In a Daily Deal column Thursday, contributors Lucantino N. Salvi (left) and Marko W. Kipa of Sheppard, Mullin, Richter and Hampton LLP
tackle issues government contractors need to weigh when considering transactions.
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When government contractors undertake to acquire a company, a plethora of unique issues must be addressed to ensure a seamless transition of the business from one owner to another. These issues include retaining small-business status, safeguarding valuable intellectual property rights, avoiding organizational conflicts of interests, scrutinizing cost allowability and allocation issues, examining export control compliance programs, obtaining prime contractor consents, and, in the case of foreign purchasers, complying with Exon-Florio and FOCI reporting requirements.
Another requirement, novation agreements, or the consent granted by the government allowing for the substitution of one contractor by a new party, further distinguish such deals. While the requirements are largely straightforward, some confusion emerges in the M&A context, Salvi and Kipa (right) write.
Although the literal language of the FAR, or Federal Acquisition Regulation, often requires a novation agreement in acquisition contexts, the case law suggests -- depending on the transaction structure -- that no such agreement may be required if the transfer of government contracts occurs "by operation of law." In this circumstance, the acquisition transaction would fall outside the ambit of the Anti-Assignment Act. The dichotomy between regulatory mandates and judicial precedent adds an element of uncertainty to some corporate transactions about whether or not a novation agreement is required.
The FAR is relatively clear with respect to when a novation agreement is required and enumerates the following nonexclusive examples: (1) the sale of all of a contractor's assets or the entire portion of the assets involved in performing a contract with a provision for assuming liabilities; (2) the transfer of assets incident to a merger or corporate consolidation; and (3) the incorporation of a proprietorship or partnership, or formation of a partnership. In these circumstances, the FAR requires the government's consent before the contracts can be transferred or assigned.
On the other hand, the FAR also specifically delineates a situation where a novation agreement is not required -- that is, where the transaction is a stock purchase and "there is no legal change in the contracting party, and when the contracting party remains in control of the assets and is the party performing the contract." Based on these stipulations, the general rule is that the FAR requires a novation agreement in connection with a corporate merger or consolidation where the government contractor does not survive the transaction as the contracting party.
But, the two note, in the context of M&A between government contractors, things are not as simple as they may seem. Read more. - Carolyn Murphy
See full column "Standing novation"
