Page 17 - GovCon M&A Blog Articles

Government Contracts & Investigations Blog
This volume is the fourth in our ten-part series on unique issues that arise in connection with mergers and acquisitions involving government contractors and subcontractors. Parts 1 through 3 focused on the structure of the transaction and the implications of that structure on the transfer of pending contracts and proposals. This volume, Part 4, introduces some of the most important issues that potential buyers should consider and address during the due diligence and negotiation process. The volume is not intended to be a detailed “due diligence checklist,” but rather a high level overview of certain key factors that are likely to impact the “go/no go” decision and the buyer’s valuation of the target company.
• Audits and Investigations: Government contractors are subject to scrutiny by a plethora of auditors. The Comptroller General has the right to audit records involving transactions directly related to most government contracts and subcontracts. In cases where a government contractor is required to disclose cost or pricing data to the Government, the Contracting Officer can audit records relating to the accuracy, completeness, and currency of the disclosed data. The Defense Contract Audit Agency (“DCAA”) can audit virtually every aspect of a contractor’s accounting and business systems. The Small Business Administration (“SBA”) has broad authority to conduct audits relating to small business issues, including, for example, compliance with a small business subcontracting plan. The Department of Labor audits compliance with various socioeconomic requirements, including, for example, equal opportunity, affirmative action, and prevailing wage requirements. The Office of Inspector General (“OIG”), which is charged with investigating fraud, waste, and abuse, also has broad audit rights. Where a contractor has credible evidence of a False Claims Act (“FCA”) violation or the commission of certain crimes in the award, performance, or closeout of a government contract, the contractor is required to make a mandatory disclosure to the OIG. Government audit reports, correspondence with government auditors and investigators, and mandatory disclosures are valuable tools for identifying and quantifying the regulatory compliance and liability risks associated with the acquisition of a government contractor. Sophisticated buyers typically request copies of these documents as well as representations and warranties regarding the target’s knowledge of any pending audits and investigations. The definition of “knowledge” often becomes a point of contention.
• False Claims Act: The False Claims Act (“FCA”) is the government’s primary anti-fraud weapon against government contractors and subcontractors. The Government can recover up to three times its actual damages, plus fines and penalties, if it can prove that the contractor “knowingly” submitted a false claim (often an invoice) to the Government. “Knowingly,” under the FCA, is defined to include not only actual knowledge, but also deliberate indifference or reckless disregard of the truth or falsity of the claim. Common examples of actions that can trigger FCA liability include invoicing the Government for work that was not delivered or performed, delivering work with “knowledge” that it does not meet contract requirements, and making a false certification that is material to payment of a claim (g., a certification of compliance with a regulatory or contractual requirement). A miscertification of size status in connection with a set aside can also give rise to FCA liability. Liability may be imposed on prime contractors directly or upon subcontractors on the theory that their actions caused the prime contractor to submit a false claim to the Government. FCA cases can be brought directly by the Government or by a whistleblower on behalf of the Government. The mere threat of an FCA suit, in some cases, is sufficient to extract a sizable settlement. Thus, it is prudent for the buyer to require disclosure of information relating to any outstanding FCA actions or investigations, to evaluate the target’s policies and procedures generally to ensure that the target is not being reckless with respect to government contracts compliance, and to obtain representations relating to the absence of any violation of the FCA or related requirements.
14 | What You Need to Know About Mergers and Acquisitions Involving Government Contractors and Their Suppliers Volume IV — Key Issues in Government Contracts Due Diligence