Mentor-Protégé and Other Joint Venture Best Practices: Top 10 things to consider before partnering on a government contract
MARCH 5, 2020
Adam K. LaskyOles Morrison Rinker & Baker LLP
206-251-4106
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• Teaming Arrangements Options– Joint Venture
• SB set-asides (affiliation exemptions)– SBA Mentor-protégé– Multi-small with Socioeconomic Lead– Multi-small
• Unrestricted– Teaming Agreement (Prime-Sub)– Considerations
• Risk profile• Control• Competitive profile (weight of past
performance and key personnel)• $$$• Size/status issues & affiliation• If non-managing/sub, how much do
you bring to the table?– Teaming Agreements can be much
more difficult to enforce
1 Is a JV the right Teaming Arrangement for you?
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• M&A-lite• NDA• CPARs disclosure• Key personnel resume exchange• References• NAICS code capabilities • Past M-P program history• Consider restrictions on number of MP JVs
– 3 at a time for mentors– 2 in a lifetime for protégés (exceptions likely to be added)– Can’t compete with each other (rules aren’t totally straightforward)
2 Choosing a JV Partner – Vetting Process
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• What’s the difference?• MP JV and other affiliation exempt JV
– Must be unpopulated except admin personnel
• Considerations for other JV:– Industry– Equipment/Personnel transient?– Control/simplicity– Insurance– Seniority / Unions / Benefits
3 To Populate or Not?
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• Form a company, not an informal JV.• Starting point of the JVA is regulatory compliance, BUT equally important JVA is:
– operationally sound– protect the rights of the members – Often forgotten with MP JVAs!
• NEVER NEVER NEVER use a template JVA from SBA or that you find on the internet– SBA’s (and other online) JVA templates are built to fail.
• JVAs are not one size fits all• Consider advantages/disadvantages state law choice
– Corporate formation issues – Legal implications (such as variable teaming agreement case law)
• Have an attorney(s) who understand JVs and GovK draft (or at the very least review) your JVA before executing -- especially if JV needs exemption from affiliation!
Have accountant review tax implications of various clauses in JVA.
4 Take Creation of the JV Seriously –Assume the Worst Case Scenarios
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• LoS compliance• Work-share split Profit-share split• PM designations• Managing member• Ownership split• Equipment list• Division of responsibilities• Make SBA’s compliance check easy
– SBA uses a checklist to assess JVA compliance with 124.513 content requirements, so make sure your agreement makes it crystal clear where/how you meet each regulatory requirement.
– Once pre-approval goes away, still will be relevant for Area Office reviews
5 Key Reg. Compliance Elements for MP JVAs
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• Applicable to MPs and other SBA affiliation exempt JVs only• MPA -- You generally must have SBA approval before you submit your first price
proposal.• JVA
– Current Rule• JVA must comply with applicable SBA content reg (124.513, 125.8, 125.18, etc.) before initial price
proposal submission (a few procurement-specific exemptions apply)– Compliance subject to size protest
• 8(a) set-asides: JVA must also be approved by SBA district office before award– Proposed Rule
• JVA must comply with applicable SBA content reg (124.513, 125.8, 125.18, etc.) on the date of final proposal revisions
– Compliance subject to size protest• SBA district office pre-approvals only required for 8(a) sole source awards
• 3-in-2 rule
6 Know the Compliance Deadlines(Snapshot in Time)
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7See Size Appeal of STAcqMe, LLC, SBA No. SIZ-5976 (2018) (upholding determination that MP JVA failed to comply with 13 C.F.R. §§ 125.18(b)(2) and (3) because it was drafted more than a year before the solicitation was issued and, therefore, did not detail the specific tasks to be performed by the JV members for the solicitation at issue).
• LOTS of MP JVs struggle with this!• Draft the JVA to cover the known project/contract, but make sure it allows
expansion for future projects/contracts via addendums.• Segregate and limit the number of terms that need to be addended/amended to add a
contract
• But make sure to clearly describe the venturers’ intent and establish a simple amendment/addendum process.
• One size does not fit all: Project-specific terms in the original JVA or an addendum must be updated from one project/contract to another (but not terms of the JVA as it applies to existing contracts).
JVA Should be Contract Specific,But Written to Be Adaptable to the Future
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• Key consideration for unpopulated JVs using an SBA affiliation exemption:– Establish mandatory minimum work share percentage for non-managing member– Require subcontracting to be done through the JV entity, not through the JV
members (prevents protégé from diluting mentor’s work share).– Write the agreement to cover a single project/contract, and require
amendments/addendums need unanimous approval of the members – that way protégé cant make JVA bid on additional projects without mentors buy-in.
• But be careful when including “negative control” provisions in JVA– “negative control” is generally through super-majority requirements pertaining to
normal business operations issues – Could lead to rejection of JVA by SBA or finding of affiliation – “negative control” arguably violates managing member rule
8 Protect the Non-Managing Member (i.e., Mentor)But Be Careful About Neg. Control
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• How and when can the partners demand funds from the members?• When and how will distributions be made?• When and how will profit be charged?• How and when will work-share percentages be calculated and re-calculated ? • What mechanism will you use to make sure distributions true-up partners for
changes in work-share over course of project?• Will loss/liability share be measured by same method as profit share (regs only
require profit share to be tied to work share)?• Most JVAs lack sufficient detail on these issues ---- especially MP JVAs where
profit split is dynamic and not based on ownership interest
9 Answer Money Questions
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• How and when will the parties can/be able to exit?• What obligations will they have upon exit?• Be aware of applicable SBA regulations.• M&A possibilities and implications?
10 Know Where the Exit Is
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Adam K. LaskyOles Morrison Rinker & Baker LLP
www.linkedin.com/in/adam-lasky/
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