Mergers and Acquisitions – Government Contracts

Novation Vs Assignment Are You Violating The Anti-Assignment Act in Your Merger and Acquisition TransactionIf you are involved in mergers and acquisitions of companies that include federal government contracts, one of the main concerns, and probably most important to the buyer is how the rights, obligations, and ability to collect revenue pass on the buyer.

Are the FAR novation requirements being met? Is there a violation of the Anti-Assignment Clause? What about SBA affiliation issues? With any buy sell transaction involving federal government contracts, the parties must understand the difference between novation and assignment of contract.

The Anti-Assignment Act prohibits the assignment of contracts issued by the federal government. However, FAR 42 novation law does have some leverage to novate a contract to the buyer. Buyers and sellers, and parties involved in mergers and acquisitions should serious assess how the transaction impacts the company’s small business status (if applicable), and whether FAR novation law allows for the possibility of getting a novation agreement approved by the contracting officer. Buyers and sellers and their attorney should seriously address the following questions.

  • Can the seller force specific performance if the contracting officer disapproves the novation agreement?
  • Would there be a violation of the Anti-Assignment Act if the transaction is consummated without the government’s approval?
  • Can the seller be subjected to continuing performance under the original government contract or face suspension and debarment?

STOCK PURCHASE SALES

Novation agreements in government contracts is generally not required when there is a stock purchase. The contracting parties are generally still the same as when the contract was awarded. However, although the FAR suggests that a novation agreement is not required, the practical point  it that parties involved in a stock purchase should still have legal counsel in the event that the contracting officer somehow has issue with the government’s risk or the interest of the government as a result of the purchase and sale

ASSET PURCHASE SALES 

When there are asset sales involving a federal contract that is going to be transferred to the buyer, the regulations expressly suggest that the parties go through the FAR novation process. Whereas, when looking at the difference in novation vs  assignment of contract, the rights under government contract law occurs in a totally different situation than a purchase sale scenario (assignment of payment etc.)

Relevant to the issues of novation vs assignment, when there is an asset purchase sale, a serious concern arises as to whether the government contract can be assigned in violation of the Ant-Assignment Act.  Here, the sellers and buyers are anticipating that one of the “assets” is the federal contract. Novation contract law under the FAR does not trump the Ant-Assignment Act.

When there is an asset purchase sale, FAR 42 novation law allows for the approval of a contract novation agreement when the contracting officer believes such approval will be in the best interest of the government.

PROBLEMS WITH THE ASSET PURCHASE AGREEMENT?

When considering the legal issues with assignment and novation of government contracts, one concern that buyers and sellers should be aware of is the legal effect of the executed asset purchase agreement and what happens of the contracting officer chooses not to approve the novation agreement.

This is when having an experienced government contracts attorney can make a huge difference.

MERGERS AND ACQUISITIONS – GETTING THE GOVERNMENT’S CONSENT

When considering the impact of mergers and acquisition and contract novation vs assignment, FAR contract novation law requires the government’s consent to transfer federal contract to the buyer.

Despite the executed buy sell agreement or asset purchase agreement, the transfer of a federal government contract is illegal unless the government gives its expressed consent under FAR Subpart 42.12

 One concern that is commonly missed by corporate attorneys attempting to handle federal government contract novations is that when compared to a traditional novated contract, the seller still guarantees performance.

This is where either the buyer or seller should consider the terms and condition of the buy sell contract before execution.

EXCEPTIONS TO THE ANTI-ASSIGNMENT ACT

When considering novation vs assignment of government contracts, the United States Court of Federal Claims elaborated on the two exceptions to the Anti-Assignment Act in the case of Liberty Ammunition, Inc. v. United States. The exceptions to the Act occur when:

  1. The government waives the legal assignment requirements and
  2. When the assignment occurs by operation of law

SBA AFFILIATION VIOLATIONS?

Small business government contractors involved with mergers and acquisitions or some other contract transfer may sometimes engage in novation of contract transactions. However, although it rarely happens, companies that somehow believe that as the purchaser of a company with a recently awarded contract the contract transfer is valid can be surprise of there is a small business size protest.

Specifically, if there is a signed novation agreement between the buyer and the seller but no approval from the contracting officer, then the novation is not valid. The legal effect could be that the seller is now affiliated with the buying company. This can be a disastrous result and violation of SBA affiliation rules.

For immediate help with government contract novations, agreements, and legal issues arising with assignment and novation law, call our government contract attorneys at 1-866-601-5518.