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Many companies have had the opportunity to grow their business by benefitting from government contracts that are specifically earmarked for small or disadvantaged businesses. But what happens with these prime government contracts when the time has come to sell your business? Federal law (41 U.S.C. § 15 – the “Anti-Assignment Act”) prohibits the transfer of government contracts to a third party, but it also allows the government to make exceptions to the rule.
What Types of Transfers Are Subject to the Anti-Assignment Act?
When a federal contractor is acquired, the government contract follows the corporate assets. If the government contract holder sells all of its assets (or all the assets used to perform the contract) to a third party, that third party can be substituted as the new contract holder. According to FAR 42.1204(a), these situations include:
• the sale of these assets with a provision for assuming liabilities;
• the transfer of these assets incident to a merger or corporate consolidation; or
• the contribution of these assets in connection with formation of a new business entity.
The process of the government making an exception to the Anti-Assignment Act and recognizing a third party as the new contractor is called “novation”.
What Transfers Are Not Subject to the Anti-Assignment Act?
FAR 42.1204(b) suggests that novation agreements are not required when a contractor changes ownership as a result of a stock purchase, with no legal change in the party to the government contract, and when that contracting party remains in control of the assets and is the party performing the contract. A change of name agreement (see FAR 42.1205) may be all that is required. However, according to FAR 42.1204(b), there may be other issues related to the ownership change that will need to be addressed in an agreement between the contractor and the government.
Who approves the novation and what is the process?
The “novation package” usually is submitted to a single administrative contracting officer (“ACO”), who will coordinate the novation process on behalf of all interested federal agencies. This single point of contact relieves the contractor of the burden of having to submit paperwork to multiple agencies, and it allows the Government to speak with a single voice.
In situations involving only one transferor, FAR 42.1202(a) provides that, if an ACO has been assigned to any of the contracts, then the “novation package” should be submitted to that ACO. Alternatively, if an ACO has not been assigned to any of the contracts, then the “novation package” should be submitted to the CO with the largest unsettled dollar balance (unbilled plus billed but unpaid).
ACOs will only approve the novation after reviewing a list of documents that are required by the Federal Acquisition Regulations (FAR). And because the novation process is an exception to the Anti-Assignment Act, expect the government to be insistent upon ensuring that all required documents are submitted.
The documents required to be submitted are listed in FAR 42.1204(e), and initially include:
- a document describing the proposed transaction (purchase/sale agreement, memorandum of understanding, etc.);
- a detailed list of all affected government contracts; and
- evidence of the transferee’s capability to perform.
And as they become available, you must provide the ACO with other documents listed at FAR 42.1204(f), such as:
- an authenticated copy of the document effecting the asset transfer (bill of sale, certificate of merger, etc.);
- certified copies of the resolution of the corporate parties’ boards of directors authorizing the asset transfer and minutes of each company’s stockholder meeting necessary to approve the asset transfer;
- an authenticated copy of the transferee’s certificate and articles of incorporation, if a corporation was formed for receiving the assets;
- a legal opinion of counsel for both the transferor and transferee stating that the transfer was properly effected;
- various balance sheets for the transferor and transferee, audited by independent accountants;
- evidence that any security clearance requirements have been met;
- the consent of sureties, or a statement that none are required; and
- any other relevant information requested by the ACO
And just in case you thought it was easy, the list of required documents may vary depending on the particular form of the transaction, the agency the contracts are with, and/or the preferences of the responsible ACO.
Processing a novation can take a very long time, because the ACOs are generally focused on finalizing new contracts, so processing a novation is last on their “to do” list. The government often ultimately approves the novation, but the process can take from several weeks to six months or more to complete.
For this reason, parties generally do not make the government’s novation a condition to closing and instead will covenant to pursue the novation agreement on a post-closing basis. Or, the parties will enter into an interim subcontract whereby the buyer will perform on behalf of the seller pending completion of the novation process. Additionally, the parties may provide for a purchase price adjustment, indemnity, or permanent subcontract if the novation is denied.
A key factor is that the government is not obligated to novate a contract. When the government concludes it is not in its interest, the government can refuse to novate the contract and hold the original contractor liable.
For More Information, you may wish to read:
SBA Blog Post on Government Contracts
FAR Subpart 42.12—Novation and Change-of-Name Agreements
GSA.gov “Guidelines For Requesting A Novation Or Change Of Name Agreement”
A model novation agreement is shown at FAR 42.1204(i)