Federal Contractor Merger and Acquisitions & Government Contract Novations
If you are involved in a merger and acquisition of companies that include federal government contracts, one of the main concerns when analyzing the FAR clause, and probably most important to the buyer is how the rights, obligations, and ability to collect revenue pass on to the buyer without committing fraud against the government. The issue of government contract novations often becomes problematic in federal construction contracts.
- How does the Federal Acquisition FAR Novation Clause apply to your specific case?
- Does your specific transaction violate the procurement Contract Assignment Clause?
- Do you have a government contracts novation law attorney on your team to help?
If you are a small business and you buy or sell the company, are there affiliation issues that you must be aware of? Depending on the transfer by novation type, your small business size may be impacted. These are all issues to be discussed with your novation consulting professional.
What is the Federal Contract Assignment Clause?
The Anti Contract Assignment Clause 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 merger and acquisitions should seriously assess how the transaction impacts the company’s small business status (if applicable), and whether the FAR allows for the possibility of getting a novation agreement approved by the contracting officer. Buyers and sellers and their attorneys should seriously address the following questions.
- Can the seller force specific performance if the contracting officer disapproves of 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?
FAR NOVATION AGREEMENT CLAUSE & STOCK PURCHASE SALES
FAR Novation agreements in government contracts are generally not required when there is a stock purchase. Under the FAR novation clauses, the contracting parties are generally still the same as when the contract was awarded.
However, although the FAR Clause suggests that a novation agreement is not required, the practical point is that parties involved in a stock purchase should still have legal counsel in the event that the contracting officer somehow has an issue with the government’s risk on non performance of the original contract or the interest of the government as a result of the purchase and sale.
- What happens if the contracting officer brings up the issue of anticipatory repudiation?
FAR NOVATION CLAUSE – 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 novation clauses occur in a totally different situation than a purchase sale scenario (assignment of payment etc.)
Relevant to the issues of novation or 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 Contract Assignment Clause. 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 Anti-Assignment Act.
When there is an asset purchase sale, the FAR 42 novation clause 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 if the contracting officer chooses not to approve the FAR novation agreement.
Maybe you should consider whether it is necessary to put approval contingency Clause in your asset purchase agreement and related novation contracts. This is when having an experienced government contracts attorney can make a huge difference.
CONTRACT NOVATION VS ASSIGNMENT GETTING THE GOVERNMENT’S CONSENT
When considering the impact of a merger and acquisition and federal government contract novation vs assignment of contract, FAR contract novation law requires the government’s consent to transfer a 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. There is always a concern that interests or obligations under the original contract are at risk.
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 conditions of the buy-sell contract before execution.
WHAT ARE THE 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 high profile case of Liberty Ammunition, Inc. v. United States. The exceptions to the Anti Assignment of Contract provision occur when:
- The government waives the legal assignment requirements and
- When the contract assignment occurs by operation of law
IS YOUR NOVATION IN VIOLATION SBA AFFILIATION RULES?
Small business government contractors involved with merger 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 surprised if 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 of your transfer by novation could be that the seller is now affiliated with the buying company. This can be a disastrous result and violation of SBA affiliation rules.
ARE YOU BUYING A COMPANY THAT IS IN VIOLATION OF THE BUY AMERICAN ACT?
One of the highly omitted areas when buying or selling a company with government contracts is to see whether the company’s day-to-day operations or selling of products to the government present a case of Buy American Act fraud. Companies selling products and parts on federal construction projects are not always in compliance. You should add this investigation to your due diligence list. See information about three defenses for criminal liability for government contractors.
For immediate help with government contract novations, agreements, and legal issues arising with assignment and novation company law, call our government contract attorneys at 1-866-601-5518.