Infotech and the law: Size regulations still an issue with SBA rule

Recently, the Small Business Administration issued a final rule to amend its small-business size regulations. Buried in this rule is a potentially confusing requirement for small businesses to provide updated size certifications following certain types of mergers or acquisitions.

The "recertification" requirement applies to mergers or acquisitions that occur after Dec. 21, 2004, and result in either novation or change-of-name agreements.

A novation agreement is required when, in connection with a transfer of assets versus a stock purchase, a contract is assigned from one company to another. A change-of-name agreement is required if only a change of the contractor's name is involved, and the parties' rights and obligations are unaffected.

The recertification requirement is part of SBA regulations that deal with determining a small business' size status.

The regulations make clear that determining a business' size is done when a small business submits its self-certification with its initial offer.

The regulations also make clear that a business qualifying as small at the time it receives a contract is considered small throughout the life of the contract. In addition, the regulations permit an agency to exercise contract options and count the award of those options as "small," even if the business grows during contract performance.

All of these rules are helpful in clarifying when a business is small and are generally consistent with previous regulations. But the new regulations create a new obligation -- the recertification requirement -- that appears inconsistent with the general rule that a small business remains small throughout a contract's term.

The recertification requirement appears to have been inspired by public comments that asked SBA to address the acquisition of small businesses during the life of a contract. Concerns were raised about situations in which the size status of a small business would change as a result of a merger or acquisition.

The comments apparently recommended that SBA consider a recertification process at the time a small business transfers its contracts after an acquisition. SBA agreed and added the requirement that a small business recertify its size at the time of a novation or change-of-name agreement.

The stated purpose of the recertification is to allow the procuring agency to determine whether it can still count the contract -- and any options or orders awarded under it -- toward its small-business goals. However, the new rule as drafted appears to conflict with the general rule that a business qualifying as small at the time it receives a contract is to be considered small throughout the life of that contract.

As a result, the new rule is not as clear on all points, and the recertification requirement may cause more mischief than it is worth.

For instance, if a business certifies that it is no longer small following an acquisition or merger, agencies may think mistakenly that they should terminate the contract for convenience or refuse to exercise an option on the contract, as may be required in other contexts.

The good news is that SBA may be considering clarifications to the recertification requirement. The clarifications would help contracting officers implement the intent of the new requirement, and would be welcomed by both government and industry.

Eliza Nagle is an associate in the Government Contracts practice of DLA Piper Rudnick Gray Cary LLP in Washington. Her e-mail address is eliza.nagle@dlapiper.com.