Government Contract Legal Issues with Mergers and Acquisitions
Government contractors have significantly increased mergers & acquisitions activity in recent years. A stream of recent stories in the Washington Post and New York Times has documented this. The acquisition of a business that has earned a government contract frequently provides the buyer an opportunity to increase its market share and strengthen its capabilities within an existing industry. The addition may also allow the new parent company to expand their portfolio to market and develop a new government contracting capability that was previously not available.
In September 2017, United Technologies and Rockwell Collins announced they had brokered a deal for United Technologies to acquire the airplane electronics and avionics parts manufacturer, Rockwell Collins for $30 billion. Through the transaction, UTC Aerospace Systems, which will be renamed Collins Aerospace Systems, will increase its aerospace capabilities and technology aerospace systems.
Also in September 2017, Northrup Grumman shared that it would acquire a rocket and defense contractor, Orbital ATK, for $7.8 Northrup's portfolio will expand to include a missile defense business and the ability to launch rockets that carry satellites into space.
Companies and private equity funds that want to expand their portfolios through the purchase of SMB government contractors must take particular caution through the due diligence process because such acquisitions are fraught with potential landmines that will slow or even terminate the proposed deal. To acquire a company that holds government contracts both parties must comply with many federal regulations before the government approves the transaction. The agency must recognize the buyer as a successor-in-interest for the seller's government contracts or subcontracts. All compliance obligations transfer to a buyer, therefore the buyer must be able to fulfill its new set of compliance responsibilities to the satisfaction of the government's contracting officers.
Many legal problems can arise in the process of government contractor mergers & acquisitions include:
- Disclosure of for any contractual or regulatory non-compliance that predates the transaction, including violations of the False Claims Act.
- Are there any prior suspensions or debarments that may affect the company to be acquired.
- Past performance ratings of the company to be acquired by government agencies, and the impact of those scores on the buyer's ability to win other government contracts.
- Analysis of the remaining years and potential accounts receivables income from existing and potentially new contracts held by the business to be purchased.
- The assignment or novation of the government contracts from the business being purchased.
- The loss of small business status or other socio-economic preferences that were initially used for the award of government contracts and will change as a result of the acquisition.
- The transfer of top-secret clearances and facility access.
- Transfer of the intellectual property rights owned by the business being purchased.
- Conflicts of interest, which may prevent the buyer from bidding on future government contracting opportunities.
- Are all of the Federal Supply Schedules current, up-to-date, and compliant with specific regulations (Price Reduction Clause).
- Are there subcontracts and teaming agreements the business to be purchased may hold, will they remain enforceable and compliant after the transaction.
- Foreign purchases require CFIUS notification and foreign ownership and control mitigation plans.
The failure to resolve these types of issues and similar compliance issues can be catastrophic. There must be a detailed analysis and a plan to address any of the financial impacts of a status change that would be caused as a result of the merger or acquisition. All necessary government approvals must be obtained before the transfer of any government assets. The potential loss of business opportunities for the buyer or the merged new entity, and in particular in situations that can result in a suspension or debarment of the contractor, or civil and criminal penalties requires careful government contracts due diligence. An experienced law firm will quickly identify these and other risks before the transaction progresses. It is essential to ensure that both parties obtain adequate disclosures and indemnifications, make thorough and accurate representation and certifications, and receive all necessary approvals from the government so that the proposed acquisition is successful and profitable.
This article is not intended to constitute legal advice and is intended for informational purposes only.
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Navigating mergers and acquisitions in the context of government contracts is a challenge. There are various legal regulations and considerations at play, which can make it difficult to understand the proper course of action. But a knowledgeable government contracts attorney can make all of the difference to help you avoid pitfalls and resolve any issues that might arise.
If you are in need of assistance with government contracts or other related matters, please do not hesitate to contact Whitcomb, Selinsky, PC immediately. Located in Denver, Colorado, you can reach the attorneys at Whitcomb, Selinsky, PC by phone at (303) 534-1958 or online by completing a simple form.