Appeal of the SBA area office’s determination that the appellant is not small for the subject procurement is denied, where the area office properly found the stock shares owned by individual employees did not constitute a single voting block and properly drew an adverse inference against the appellant’s failure to submit the tax returns of its largest shareholder in response to the protest.

Level Access Inc. appealed the Small Business Administration area office’s determination that it is not a small business.

After the Department of Veterans Affairs identified Level Access as the apparent awardee of a contract for Section 508 accessibility compliance scanning and services, Deque Systems Inc. challenged its size. Deque alleged that Level Access was affiliated with Booz Allen Hamilton under the ostensible subcontractor rule, and/or with JMI Equity, which has a 40 percent ownership interest in Level Access and is actively involved in management. Deque also alleged affiliation with The Carlyle Group through both BAH and JMI Equity.

In response, Level Access submitted its completed SBA Form 355, its proposal, Federal income tax returns, corporate documents, and other material. The appellant’s tax returns for the years 2014 — 2016 show that its average annual receipts do not, by themselves, exceed the applicable $27.5 million size standard for the procurement. In its present form, Level Access is partially owned by JMI Equity, which is its largest individual shareholder.

Level Access also argued that its proposal demonstrates it will perform two-thirds of the work, including all primary and vital requirements, and will manage the effort. Regarding The Carlyle Group, the appellant asserted that it is public knowledge that The Carlyle Group once held majority ownership in BAH as part of a “take private” transaction, but has since divested this position. Likewise, Level Access argued that Deque’s allegation of affiliation between The Carlyle Group and JMI Equity, based on a sale, from the one to the other, of stock in a third company, is meritless.

Next, Level Access denied affiliation with JMI Equity, arguing that JMI Equity is exempt from affiliation because it is a venture capital operating company. Regarding affiliation through stock ownership, Level Access noted that JMI Equity owned less than 50 percent of its voting stock on a fully-diluted basis, and maintained that JMI Equity’s ownership position is not large compared to other outstanding voting blocks of stock. Specifically, Level Access claimed that its employees own the next largest block of shares and that they are aligned as a cohesive voting block with common interests. As for common management affiliation, Level Access maintained that JMI Equity holds only one of its four filled Board of Director seats.

The area office determined that Level Access is not a small business. First, the area office concluded that Level Access did not violate the ostensible subcontractor rule based on its arrangement with Booz Allen Hamilton. However, the area office determined that the exemption from affiliation for venture capital operating companies did not apply in this circumstance, because Level Access is not seeking assistance under the Small Business Investment Act. The area office also rejected Level Access’ argument that the firms could not be affiliated simply because JMI owns less than 50 percent of the company. Further, the area office explained that stock owned by individual employees cannot be considered a block. The area office held that JMI could control Level Access through its large minority ownership position and therefore the two are affiliated. Further, the area office noted that JMI had the voting power to choose three of Level Access’ five directors. Finally, the area office noted that Level Access had not submitted JMI’s tax returns and drew an adverse inference that the missing information would have shown that the appellant is not a small business under the size standard associated with this procurement.

Level Access appealed, arguing the area office made two clear errors. First, the appellant argued the area office incorrectly declined to consider the stock owned by its employees as a single block under the identity of interest rule. Had it done so, JMI Equity’s block would not have been large compared to the next largest block, and there would have been no affiliation through stock ownership. Second, Level Access argued the area office unfairly drew an adverse inference against Level Access’ failure to provide JMI’s tax returns, because it did not ask the appellant to produce them. Level Access argued it was prejudiced by this omission, because the combined average annual receipts of both companies are below the applicable $27.5 million size standard.

OHA denied the appeal, finding no clear errors in the size determination. OHA was unpersuaded by Level Access’ assertion that its employees should be presumed to have a shared identity of interest, finding no evidence to support this claim. Level Access provided no rationale for treating its employees as block voters separate from the company’s other shareholders. OHA explained that a shared identity of interest will not arise solely because individuals have a common employer, absent any other ties or common interests.

Because the area office correctly did not aggregate the stock of the appellant’s employees into a separate block, it follows that JMI Equity holds a block of voting stock which is large compared to other outstanding blocks of voting stock, and thus controls Level Access and is affiliated with it.

OHA also rejected Level Access’ argument that the area office erred in drawing an adverse inference against its failure to provide JMI’s tax returns. The initial protest specifically and plausibly alleged affiliation between Level Access and JMI Equity, and therefore the appellant was on notice that JMI Equity was a likely affiliate and should have produced information about JMI Equity’s annual receipts and other affiliates with its response to the protest. Absent this information, it was appropriate for the area office to draw an adverse inference.

OHA also was not persuaded by Level Access’ argument that the combined receipts of both companies do not exceed the size standard. Even assuming that JMI Equity itself is small, OHA found it possible that Level Access would be affiliated with other concerns, such as other portfolio companies, in which JMI Equity holds controlling interests.

Finally, OHA found that even if Level Access were not affiliated with JMI Equity through stock ownership, the record strongly suggested the firms would be affiliated on alternate grounds. For example, JMI Equity appeared to exercise affirmative or negative control over Level Access’ Board of Directors through provisions in the Stockholders Agreement.

Level Access Inc. is represented by Jeffery M. Chiow, Lucas T. Hanback, and Stephen L. Bacon of Rogers Joseph O’Donnell, P.C. Deque Systems Inc. is represented by Susan Warshaw Ebner, Sean D. Lee, Jacqueline R. Scott of Fortney & Scott, LLC.