Brace for Impact: Final SBA Rule Changes to Recertification and Negative Controls Will Reverberate in GovCon M&A and Investment Market

On December 17, 2024, the Small Business Administration (SBA) published a final rule amending multiple aspects of all of the SBA’s small business size and status programs.  Among other notable changes, SBA (1) introduced a new rule that changes the impact of a recertification as other than small or as other than the relevant small business status following a merger or acquisition, and (2) introduced a standardized set of permissible negative controls for minority shareholders in all types of small businesses, thereby significantly expanding the controls investors may have in service-disabled veteran-owned small businesses (SDVOSBs), women-owned small businesses (WOSBs), and participants in the SBA’s 8(a) Business Development Program. 

Crowell’s prior alert on the August 2024 proposed rule discussed SBA’s proposed changes on these fronts. The changes in this final rule are effective as of January 16, 2025, except that certain aspects of the recertification rule have a one-year grace period.

Recertification

SBA made significant changes to the impact of a small business recertifying as “other than small” (or recertifying as other than the applicable small business status) following an acquisition, merger, novation or other change in control. As a result, SBA has shortened the set-aside runway on multiple award contracts and GSA Schedules for such contractors. SBA has done so by introducing a new recertification regulation at 13 C.F.R. § 125.12, which imposes uniformity with respect to the impact of a recertification as to small business size and status. As before, the rule requires a recertification within 30 days of a merger, sale, or acquisition.  But SBA has defined the following as “disqualifying recertifications” that impact eligibility for new orders and/or options:

• Multiple-Award Set Aside Contracts: the recertified contractor, if acquired by a large business, is ineligible to receive options or bid on set-aside orders under multiple-award contracts (MACs). The disqualified contractor is ineligible for set-aside orders issued under both set-aside MACs and unrestricted MACs.
• GSA Schedules: the recertified contractor, if acquired by a large business, is no longer eligible for set-aside orders or set-aside blanket purchase agreements off its Schedule.
• Pending Proposals: the recertified contractor is ineligible for award under (1) pending proposals for single award set-aside contracts if the event triggering the disqualifying recertification occurs within 180 days of the offer, and (2) pending proposals for set-aside MACs regardless of timing (as the contractor would be ineligible to bid on orders under that contract).

As was the case before the final rule, a recertification following acquisition by a large business does not render the contractor unawardable in the following circumstances:

• Single-Award Set Aside Contracts: the recertified contractor remains eligible to receive options and orders under single-award set-asides. (The procuring agency cannot count such an option or order towards its size and status goals.)
• Pending Proposals: the recertified contractor remains eligible for single-award set-aside proposals submitted more than 180 days prior to the event triggering the recertification. (The agency can count the single-award or reserve for small business goaling purposes for up to five years from the date of the award unless there is a disqualifying recertification.)

Amidst these changes, SBA provided two oases for the small business contractor looking to sell. First, a recertification following M&A is not disqualifying for set-asides or options on a multiple-award contract when the acquirer also individually qualifies as small, even if the two contractors do not qualify as small in the aggregate following the merger or acquisition. (While the entity remains eligible for awards, the agency cannot count new orders or options, from that point forward, towards its size and status goals.)

Second, SBA provided a one-year delay of the effective date for the changes to recertification on small business MACs, stating that “[a] firm that has a disqualifying size or status recertification due to a merger, acquisition or sale that occurs prior to January 17, 2026 remains eligible” for orders and options issued under existing set-aside multiple award contracts. (Note, though, that the agency cannot count any new or pending orders issued pursuant to the contract, from that point forward, towards its small size and status goals.)  Notably, this exception does not appear to apply to GSA Schedules, which are not “small business multiple award contract[s]” and therefore any disqualifying recertification as of January 17, 2025 prevents the Schedule holder from bidding on set-aside orders and BPAs going forward.   

One likely effect of the recertification changes is a significant boom in GovCon M&A activity in 2025, as small business contractors and buyers rush to close transactions within the year-long safe harbor such that they can continue to receive orders and have options exercised on their set-aside MACs.  A second, perhaps longer-term impact will be a potential increase in small business contractors acquiring other small businesses to make use of the carveout for such transactions, although this may not be a viable option for acquisitions of small businesses with sizeable valuations, because that could discourage small business buyers.

Changes in Control – Negative Controls

SBA also changed the extent of the control that a minority owner or shareholder can hold in a small business contractor. This is an effort to establish uniformity across SBA’s small business programs, which historically have diverged in their approach to permissible negative controls. Prior to this rule change, minority investors in small businesses could have blocking power over “extraordinary actions” as reasonable protection for their investment but could not hold blocking rights over what SBA deemed “ordinary actions,” in each case as iteratively defined across years of SBA Office of Hearings and Appeals (OHA) case law. On the other hand, small businesses that were 8(a) Participants or WOSB/SDVOSB certified were subject to varied, narrower negative control rules. With these changes, SBA aims to promote more certainty for those looking to make minority investments in small business contractors.

As in the proposed rule, SBA establishes six actions over which minority investors may have blocking power. SBA will not find that a minority shareholder has negative control where such minority shareholder has the authority to block action by the board of directors or shareholders that would (i) add a new equity stakeholder; (ii) dissolve a company; (iii) sell the company or all assets of the company; (iv) cause a merger of the company; (v) declare bankruptcy; or (vi) amend the company’s corporate governance documents to remove the shareholders’ authority to block any of (i) through (v).

Notably, based on comments to the proposed rule requesting a catch-all for extraordinary actions not otherwise identified within the six, SBA also included a seventh permissible negative control—that a minority shareholder may have blocking power over “[a]ny other extraordinary action that is crafted solely to protect the investment of the minority shareholders, and not to impede the majority's ability to control the concern's operations or to conduct the concern's business as it chooses.” 

This addition is likely a welcome relief to small businesses seeking investment as well as investors that may have feared the proposed rule’s list of six would stifle investment in small business contractors. It also is an expansion of the controls available to investors in 8(a)s and women- and veteran-owned businesses. However, this addition may also somewhat undermine SBA’s goal of certainty as to the permitted controls. We expect to see continued development in OHA case law as to what controls fall under this catch-all provision as extraordinary actions versus impermissible impediments to day-to-day operations.