: GEOMET Technologies, Inc.; Versar of Ohio, Inc.; Versar Laboratories, Inc.; Versar Risk Management, Inc.; Fluxagamm, Inc.; Versar Services, Inc.; and Sarnia Corporation. The total number of employees for Versar and all of its subsidiaries does not exceed 500 employees. The Area Office's September 5th determination contains a detailed chronology of the events, from January 28, 1993 to May 2, 1997, leading to the acquisition. In the affidavits submitted by Versar regarding the acquisition negotiations, Mr. James A. Skidmore, Jr., SMC's Chairman, President, and CEO, stated that, on April 28, 1997, the SMC management group met to discuss Versar's April 25th offer to acquire SMC. Mr. Skidmore stated they rejected the offer on April 28th, but decided to negotiate further. He stated that, on May 1, 1997, the negotiators reached an agreement in principle, but certain conditions remained to be satisfied. Mr. James C. Dobbs, Versar's Vice President and General Counsel, who was in charge of the negotiations, stated the negotiations continued through May 2, 1997. Mr. Wayne Shortridge, a partner of a law firm representing Versar, stated Versar and SMC negotiated from April 29th through May 1, 1997. He stated the parties reached an agreement in principle on May 1st, but modified the agreement on May 2nd, when they reached a final agreement and executed the documents. Mr. Shortridge stated there was "no agreement, in principle or otherwise, conditional or unconditional, between Versar...[and SMC] for the acquisition of an interest in SMC," on April 28th. Mr. Pedro J. Vita, Senior Vice President of NationsBank (the bank financing the acquisition), stated NationsBank withdrew its financing offer on April 30th. He stated Versar reached an agreement with the Administrative Creditors [1] on May 1, 1997, whereby the final acquisition agreement was conditioned on NationsBank's financing the cash portion of the transaction by May 2nd. Mr. Vita stated this condition was satisfied on May 2, 1997. Based upon the above factual findings, the applicable case precedent, and the applicable regulation, 13 C.F.R. Section 121.103(d), the Area Office found no agreement in principle existed on April 28, 1997. [2] Accordingly, the Area Office found Versar and SMC were not affiliated as of that date, and concluded Versar is a small business under the applicable size standard. Appellant received the size determination on September 15, 1997, and filed an appeal postmarked September 17, 1997. Arguments on Appeal Appellant asserts, on April 25, 1997, Versar offered to acquire SMC, an acquisition that would render Versar ineligible for this set-aside. Although SMC rejected the offer on April 28, 1997, the deal was consummated a few days later on May 2, 1997. Appellant concedes Versar did not enter into any agreement with SMC on April 28, 1997, and it does not controvert the Area Office's chronology of the events. It asserts, however, that at the time of its April 28th self-certification, Versar did not intend to remain a small business, and that Versar's intent should control. On October 8, 1997, Versar responded, requesting OHA to deny the appeal because the Area Office did not err. Versar relies on what it characterizes as well-settled OHA precedent, that SBA will give "present effect" only to an actual agreement or agreement in principle to merge (or acquire a company), made on or before the date of self-certification. Versar asserts that its "intent" is irrelevant. The only relevant consideration is whether Versar was, in fact, a small business when it self certified. Versar asserts OHA should deny the appeal. It asserts Appellant has conceded Versar had not entered into an agreement with SMC on April 28th. Versar also notes Appellant has conceded the accuracy of the Area Office's chronology of the events, which clearly shows no agreement between Versar and SMC, either in fact or in principle, on April 28th. Appellant filed another submission that OHA received on October 9, 1997. Discussion Since the appeal was filed and served within 15 days from the date the size determination was served, the Administrative Judge concludes the appeal is timely. 13 C.F.R. Section 134.304(a)(1). However, since the record closed on October 8, 1997, the Administrative Judge will not consider Appellant's October 9th submission. [3] The Administrative Judge adopts without discussion the Area Office's chronology of the events and its factual findings. She also concludes the Area Office's determination contains no reversible error. [4] The applicable regulations provides that the size status of a concern (including its affiliates) is determined as of the date the concern submits a written self-certification that it is small to the procuring agency as part of its initial offer. 13 C.F.R. Section 121.404. [5] Here, it is undisputed that Versar self certified on April 28, 1997. Affiliates acquired after the date of self certification are not counted for size determination purposes. Size Appeal of Alpha-Omega Environmental Co., No. 3658 (1992). Further, a firm is not considered affiliated with another firm merely by virtue of negotiations toward one possibly acquiring the other. Rather, a firm becomes affiliated with another when it reaches an agreement in principle to acquire the other by the date of self certification, even if the merger or acquisition has yet to be executed. Size Appeal of Ecological Planning and Toxicology, Inc., Id. (denying an appeal where there was no agreement in principle to merge until after the date of self- certification). Hence, SBA will give present effect to an agreement to merge or acquire another firm "whether the agreement is unconditional, conditional, or finalized but unexecuted." 13 C.F.R. Section 121.103(d). Conversely, SBA does not give present effect to agreements to negotiate toward a possible future merger or acquisition at some future date, because they are not considered "agreements in principle". Similarly, an agreement to continue negotiations does not constitute an agreement in principle for purposes of the "present effect" rule. Size Appeal of Technology Systems Association, Inc., Id at 9. [6] As mentioned above, the undisputed record, including affidavits, establish the chronology of events leading to Versar's and SMC's merger. The Administrative Judge finds that, on April 28th, the only agreement between Versar and SMC was to continue to negotiate. Thus, the Administrative Judge concludes that, on that date, Versar was a small business and eligible to bid on this procurement. Finally, the Administrative Judge rejects Appellant's assertion that Versar "intended" to acquire SMC as of April 28th, and this intention should control for size determination purposes. First, Appellant's argument is contrary to the regulatory language. Second, the regulations and case law require an agreement between the parties, either in principle or executed, before a small business is deemed affiliated with another. Any other interpretation violates due process and would lead to chaos. Conclusion For the above reasons, the Administrative Judge concludes Versar was a small business at the time of its self- certification. She AFFIRMS the Area Office's determination, and DENIES the appeal. This is the Small Business Administration's final decision. 13 C.F.R. Section 134.316(b). ___________________________ GLORIA E. BLAZSIK Administrative Judge _________________________ [1] The record identifies the Administrative Creditors as a group of creditors who had a first priority lien on SMC's assets. [2] The Area Office cited Size Appeal of Technology Systems Associates, Inc., No. 3963 (1994) and Size Appeal of Ecological Planning and Toxicology, Inc., No. 3919 (1994). In both cases, OHA essentially held that, where parties agree to continue negotiations toward a merger or a sale of stock at some future date, such agreements are not agreements in principle and will not be given present effect. [3] The Administrative Judge's September 23, 1997 Notice and Order, states that all responses to the appeal "must be RECEIVED by this Office on or before fifteen (15) calendar days from the date of this Notice," and, except for good cause shown, the record will close on that date. Here, the record closed on October 8, 1997, and Appellant failed to assert any "good cause" why the Administrative Judge should accept it. Accordingly, the Administrative Judge will not consider it. [4] While the Administrative Judge ordinarily might dismiss this appeal (13 C.F.R. Section 134.303), she accepts it and decides it on the merits, because it is a question of first impression under the revised regulations. [5] The regulations contain two exceptions not applicable here. [6] The Administrative Judge notes both cases cited were decided under the regulations previously in effect. 13 C.F.R. Section 121 and 134 (1995), which are virtually the same under the revised regulations, 13 C.F.R. Section 121 (1996). Thus, these cases remain valid precedent. Posted: November, 1997