SBA’s Present Effect Rule and Size Protests

By: Christine V. Williams on 08/11/2018

When a merger or acquisition deal is occurring and the firms have contracts awarded on SBA eligibility, including size, the present effect rule must be considered.  That rule, if not careful, may have the unintended consequences of rendering firms other than small, or otherwise ineligible, before the ink is even on the paper to close the deal.  That is, SBA has a rule that states, in pertinent part:

(1) In determining size, SBA considers stock options, convertible securities, and agreements to merge (including agreements in principle) to have a present effect on the power to control a concern. SBA treats such options, convertible securities, and agreements as though the rights granted have been exercised.
(2) Agreements to open or continue negotiations towards the possibility of
a merger or a sale of stock at some later date are not considered agreements in principle” and are thus not given present effect.

OHA has explained that, under the present effect rule, “a merger or
acquisition is effective as of the date [] that an ‘agreement in principle’ is reached, even though the merger or acquisition itself is not yet consummated.” Size Appeal of Heard Constr., Inc., SBA No. SIZ-5461, at 5 (2013) (quoting Size Appeal of Nuclear Fuel Servs., Inc., SBA No. SIZ-
5324, at 8 (2012)).

In a recent case, OHA reviewed whether the present effect rule would render a firm affiliated with a potential deal partner and found that it would not because of the timing of the offer plus price as well as the deal not being reached in principal.  Here is a link to that case: Crop Jet Present Realization