Business Reorganizations May Present Trap for Unwary Government Contractors
A recent bid protest decision underscores the care and planning that government contractors must apply in considering various forms of business reorganizations. For example, a contractor that is presently organized as a Corporation may wish to convert to a Limited Liability Company ("LLC") for various tax purposes. In other cases, a contractor organized as an LLC may wish to reorganize as a Corporation in order to sell stock to a venture capital source. As highlighted in the Government Accountability Office's ("GAO's") decision in W.B. Construction and Sons, Inc.;B-405874 and 405874.2, __ CPD ¶ __ (Dec. 16, 2011), such a reorganization may create doubt as to the legal identity of an offeror that could result in a bidder being found ineligible for award.
The procurement at issue involved an Army acquisition that was set-aside for competition among small businesses enrolled in the Small Business Administration's ("SBA's") 8(a) program. The solicitation involved and indefinite-quantity/indefinite delivery contract for construction services to be awarded on a lowest-priced, technically acceptable basis. The apparent successful offeror submitted its proposal under the name of "DQSI, LLC," (emphasis added). The CAGE Code and DNS Number on the proposal, however, were for "DQSI, Corporation." (emphasis added). Upon seeking the required confirmation from the SBA of DQSI's eligibility for award under the 8(a) program, the SBA informed the Army that DQSI, Corporation was eligible for award, based on the CAGE Code and DUNS Number provided by the Army.
The Army awarded the contract to DQSI, Corporation, and W.B. Construction and Sons, Inc., ("W.B.") the next low priced offeror, protested to the GAO. In support of its protest, W.B. asserted that DQSI, Corporation (the company enrolled in the SBA 8(a) program to which award was made) was not the same legal entity as DQSI, LLC (the entity which submitted the proposal). W.B. also asserted the DQSI Corporation was converted to an LLC in 2009, that DQSI failed to obtain SBA approval of its change in business form, and that under state law corporations and LLCs are separate and distinct legal entities organized under different statutes. The SBA confirmed that only DQSI, Corporation was enrolled in the 8(a) program and that there was no record of DQSI requesting approval to change its business form.
The GAO sustained the protest on the basis that (1) uncertainty as to the legal identity of the offering entity rendered DQSI's proposal technically unacceptable and (2) as a general matter the entity awarded a contract must be the same as the identity that submitted the initial proposal. This decision affords some important practice points to government contractors considering business reorganizations, including:
- If possible, postpone the transaction changing the business form until after contract award. After award, it is generally possible to simply either submit a change of name notice (in the case of a transaction involving a stock or equity acquisition or merger) or request for novation (in the case of a transaction involving an asset sale or transfer) to the Contracting Officer.
- If it is not possible to postpone a reorganization, amend any pending proposals to clearly identify the new entity (including CAGE Code, DUNS number and other required data) if this is permitted under the terms of the solicitation.
- In the case of an entity enrolled in the SBA 8(a) program, ensure that you comply with the requirement to obtain SBA approval, in advance, of any change in the business form and ownership. Under 13 C.F.R. § 124.105(i), an 8(a) firms may change its ownership or business structure so long as one or more disadvantaged individual own and control it after the change and SBA approves the transaction in writing prior to the change.