Page 10 - GovCon M&A Blog Articles

Government Contracts & Investigations Blog
The FAR also lists additional documents that you must provide to the responsible contracting officer as they become available, generally after the deal has closed. These include:
1. An authenticated copy of the instrument affecting the transfer (e.g., bill of sale, certificate of merger, contract, deed, agreement, or court decree);
2. Appropriate corporate approval of the transfer consisting of certified copies of board resolutions and/or stockholder minutes;
3. An authenticated copy of the transferee’s certificate and articles of incorporation (if a corporation was formed to receive assets involved in performing government contracts);
4. Opinion of legal counsel for the transferor and the transferee stating that the transfer was properly effected under applicable law and the effective date of the transfer;
5. Balance sheets of the transferor and the transferee as of the dates immediately before and after the transfer of assets, audited by independent accountants;
6. Evidence that any security clearance requirements have been met; and
7. The consent of sureties on all contracts transferred or a statement from the transferor that none are
required.
FAR 42.1204(f). Most of this information is relatively easy and inexpensive to obtain. The requirement for audited balance sheets, however, can be burdensome. Some contractors, including most small businesses, do not maintain audited financial statements. Requiring such contractors to obtain audited balance sheets would be costly and could also significantly delay the novation process. Accordingly, many contracting officers will waive this requirement, and instead accept unaudited balance sheets or other proof that all of the assets have been transferred.
The requirement for opinions of counsel also merits brief attention. These need not and should not be lengthy or elaborate documents. Corporate counsel for the transferor and the transferee should be able to prepare such opinions quickly and inexpensively since they are familiar with the transaction. While it will be necessary for the opinion to include some assumptions and caveats, these should be kept to a minimum, typically no more than a few paragraphs, in order to avoid rejection by the responsible contracting officer. We often find it useful to have our clients submit drafts of the opinion letters, before the formal novation request, so their form and content can be approved in advance.
The Novation Agreement
As noted above, the FAR requires submission of three signed copies of the “proposed” novation agreement. The FAR includes a standard form novation agreement for the assignment of government contracts. FAR 42.1204(i). The standard form is required where the transferor and transferee are corporations and all of the transferor’s assets are transferred. Id. The form may be adapted for use in other contexts, but the Government generally will not accept modifications to the key terms. Id. In our experience, proposing significant changes to those terms serves little purpose, other than to delay approval of the novation agreement.
Many provisions in the novation agreement are what you would expect in a consent to assignment. The transferor relinquishes its rights under the contract; the transferee agrees to be bound by the contract; the Government recognizes the transferee as the successor in interest to the transferor; the parties agree that the Government will pay the transferee rather than the transferor; and the contracts remain in full force and effect. Lurking within the standard novation agreement, however, are several unusual terms that strongly favor the Government. There is little you can do to change these terms, but you should be aware of their implications.
What You Need to Know About Mergers and Acquisitions Involving Government Contractors and Their Suppliers | 07 Volume II — Obtaining Consent to Assign a Government Contract