Opinion ID: 184812
Heading Depth: 3
Heading Rank: 1

Heading: Acquisitions After the Self-Certification

Text: 20 DSE first contends that the SBA Area Office's size determination was arbitrary and capricious in its refusal to give present effect to three acquisitions consummated in the two-month period following AMTEC's self-certification as small. In particular, DSE alleges that the SBA departed from both its own regulations and past precedent when it decided against including the employees of Allied Molded Products, Inc. (Allied Molded), Actown-Electrocoil, Inc. (Actown), and AEIC, Inc. (AEIC) in assessing AMTEC's size. In DSE's view, the chronology of events surrounding these transactions reveal that AMTEC had reached what the SBA terms an agreement in principle to conclude each of the relevant acquisitions as of November 12, 1997. Mindful of our duty to take into account the agency's expertise in making such assessments, we cannot agree. 21 The SBA uses the date of self-certification as the general baseline against which to measure a firm's size. See 13 C.F.R. § 121.404 (Generally, SBA determines the size status of a concern (including its affiliates) as of the date the concern submits a written self-certification that it is small to the procuring agency as part of its initial offer including price.). In addition to two enumerated exceptions to this background principle, neither of which applies here, SBA regulations also provide for giving present effect to certain transactions, treating them as if they had occurred prior to the date of selfcertification. The relevant provision appears as a part of the elaborate standards the SBA uses in determining whether or not associate entities qualify as affiliates for purposes of assessing size. 13 C.F.R. § 121.103 provides that: 22 (a) General Principles of Affiliation. (1) Concerns are affiliates of each other when one concern controls or has the power to control the other, or a third party or parties controls or has the power to control both. 23 (2) SBA considers factors such as ownership, management, previous relationships with or ties to another concern, and contractual relationships, in determining whether affiliation exists.... 24 (d) Affiliation arising under stock options, convertible debentures, and agreements to merge. Since stock options, convertible debentures, and agreements to merge (including agreements in principle) affect the power to control a concern, SBA treats them as though the rights granted have been exercised.... SBA gives present effect to an agreement to merge or sell stock whether such agreement is unconditional, conditional, or finalized but unexecuted. Agreements to open or continue negotiations towards the possibility of a merger or a sale of stock at some later date are not considered agreements in principle and, thus, are not given present effect. 25 In its Third Size Determination, the SBA found AMTEC to have been affiliated with a series of other companies that, like itself, were owned by North American Fund II, L.P. (Fund II), a venture capital fund. The network of interlocking companies either owned by Fund II or controlled by those who control it is elaborate and rather complex. For purposes of deciding this case, however, we need only point out that as a result of common ownership and control, the SBA deemed all companies owned or managed by Fund II and North American Fund III, L.P. (Fund III) to be affiliates of AMTEC. See Third Size Determination at 4-5. The parties do not contest this finding; instead, their controversy centers around the acquisition of Actown and AEIC by Fund III, and of Allied Molded by AMTEC. Because the question of affiliation is time- and fact-specific, we briefly discuss the chronology of events surrounding each transaction. 26 Fund III and each of Actown and AEIC executed a Letter of Intent on October 23, 1997, in which the parties set forth their intention to enter into an acquisition agreement by the end of that year. The companies had begun negotiations months earlier, after a business search firm contacted Fund III with information regarding Actown and AEIC. After Fund III signed a confidentiality agreement that granted it access to Actown's business information, the companies continued to negotiate a general structure for the deal and a proposed purchase price. The Letter of Intent reflected the agreements that had been reached by October 23rd but, as the SBA Area Office found, did not constitute a binding agreement or an agreement in principle to merge or acquire stock. Id. at 9. The SBA reached this conclusion based on the fact that one key material term, the purchase price of $20 million, is merely 'contemplated' rather than agreed to, and is contingent on a number of variables including Fund III's determination as to [Actown's and AEIC's] financial prospects, existence of dividend payments, results of environmental studies, and adverse changes in the businesses. Id. The Letter of Intent also failed to resolve the liabilities that Fund III would incur upon closing, the impact of the acquisition upon Actown's employees, the negotiation of employment agreements, the method of financing, and the amount of equity and subordinated debt that Fund III would commit. The acquisition was expressly made contingent upon reaching a mutually acceptable agreement on these terms. Finally, as the SBA emphasized, the parties could walk away from the negotiations and terminate the Letter of Intent at any point during the process of due diligence without incurring any liability. Id. Negotiations continued during November, December and January, and the transaction was not consummated until January 13, 1998. 27 Turning to the acquisition of Allied Molded, the parties began negotiations in October of 1997 and signed a Letter of Intent during the week that followed AMTEC's selfcertification. This letter did contain a proposed price, but it was contingent upon various stated assumptions that AMTEC would have to verify. In addition to due diligence and environmental impact studies, the letter also noted that a number of significant issues remained outstanding-- e.g., noncompetition agreements, representations and warranties, conditions and indemnifications--and were to be the subject of further negotiations. Finally, the letter granted AMTEC the right to walk away at any point in time without incurring liability. In its Third Size Determination, the SBA concluded that this letter is sufficiently nonbinding and tentative as to the material terms that it does not constitute an agreement to merge or acquire stock which SBA would give present effect under the regulation. Similarly, it held that the letter did not signify an agreement in principle as final agreement was contingent on the acquiring [company's] due diligence and other variables ..., and was not enforceable. Id. at 10. The parties reached final agreement in December, executing a Purchase and Sale contract on December 30, 1997. 28 With respect to each acquisition, DSE alleges that the SBA's Third Size Determination was arbitrary and capricious in its conclusion that there were neither agreements nor agreements in principle in place as of AMTEC's November 12th small self-certification. Drawing upon a series of previous SBA decisions, DSE alleges that agency practice can be distilled into a two-pronged rule: the SBA gives present effect to an acquisition agreement unless (i) a final agreement rests on conditions that are unusual, incapable of fulfillment, speculative or conjectural; or (ii) the probability that the transaction would ever be consummated is extremely low. We do not believe, however, that the SBA's cases can plausibly be read to state such a rule. DSE's attempted exegesis rests upon a selective misreading of SBA precedent. 29 Upon examination, none of the cases cited by DSE resemble the case at bar. In nearly all, the presence of a binding agreement or an agreement in principle was fully evident. The only question was whether the SBA would give present effect to that pre-existing agreement when the transaction it described would not be consummated until some point in the future. See, e.g., Size Appeal of Consol. Indus., Inc., No. 4235 (SBA OHA 1997) (giving present effect to option agreement under which large entity could purchase all of Consolidated's stock at a set price); Syro Steel, No. 3800 (SBA OHA 1993) (where Articles of Incorporation, Agreement of Merger, Agreement and Plan of Merger had all been executed, and S-4 registration statement filed with the SEC seeking regulatory approval of merger, held that binding agreement had been reached at time of self-certification); Dependable Courier Servs., No. 2110 (SBA OHA 1985) (giving present effect to a takeover when the companies had executed a Stock Purchase Agreement granting negative control over the target to the acquiring company and leaving formal completion subject only to minor contingencies); Mark Wienert, SBA No. 865 (1976) (as Board of Directors had each ratified Principles of Agreement, leaving only minor and routine conditions precedent to closing, present effect deemed appropriate). Here, by contrast, we are asked to review the propriety of the SBA's determination that no agreement in principle existed as to either acquisition by the date of self-certification. Conceptually, this question precedes any inquiry into whether such an agreement, if found, should be given present effect. 30 Given the fluidity of contemplated and evolving corporate transactions, which relegates any post hoc examination to a search for indicia of an agreement, we consider SBA expertise to be at its apex when determining whether an agreement in principle exists. We will not readily substitute our judgment for that of the agency, see Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983), but will defer to its experience provided that the agency has offered a reasoned explanation for its decision, and that the result is in accord with material facts contained in the administrative record. The SBA's Third Size Determination easily satisfies this standard. With respect to the acquisitions of Allied Molded, Actown, and AEIC, the SBA explained that the companies had not reached an agreement in principle because the respective letters of intent failed to resolve important terms of conditions of the proposed transactions. Since this conclusion is consistent with SBA regulations, see 13 C.F.R. § 121.103(d) (Agreements to open or continue negotiations toward the possibility of a merger or a sale of stock at some later date are not considered 'agreements in principle' and, thus, are not given present effect.), as well as prior SBA precedent, see Size Appeal of Geosyntec Consultants, No. 4277 (SBA OHA 1997) (refusing to give present effect to binding agreement reached four days after self-certification where target company had rejected a previous comprehensive bid but parties continued negotiating toward an accord), we will not disturb it.