Asset Purchase Agreement & Government Contract Novation

As a government contractor, or company seeking to buy a business where federal contracts are involved, you must consider the various implications you face given the federal regulations governing novation law and the sale of a business and assignment of contract issues.

There are various legal nuances involved with assignment and novation such as whether or not to do an assets purchase agreement sale or transfer the business through a stock purchase.

The federal government could recognize the successor in the business sale if it is within the government’s interest. If you are the seller of a company via an asset purchase agreement (also referred to as an asset sale agreement) and is also the prime contractor on a federal project, there is a possibility that you would have to get a novation agreement approved by the contracting officer.

Novation Selling Your Business? What is an Asset Purchase Agreement?

An asset purchase agreement (APA) is a contract between a buyer and the seller that addresses the disposition of the company assets upon when the sale is finalized.  As it applies to federal government contract novations, you must seriously look at whether or not “assets” and mentioned in the agreement, really meets the government’s definition. The government’s attorney will scrutinize this when you submit your novation agreement package.

When you submit your novation package to the responsible contracting officer, you also want to make sure that the federal contract is not the only ‘asset’ being sold. This would place you in direct contradiction and violation of the Anti Assignment Clause.

The provisions in your asset purchase agreement may include promissory notes to pay the purchase price,  place liens and encumbrances on the asset. You want to make sure that you have a state attorney to validate compliance with your state law when you try to submit a government contract novation.

 Basics of Government Contract Novation Law & Business Asset Sale Agreement Sale 41 USC 15

Under 41 USC 15, if your company is the party to whom the Federal Government issues a contract or purchase order, you cannot transfer the contract or order, or any interest in the contract, to a third party.  If a court determines that there was a transfer without government approval, the purported transfer is a violation of federal novation law and annuls the contract or order so far as the Federal Government is concerned, except that all rights of action for breach of contract are reserved to the Federal Government.

The Anti-Assignment Act, 41 USC 15 prohibits the direct sale of federal contracts. However, the contracting officer can consent to the business transfer. The most common way to buy or sell a business where the buyer or seller is a prime contractor is through a business asset purchase agreement. However, stock purchase contracts are also allowable.

FAR 42.1204 (a) allows  “novation contract agreements” when federal government contractors transfer all assets with a merger and acquisition or sale of the business.

Under the Anti-Assignment Act,  41 USC 15, there are no allowances for only the sale of a federal contract. However, if the contract(s) is part of the business purchase contract and sale, the contracting officer may allow the novation of the contract.

Does Your Asset Purchase Agreement Meet the FAR Novation Requirements?

 FAR 42.12 novation law regulates novation of contracts when buying or selling an existing business. Therefore, compliance with the federal assignment and novation laws is also important. As a general rule, the FAR does not require a novation agreement when the sale of the business is caused by an asset purchase. However, always remember that even though this is not a regulatory requirement, the CO still has some say so as to what happens with the contract. See SBA Fraud Cases – Defending Government Contract Fraud Allegations.

• The government is not mandated to approve your novation agreement
• Also, a critical part of your acquisition purchase sale that the government’s attorneys will be interested in is whether your asset sale agreement violates the Anti-Assignment Act.

The contracting officer makes the final decision as to whether a government contract novation agreement is required when there is a merger or acquisition of a federal contractor’s business. See the Basics For FAR 9.5 Organizational Conflict of Interest OCI Mitigation Plan.

Buyers and sellers should get a legal review of the asset purchase sale or stock purchase contract to make sure that the assets are sufficient under the Federal Acquisition Regulations.

What Should be Included in the Asset Agreement?

When you are buying or selling a business involving government contracts, federal novation law requires you to have thorough documentation. For example, the asset purchase agreement should spell out (1) what is the asset? (2) a description of the asset (3) how much is the asset sold for and (4) what assets of the business are not being sold. As mentioned earlier, if the asset sold is only the government contract, the attorneys for the government will more than likely allege that the Anti Assignment law has been violated. There is simply no such thing as government contract sales.

Reasons to Manage Your Business Sales With an Asset Agreement & Novation are Involved

 Given the number of risks associated with the performance of government contracts, buyers, and sellers of businesses should always make sure that the contracting officer (“CO”) is involved early in the business sales process. Only the CO can approve a government contract novation agreement resulting from an executed business asset purchase agreement.

Getting your novation approved when conducting an asset purchase sale of your company also means establishing some way of managing the entire process.

• You have state law requirements that govern the legal sufficiency of the asset purchase agreement
• You also have federal laws governing the Anti-Assignment Act and the restrictions on selling just the government contract.
• Hire an attorney that can manage both without violating the FAR novation rules.

Having someone that understands the ins and outs of selling a business that involves federal government contracts can be a wise investment. The key to your success is the carefully balance all of the moving pieces while having experienced people that understand the federal contract novation process.

What Happens When Your Government Contract Novation Also Includes an Existing Teaming Agreement?

When companies decide to sell,  there are other wrinkles that can arise. If the existing contract involves a teaming agreement or a joint venture. How does the teaming partner handle the sale to a new company? These are all concerns that can become a problem when trying to get a government contract novation approved.  The agency contracting officer may contemplate problems during the performance with the new party to the contract.

This could lead to the conclusion that the CO does not believe the novation is in the best interest of the government.  You may want to have the parties agree to the transaction. Make sure that the companies involved in the contract performance agree to the sale or purchase.

Does Force Majeure Clauses Apply to Federal Government Contracts COVID 19?

For additional help with your asset purchase agreement under 41 USC 15,  FAR novation rules for small business stock purchase contract requirements, novation agreements and mergers and acquisition of companies who have prime contracts with the federal government, call our government contract novation law lawyers at 1-866-601-5518 for a FREE INITIAL CONSULTATION.