What Do I Do With The Contracts? – Issues In Buying Or Selling A Government Contractor

I usually get the request after the buyer and the seller have agreed on a structure for a purchase or a merger and they are working through their due diligence and papering the deal: “Ok, we’re ready to go with this purchase (or sale), how do we transfer the contracts.”

Transferring the contracts should not be an afterthought in the deal, the transfer of the contracts should in many cases be the prime consideration, around which the deal is structured, because in many cases – and particularly for small contractors – the contracts themselves are the primary asset that brings value to the company being sold.

In general, the Anti-Assignment Act prohibits the transfer of government contracts to a third-party. However, there are exceptions to that blanket transfer prohibition. Those exceptions, and the rules for how to request approval of a transfer under those exceptions, are set out in the FAR at section 42.1204. A contractor that attempts a purchase or sale without thoroughly evaluating the rules of FAR 42.1204, and without conscientiously following the procedure described in that section, runs the very significant risk of having a request to transfer denied, or of having the contract cancelled, thereby risking the very asset that gives the company value.

The first question the parties to a transaction should consider is whether the transaction is such that the contracts are “being transferred” at all.

As described in FAR 42.1204, if there is a change of ownership of a contract “as a result of a stock purchase,” but there is no legal change in the contracting party, and the contracting party remains in control, there is no “transfer” of the contract such that the government must consent to the transfer.

However, if there is a stock purchase (or for a limited liability company or partnership the equivalent to a stock purchase), there may be other issues the contractor must consider. For example, if the contractor is certified in a set-aside program, is there still “direct ownership” by a qualified individual; If the contractor is subject to NISPOM regulation, are the security issues implicated by the transfer of ownership; For all contractors, does the change of ownership implicate responsibility issues that must be addressed; and etc. and etc.

If there is a direct asset purchase, then the contractor must consider the Anti-Assignment Act, and must appropriately seek out the exceptions to the prohibition on transfers. As described in FAR 42.1204, there are two situations in which the Government may consent to the transfer of a contract:

1) The contractor is transferring all of its assets; or

2) The contractor is transferring the entire portion of its assets involved in performing the contract.

In either of those cases, if the government consents, it will execute with the contractor what is called a “Novation Agreement” which will “novate” the contract, meaning substitute the new contractor for the old contractor in the agreement.

A contractor that wants a novation has to ask for it. Naturally, there is an appropriate way to do that. That is to submit a “novation package” to the contracting officer. As in any transaction between a contractor and the Government, the Government must have adequate documentation of the proposed transaction to allow the Contracting Officer to fulfill his or her duty not to obligate the Government recklessly or unlawfully. So, at a minimum, a novation package must contain the following:

(1) The document describing the proposed transaction, e.g., purchase/sale agreement or memorandum of understanding.

(2) A list of all affected contracts between the transferor and the Government, as of the date of sale or transfer of assets, showing for each, as of that date, the —

(i) Contract number and type;

(ii) Name and address of the contracting office;

(iii) Total dollar value, as amended; and

(iv) Approximate remaining unpaid balance.

(3) Evidence of the transferee’s capability to perform.

(4) Any other relevant information requested by the responsible contracting officer.

(f) Except as provided in paragraph (g) of this section, the contractor shall submit to the responsible contracting officer one copy of each of the following documents, as applicable, as the documents become available:

(1) An authenticated copy of the instrument effecting the transfer of assets; e.g., bill of sale, certificate of merger, contract, deed, agreement, or court decree.

(2) A certified copy of each resolution of the corporate parties’ boards of directors authorizing the transfer of assets.

(3) A certified copy of the minutes of each corporate party’s stockholder meeting necessary to approve the transfer of assets.

(4) An authenticated copy of the transferee’s certificate and articles of incorporation, if a corporation was formed for the purpose of receiving the assets involved in performing the Government contracts.

(5) The opinion of legal counsel for the transferor and transferee stating that the transfer was properly effected under applicable law and the effective date of transfer.

(6) Balance sheets of the transferor and transferee as of the dates immediately before and after the transfer of assets, audited by independent accountants.

(7) Evidence that any security clearance requirements have been met.

(8) The consent of sureties on all contracts listed under paragraph (e)(2) of this section if bonds are required, or a statement from the transferor that none are required.

FAR 42.1204(e)

It’s a complicated process, and you want to get it right, and you want to make sure that the deal doesn’t get hung up waiting for novation.

If you want to ask us questions about novation agreements, the novation process, or how to think about your government contracting work in the context of a merger or an acquisition, please call or email me.

Chris Shiplett
Randolph Law, PLLC
(p) 703-652-3039
(e) chris.shiplett@randolphlawonline.com