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Government Contracts & Investigations Blog
contracts that have been terminated, to request any “cure” or “show cause” notices that have been received, and to analyze those records to determine the level of risk they present to the business, in terms of both any immediate financial impact and the long-term ability to secure future work. Finally, the buyer should consider the target’s present responsibility. Contractors that fail to comply with their contractual or regulatory obligations, or that engage in other conduct that calls into question their integrity, can be suspended or debarred from government contracting. This is often referred to as the “death penalty” for a government contractor.
• Multiple Award Schedule Contracts: The Multiple Award Schedule (“MAS”) program allows contractors to have a catalog of commercial products and services that can be purchased, through simplified means, by any federal agency (as well as certain other authorized purchasers). A MAS contract is a great way to sell commercial products and services to the Government, but there are risks. Obtaining a MAS contract requires a contractor to disclose its commercial sales practices and discounts to the Government and to offer an automatic price reduction to the Government whenever the contractor reduces its price to a specified commercial customer or a specified category of customers. Failure to make an accurate disclosure of commercial sales practices to the Government, or failure to provide the Government an automatic price reduction when required, can trigger significant liability, including not only contract damages but potentially treble damages under the FCA. In addition, MAS contractors are required to pay a fee, known as the Industrial Funding Fee (“IFF”), equal to a percentage of revenue under the contract in order to cover the Government’s contract administration cost. Failure to report sales accurately or failure to pay the IFF can also result in significant liability, including the potential for treble damages under the FCA. Thus, when purchasing a contractor that holds a MAS contract, it is important to review the adequacy of their disclosures to the Government as well as the adequacy of their procedures for complying with the price reductions clause and paying the IFF. Depending on the circumstances, the buyer also may wish to seek representations and warranties relating specifically to compliance with MAS contract requirements.
• Security Clearances: Acquiring a contractor that performs classified work presents unique challenges and risks. It is often difficult and sometimes impossible for the buyer to gain access to classified contracts. This limitation on the ability to conduct due diligence can be mitigated somewhat by obtaining robust representations. The existence of classified work is more problematic, however, if the buyer is subject to foreign ownership, control, or influence (“FOCI”). There is an obligation to mitigate FOCI and, depending on the nature and extent of the FOCI, the acceptable methods of mitigation may range from a simple Board Resolution to “wall off” foreign interests from access to classified contracts, to a Proxy Agreement or Voting Trust (in which the actual owners are deprived of most day-to-day management prerogatives) or a Special Security Agreement. The contractor will also need to file an updated SF 328 (“Certificate Pertaining to Foreign Interests”) and will need to consider whether to file a “voluntary” notice of the transaction with the Committee on Foreign Investment in the United States, aka “CFIUS.”
This volume has provided a high level overview of the issues that most commonly arise in the acquisition of a government contractor. Our upcoming volumes will address these issues in further detail, including a discussion of relevant due diligence requests, representations and warranties, and other risk mitigation strategies.
What You Need to Know About Mergers and Acquisitions Involving Government Contractors and Their Suppliers | 17 Volume IV — Key Issues in Government Contracts Due Diligence