Will Smith doesn’t like noncompliant SBA joint venture agreements–so ensure yours complies

I didn’t watch the Academy Awards on March 27. But like many, I saw a headline about the infamous slap and heard more about it on the radio. It stunned me that a joke (vexatious though it may have been) could so ignite Will’s ire. So I did a little digging.

It turns out that Will wasn’t mad about the joke. Rather, he had just discovered that Chris had fouled up their joint venture agreement. Will was understandably irked because the noncompliance cost him dearly: it transformed him and Chris into affiliates, making their joint venture ineligible for a pending government contract. He marshaled all his will power to tamp down his rage. Ultimately, it got the best of him, and he let Chris have it.

All joking aside (whoa, glad Will’s not here right now), the content of joint venture agreements is no laughing matter. If you don’t get it right–to include the formulaic contents stipulated by SBA’s regulations–you can turn your optimal bidding arrangement into an ineligible offeror.

Permissible joint venture configurations

SBA exempts two types of joint ventures from affiliation: (1) a joint venture where all venturers independently qualify as small under a solicitation’s size standard, and (2) a joint venture between a protégé and SBA-approved mentor where the protégé is small under the solicitation’s size standard. Both types can pursue small business set-aside contracts as a small business. And both can also pursue socioeconomic set asides (for example, a HUBZone contract) if, in the case of the first variety, one business is HUBZone certified, and in the second variety, the protégé is HUBZone certified.

In every case, however, the joint venture have a joint venture agreement that complies with the applicable regulations, depending on the type of contract. If the venturers get it wrong, they get a slap from the affiliation hand. In turn, affiliation could mean that the joint venture is a large, ineligible business.

Joint venture agreement contents

The regulations at 13 C.F.R. Parts 124, 125, 126, and 127 demand largely uniform elements for most joint ventures. Below is a summary:

• The joint venture’s purpose
• Designating the the protégé (in the case of mentor-protégé joint ventures) or the party with the socioeconomic status (in the case of joint venturers composed of multiple parties) as the managing venturer
• Designating an employee of protégé/socioeconomic venturer as the Responsible Manager, the manager with the ultimate responsibility for contract performance
• Stating that the protégé/socioeconomic party must own at least 51% of the joint venture
• Stating that the protégé/socioeconomic party must receive profits from the joint venture commensurate with the work that it performed or a higher percentage, and providing that remaining joint venture funds will be distributed according to ownership share at termination
• Providing for a special bank account, in the joint venture’s name, that requires the signature or consent of all parties for payments made by the joint venture for performance on the contract and that payments will be deposited and expenses paid from the account
• Itemizing the major equipment facilities, and other resources that each party will provide; where the contract is indefinite, there is some flexibility
• Specifying the parties’ responsibilities relative to contract negotiation, source of labor, and contract performance; again, where the contract is indefinite, there is some flexibility
• Obligating all parties to perform the contract despite a party’s withdrawal from the joint venture
• Requiring the protégé/socioeconomic venturer to keep the joint venture’s accounting and administrative records at its office, unless given permission to keep them elsewhere
• Requiring the protégé/socioeconomic venturer retain the joint venture’s final original records after contract performance
• Stating that the joint venture’s quarterly financial statements showing cumulative receipts and expenditures must be submitted to SBA no later than 45 days after each operating quarter
• Stating that a project-end profit and loss statement, including final profit distribution must be submitted to SBA no other than 90 days after contract completion

Exceptions to content requirements

There, are two notable exceptions to the mandatory content requirements above.

First, where multiple small businesses joint venture to pursue only all small business set-aside contracts, there are not content requirements for the agreement. In that limited situation, there must be a written agreement, but SBA doesn’t dictate any required provisions. Of course, the more precise the agreement, the better. But the parties don’t risk affiliation based on joint venture agreement omitting certain terms.

Second, for mentor-protégé joint venturers pursuing all small business set-aside contracts, the bottom two bullet points above don’t apply. In their place, SBA requires submission of performance-of-work reports to both SBA and the contracting officer after each operating year and after contract completion.

Two final points

Two other points are worth remembering–unless, of course, you want SBA to Will-Smith-slap you. First, the parties must amend their joint venture agreement to account for each solicitation/contract that it pursues; venturers often do this through an addendum. And second, the joint venture must possess a fully compliant joint venture agreement on the date of final proposal revision.

Keep in mind that these are the requirements, as they exist today. But SBA’s regulations change frequently, so please do not consider this post to be conclusive on the information needed for a joint venture agreement. Rather, we encourage every joint venture to reach out to counsel–before submitting a bid–to ensure that its joint venture agreement complies.

Feel free to reach out to us at 913-354-2630 if you any questions about joint venture agreements.