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 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.
Basics of Government Contract Novation Law & Business Asset Purchase 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. Ff 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 sales 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 and sale, the contracting officer may allow the novation of the contract.
FAR 42.12 Novation Law – Government Contract Novation Agreement 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.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.
Buyers and sellers should get a legal review of the assets purchase sale or stock purchase agreement to make sure that the assets are sufficient under the Federal Acquisition Regulations.
Management of Business Sales With an Asset Purchase Agreement: Given the amount of risks associated with the performance of government contracts, buyers, and sellers of businesses should always make sure that the contracting officer is involved early in the business sales process.
Only the CO can approve a government contract novation agremeent resulting from an executed business asset purchase agreement.
Having someone that understands the ins and outs of selling a business that involves federal government contracts can be a wise investment.
For additional help with your asset purchase agreement under 41 USC 15, novation stock purchase 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.