The Small Business Administration's (SBA) Mentor-Protégé Program allows a large company to joint venture with a smaller firm without the two entities being treated as one for size purposes – so long as a joint venture agreement gives the protégé managerial control. Size Appeal of Acacia7 JV shows how drafting loose managerial terms can lead to an unfavorable outcome.
Overview
On September 4, 2024, an SBA Area Office ruled that Multimedia Environmental Compliance Group JV (MECG) qualified as a small business for a solicitation by the Department of the Navy for architectural and engineering services. On January 22, 2025, Acacia7 JV (Acacia) appealed the size determination and SBA's Office of Hearing and Appeals (OHA) concluded that MECG was, in fact, not small. MECG challenged OHA's decision at the Court of Federal Claims (COFC), but the COFC sent the matter back to OHA. After taking a second look, OHA reaffirmed its earlier conclusion: the joint venture could not claim small business status because control was not truly vested in the protégé.
How the Joint Venture Was Organized
MECG was established as a joint venture bringing together Nicklaus Engineering, Inc. (NEI) and Wood Environment and Infrastructure Solutions, Inc. (WEIS). NEI maintained majority ownership and was the managing member of the joint venture. NEI's president and director, Stacy Gutierrez, also acted as MECG's manager, while WEIS participated as the large business partner. The SBA approved a Mentor-Protégé Agreement (MPA) between NEI and WEIS for the All-Small Mentor-Protégé Program.
MECG was formed solely to bid on the Navy contract. The agreement assigned proposal review to both NEI's Responsible Manager and the Program Manager, a WEIS employee, who together oversaw project management and led contract negotiations. Gutierrez served as the Responsible Manager to administer the ordinary day-to-day business. However, the operating agreement was not clear whether the Responsible Manager or the Program Manager would make final decisions on shared obligations.
The agreement formed an Executive Committee with one member from each venturer to handle certain designated matters. Any dispute between the parties was to be resolved by the Executive Committee or good faith negotiations.
Protest Issues
Acacia argued the joint venture agreement (JVA) described NEI as the "Managing Party" but provided no definitive powers. In contrast, the two-person Executive Committee was granted broad authority, giving the mentor veto power. Combined with the apparent equal power of the Program Manager, NEI did not satisfy the requirement that the small business venturer control the day-to-day management and administration of the joint venture's contract performance.
MECG replied that it was a proper mentor-protégé joint venture with NEI as the managing venturer, and NEI's President serving as the Responsible Manager with full authority over daily performance. It argued that WEIS' role on the Executive Committee was limited to customary governance that did not intrude on NEI's control.
First Acacia7 Holding
OHA accepted the Area Office's size calculation for NEI as small, but it ruled MECG ineligible because its JVA violated two SBA rules. First, 13 C.F.R. § 125.8(b)(2)(ii) requires the small firm to have exclusive day-to-day control, yet MECG's Executive Committee and Program Manager gave the large mentor, WEIS, too much control.
Second, 13 C.F.R. § 125.8(b)(2)(viii) demands a clause obliging both venturers to finish the contract if one withdraws. MECG's agreement gave the remaining partner an option. Because of these defects, OHA concluded that MECG could not qualify as a small business for the procurement.
SBA OGC Weighs In
SBA's Office of General Counsel (OGC) filed comments on the appeal. They agreed with OHA's first Acacia7 decision that MECG's JVA was in violation because it allowed the large mentor, WEIS, to exercise "negative control" through both the Executive Committee and a WEIS Program Manager. They stated that the agreement was too vague about the power delegation of the Responsible Manager and the Program Manager, failing the rule that the small venturer must independently control day-to-day contract management. The OGC did, however, find the agreement compliant with the provision on continuing performance after a partner's withdrawal.
OHA's Analysis on Remand
OHA reaffirmed the basics: two firms approved to be a mentor and protégé may joint venture so long as the protégé qualifies as small for the procurement and the joint venture meets certain requirements. Further, SBA requires that in a joint venture between a small business and its large mentor, the small business must be in control of day-to-day management and administration. The joint venture must have one person in charge, the Responsible Manager, who is an employee of the small business and maintains ultimate responsibility for contract performance.
OHA's original Acacia7 decision correctly found that NEI is small and that MECG's JVA meets most requirements, but it misread the withdrawal provision, and the JVA actually does compel either venturer to finish the contract if the other withdraws. However, the agreement still falls short because control over day-to-day management is shared with a WEIS appointed Program Manager and a two-person Executive Committee, giving the mentor a veto. This structure allows WEIS to exert negative control, failing to meet the cessation of control requirement.
Practical Guidance for Future Mentor-Protégé JVs
OHA's decision stated that the JVA should be a straightforward document that lays out who has the authority to manage the joint venture. Exclusive day-to-day control needs to be clearly vested in a single employee of the small venturer. When drafting operating agreements, avoid open-ended phrases regarding responsibilities, or regulators may assume the mentor will fill the gap.
If an Executive Committee is necessary, the protégé should be given a decisive vote. In the withdrawal clause, mandatory language should be used to clarify complete performance will be accomplished. A compliant joint venture should read as though the protégé alone is in control, while the mentor sits ready to assist and advise.
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