Page 5 - GovCon M&A Blog Articles

Government Contracts & Investigations Blog
With today’s posting, we begin a ten-part series on unique issues that arise in connection with the acquisition or disposition of a company that performs government contracts or subcontracts. These issues obviously come into play when the target company fits the bill as an established “government contractor,” replete with all of the infrastructure, systems, and processes that one normally associates with that term. They also come into play, however, in connection with companies that sell standard commercial items to the Government under the auspices of the General Services Administration’s schedule contracts and companies that operate at all tiers within the Government’s supply chain. They apply whether such companies are selling specialized products manufactured to Government specifications or commercial items adopted or adapted for use, ultimately, by the Government.
Over the next ten months, we will examine a number of these issues, including the Government’s right to approve or disapprove of the transaction; pre-closing and post-closing notifications; the impact of the transaction on pending bids and proposals; the effect of the transaction on a company’s continuing eligibility for procurement preferences, such as small business set-asides; special issues posed by cross border transactions and classified contracts; the trap posed by lurking “organizational conflicts of interest”; the effect of the transaction on the recovery of certain costs; the effect of post-closing changes in cost accounting practices; and the liabilities that may lie in wait for the acquiring entity.
Today’s inaugural installment in this series focuses on the government contracts considerations that should be taken into account in deciding on the form that the transaction will take, e.g., a stock purchase, an asset transaction, or a merger. We recognize that there are many considerations that will drive this decision that are wholly unrelated to government contracts, principal among them tax considerations. It is not the purpose of this posting to discuss those other considerations, or to suggest that government contract considerations should be elevated above them in the hierarchy of transactional considerations. Our purpose, rather, is to identify the issues so that they can be taken into account as part of the overall evaluation of the structure and not become an eleventh hour surprise for dealmakers anxious to close and put the transaction to bed.
So, with that prologue, why does it matter, from a government contracts perspective, what form the deal takes? The answer to this question can be found in two federal statutes, i.e., 41 U.S.C. § 6305 (formerly 41 U.S.C. § 15) and 31 U.S.C. § 3727, which prohibit, respectively, the transfer of government contracts, or of interests in government contracts, and the assignment of claims and interests in claims against the Government. There are several reasons for these statutes, e.g., to discourage speculation in government contracts that can then be “flipped” for profit after award; to make sure that the Government knows with whom it is dealing and that it obtains the benefits anticipated when it chose the contractor in the first instance; and to avoid duplicative claims and payments under the contracts.
If these anti-assignment statutes apply to the transaction, the Government will have the right to approve of the transfer of contracts effected under the deal and treat the acquirer/assignee as the successor-in-interest to the prior contractor. By the same token, if a prohibited transfer takes place without the required Government consent it “annuls the contract or order.” 41 U.S.C. § 6305(a). Under the FAR, absent the required Government consent, “the original contractor remains under contractual obligation to the Government, and the contract may be terminated for reasons of default, should the original contractor not perform.” FAR 42.1204(c). Needless to say, this is not the kind of post-closing development that will be warmly welcomed by the buyer, whose initial notice of the problem may come when the Government declines to pay invoices submitted by a “stranger” to the contract.
02 | What You Need to Know About Mergers and Acquisitions Involving Government Contractors and Their Suppliers Volume I — The Structure of the Deal and Government Consent