Appeal of the area office’s negative size determination is denied, where the area office correctly applied the present effect rule to a letter of intent regarding an acquisition of the appellant by a large business. OHA agreed there was tangible evidence the parties began negotiations before the LOI was executed and therefore the letter was an agreement in principle. OHA found the appellant had previously rejected a lower purchase price, suggesting negotiations were already underway before the LOI was signed. Further, the letter required only confirmatory due diligence, and included language regarding exclusivity, escrow, and indemnification. Given the totality of the circumstances, OHA found it clear the parties were committed to the acquisition before the appellant submitted its offer for the procurement at issue.
Enhanced Vision Systems Inc. appealed the SBA area office’s determination that the appellant is not a small business under the size standard associated with the subject procurement, arguing the area office erroneously concluded that a letter of intent regarding a possible acquisition of the appellant by another firm should be given present effect.
The Department of Veterans Affairs CO issued the solicitation for closed circuit televisions as a small business set-aside under NAICS code 334220, Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing, with a corresponding 1,250 employee size standard. After Enhanced Vision was identified as the apparent awardee, a disappointed offeror challenged the appellant’s size.
FedBiz IT Solutions LLC argued that the awardee had already entered into an agreement to be acquired by VFO Holdings BV, a large business, at the time of its initial offer. According to FedBiz, this created an affiliation between the two firms and therefore Enhanced Vision was other than small for this procurement.
Some six months prior to proposal submission, the appellant and Freedom Scientific Inc., a subsidiary of VFO, began negotiations regarding a potential acquisition of Enhanced Vision. During the negotiations, the parties entered into an LOI regarding the negotiations and potential acquisition. During this period, the appellant submitted its offer for the contract at issue. While no agreement was reached prior to the conclusion of the LOI’s exclusivity period, the parties restarted negotiations after proposals were submitted and Enhanced Vision was acquired by VFO. Several months later, the agency announced Enhanced Vision as the awardee.
FedBiz argued that SBA considers agreements to merge as having a present effect on the power of one concern to control another. Further, OHA has previously held that an LOI for one company to purchase another will have present effect on affiliation, even if the LOI is not legally binding. Given the timing of the announcement of the acquisition, FedBiz considered it evident that the parties had reached agreement prior to the submission of proposals.
FedBiz also argued Enhanced Vision was affiliated with other firms owned by VFO, as well as with Vector Capital, the firm that owns VFO. FedBiz calculated the companies’ aggregated employees at approximately 9,850 individuals, far higher than the 1,250-size standard for this procurement.  FedBiz argued Enhanced Vision was required to recertify its size status after VFO’s acquisition.
In response, to the protest, Enhanced Vision argued that it did not have an agreement in principle with VFO at the time it submitted its offer. Bahram Javaheri, the former president of Enhanced Vision, stated that he believed the only commitment made in the LOI was to enter exclusive negotiations with VFO for a potential acquisition. His interpretation of the LOI was that it was an agreement to enter negotiations and a diligence process for the sale of the company, but not a preliminary agreement to sell the company. The chief financial officer for VFO submitted a declaration making similar representations. Therefore, Enhanced Vision argued that it was a small business on the date it submitted its offer and that its size should be determined as of that date.
In contrast to FedBiz’s arguments, Enhanced Vision argued that OHA has previously held that agreements to open or continue negotiations towards the possibility of a merger are not considered agreements in principle and thus are not given present effect.
However, the area office sustained the protest, agreeing that the LOI should be given present effect, which rendered Enhanced Vision affiliated with VFO, its owner, and the firms owned by VFO. The area office concluded that the LOI contained provisions binding on both parties, despite the document’s title describing the agreement as non-binding.
For example, the area office concluded that the exclusivity provision prevented Enhanced Vision from engaging in any activity that would in any way change the control of the company. Thus, VFO had control over the appellant on the date it submitted its offer. The area office also examined the communications between Enhanced Vision and VFO and found it reasonable to conclude that discussions between the parties began as early as six months prior to the submission of proposals. For example, the wording of the LOI suggested that a similar document had been prepared earlier and that VFO had already begun its due diligence.
Further, the executed LOI included specific dates, a price, and certain terms that would apply to Enhanced Vision and prevent its management, employees, and principals from performing certain transactions. SBA found no indication that the parties were not serious about completing the purchase. Therefore, the area office concluded that the LOI represented the final stages of an agreement in principle, not a mere agreement to open negotiations. The area office also concluded the probability of a transaction was not remote. For example, the LOI gave both parties 30 days to meet certain terms and conditions, which indicated a serious effort to conduct the acquisition.
In its appeal, Enhanced Vision argued the LOI merely committed the parties to negotiations and lacked terms necessary to be considered an agreement in principle. The appellant also argued the area office ignored the fact that negotiations broke down after the LOI was executed. According to Enhanced Vision, other than the total acquisition price, the LOI did not include any essential terms of a deal. Further, the LOI did not specify any penalty in the event the appellant began negotiations with another party during the exclusivity period.
In contrast, Enhanced Vision noted the final purchase agreement included multiple, legally binding provisions, including language related to escrow, warranties, indemnification obligations, confidentiality, waivers and releases, non-competition, and access to books and records. Generally, Enhanced Vision argued its LOI fit SBA’s definition of an agreement that should not be given present effect.
The appellant also challenged the area office’s suggestion that the LOI gave VFO negative control, arguing that many business agreements involve some level of exclusivity and that VFO had no authority to guide or block Enhanced Vision’s business operations.
First, OHA addressed FedBiz’s argument that Enhanced Vision should be deemed other than small because it failed to recertify its size after it was acquired by VFO. The appellant argued that the rule was not intended to cause a concern to become ineligible if an acquisition occurs after it certifies as small and before an award is made, but instead prohibits an agency to count the award to its small business goals.
OHA agreed, finding the requirement to recertify after a merger or acquisition related directly to the agency’s ability to count a future award of a task order to an acquired firm against its small business goals. The rule had no effect on the acquired firm’s standing as a small business when it was so qualified at the time the underlying contract was awarded.
However, OHA found the area office’s determination was correct, agreeing that there was tangible evidence of an agreement in principle between the parties. OHA found it clear that  Enhanced Vision and VFO began negotiations weeks and possibly months before the LOI was executed. Evidence in the record showed that VFO first expressed interest in acquiring the appellant as early as two years prior. The parties entered into a mutual nondisclosure agreement in July 2017, and signed the LOI in November 2017, after the parties reached an agreement on price. The fact that one price had already been proposed and rejected before the execution of the final LOI with a price that was deemed more favorable by the appellant is a clear indication that negotiations were not prompted by the LOI, but had been underway well before the LOI was finally signed. Further, this suggested the LOI was an agreement in principle.
Further, the LOI required only a confirmatory due diligence, as opposed to an extensive review. OHA also found the results of the due diligence review suggested the LOI was not conditional. While the review found that Enhanced Vision’s financial performance was soft, VFO did not withdraw from the LOI or require Enhanced Vision to improve its financial standing before continuing negotiations. Instead, VFO worked to ensure that the acquisition took place by seeking additional approval from its board to confirm the deal.
While Enhanced Vision provided a thorough analysis comparing the LOI to the purchase agreement, OHA explained that an LOI need not rise to the level of detail provided in a final purchase agreement to constitute an agreement in principle. Instead, OHA must find sufficient evidence that the parties have agreed that a transaction to merge is to take place at some time in the future. OHA concluded that the LOI’s set price, exclusivity provisions, and language requiring confirmatory due diligence, escrow, and indemnification provided such evidence. OHA also rejected the appellant’s assertion that a breakdown in negotiations rendered the LOI less than an agreement in principle, finding that negotiations often go through periods of disagreement and cooling off. Further, this breakdown lasted only 7 days during the Christmas holiday season, so OHA found it was not an extended period of disagreement.
Finally, OHA noted that the purchase agreement was executed just two weeks after the exclusivity period of the LOI expired, and there was no indication that the appellant entertained any other buyers during or after the exclusivity period. This suggested the appellant was committed to being purchased by VFO, or one of its affiliates, even after the exclusivity period had expired, because the LOI was an agreement in principle.
Accordingly, OHA denied the appeal.
Enhanced Vision Systems Inc. is represented by H. Boyd Greene IV of Kirkland & Ellis, LLP, and by Steven J. Koprince and Matthew P. Moriarty of Koprince Law LLC. FedBiz IT Solutions LLC is represented by David S. Cohen and Laurel A. Hockey of Cordatis, LLP.
