SNI United And The Risks Of DIY Joint Ventures

I think we can get by without hiring counsel or a consultant. 

I mean, we aren’t even sure we’ll win the bid, right? 

So let’s just download the forms we need from one of those online sites. 

That should help us get by for now…

     What small business owner hasn’t said or thought this - or something like this - at one time or another?  With limited funds available, particularly for a small business’ legal spend, every dollar counts.  Certainly, when taking into account the uncertain outcome from bidding on a government contract, cutting a corner here or there may be tempting.  And there may be, no doubt, some situations in which a simple online template might help a government contractor “get by.”

     As two small businesses recently learned last month, however, setting up a joint venture to bid on an 8(a) set-aside contract is not one of them.

SNI United

     In Size Appeal of: Syscom, Inc. Re: SNI United, LLC, the U.S. Department of Air Force (Air Force) issued an RFQ for an 8(a) set-aside contract for refuse and recycling services.  Air Force eventually notified offerors that the apparent awardee was SNI United, LLC (SNI).  SNI is organized as a limited liability company (LLC) under Michigan law and is a joint venture between 1-855-US-TRASH, LLC (US Trash), an 8(a) participant, and Six Nations Inc. (Six Nations), a small business.  

     SNI won the bid, but after Air Force notified unsuccessful offerors that SNI was the apparent awardee, one of them submitted a size protest to the SBA and the case ultimately ended up at the SBA’s Office of Hearings and Appeals (OHA).  The unsuccessful offeror claimed that the 8(a) participant did not control the day-to-day management and administration of the joint venture, in violation of the SBA’s small business regulations under 13 CFR 124.513(c)(2).

     The SBA regulates a number of small business government contracting programs and among its concerns is that a small business program participant may not, in fact, be controlled or managed by the qualifying person or small business, or that SBA program benefits may pass through the qualifying person or small business to another person or entity that is not qualified. 

     These concerns are partly reflected in the SBA’s regulations that allow a joint venture between an 8(a) participant and another small business to be awarded an 8(a) contract even though the other small business may not be an 8(a) participant.  Those regulations impose specific requirements on the related joint venture agreement that are intended to ensure that the 8(a) participant controls the joint venture and receives benefits from it.  For example, the regulations require a joint venture agreement to designate the 8(a) participant as the managing venturer of the joint venture and to designate an employee of the 8(a) managing venturer as the responsible manager with ultimate responsibility for performance of the contract.

     Often with LLC’s, requirements like the ones found in the SBA’s joint venture regulations can be incorporated in a competently and carefully drafted LLC operating agreement, that itself can act as a joint venture agreement.

     That wasn’t, however, what was done in SNI United.

     We won’t recount all of the drafting mistakes in this article.  But one that sticks out is that the SNI joint venture partners apparently used forms and procedures that apply to corporations, not LLC’s.  For example, they adopted bylaws instead of an operating agreement and they created a board of directors. This might seem odd at first, until you get to their purported explanation - namely, that they “drafted the corporate documents related to the joint venture themselves without the assistance of legal counsel, based on forms they found online.”  So the joint venture “created bylaws and adopted a board of directors to manage the joint venture because that is what the form it found online did.”

     That being said, the SNI joint venturers did adopt a separate joint venture agreement, which named the 8(a) business as the managing venturer.  The problem there, as OHA acknowledged in its decision, is that under the law for LLC’s in Michigan, managers or managing members must be designated in an articles of organization or in an operating agreement, and in the absence of that kind of designation, all members of the LLC are deemed to manage the business.  In SNI United there was no operating agreement, since the joint venture partners had drafted bylaws instead, and there was no designation in SNI’s articles of organization.  Thus, under Michigan law all members were deemed to manage the joint venture LLC, and OHA sided with Michigan law in its conflict with SNI’s joint venture agreement. 

     Another shortcoming OHA found was in provisions in SNI’s bylaws that undermined the notion that the 8(a) business had the ultimate authority to manage and control the business.  In short, the part of the bylaws that related to board meetings gave the owner of the non-8(a) business the power to block a quorum and, thus, to prevent any action by the board simply by not showing up.

     Throughout their submissions, the SNI joint venture partners insisted that they created the joint venture and related documents in good faith, with the intent to comply with the SBA regulations, and that they had in fact, notwithstanding governing documents, operated the joint venture under the SBA rules.  So they asked not to be penalized for their inadvertent mistakes.  Although the SBA was sympathetic, OHA ultimately ruled that SNI did not qualify as an 8(a) joint venture under the SBA’s regulations and was not an eligible small business for the procurement.

Key Lessons

     SNI United serves as a warning on the use of online forms and templates, since they typically are not designed to comply with FAR, DFARS or the SBA’s small business regulations.  Following automated prompts and cues, therefore, may cause small businesses to adopt rules and procedures that not only are unnecessary in some instances, but worse, may conflict with government contracting rules and requirements.

     The case also highlights the downside of “doing it yourself” in lieu of obtaining competent and cost-effective counsel or advice, particularly when it comes to organizing a business, much less a joint venture, that is targeting government set-asides.  Indeed, the perceived savings in the cost or inconvenience often is dwarfed by the time, expense and resources a company may feel compelled to spend in order to fend off a protest or adverse agency determination.

     This leads us to, perhaps, the most painful lesson a small business may learn if it finds itself in a similar situation.  As set out in OHA’s decision, the SBA’s district office purportedly had served as a sort of match-maker, connecting the 8(a) business with its non-8(a) partner, which was a recent 8(a) graduate.  The joint venture seemingly had things going its way, and it actually won the contract it was targeting – only to have the opportunity and the contract dollars that come with it slip away.  Since the partners were purportedly already complying with the SBA rules in practice, to hold onto their award they just needed their governing documents to line up with their practice and the SBA’s rules.

     Therefore, rather than help it "get by," an early decision by a small business to forgo seeking advice from counsel or consultants in favor of a do-it-yourself solution may, in the end, leave it regretting "the one that got away."