What are the Key Concerns With Mergers and Acquisitions of Government Contracting Companies?

Theodore P. Watson, Esq.  A Merger and acquisition involving companies with federal government contracts carry significant implications. Understanding the significance of these transactions and the key considerations and concerns associated with them is crucial. Whether you are acquiring or selling a company with government contracts, using resources up front to minimize costly mistakes, in the end, can save millions of dollars in the long run.  

Is It Worth Getting Hit With a $1′.75 Million for Misrepresenting as a Small Business Government Contractor?

In one 2023 case in ALEXANDRIA, Va. –A company located in Chantilly has agreed to pay $1.75 million to settle civil fraud allegations that it and its subsidiaries improperly obtained government contracts that were set-aside for small businesses. Pavion Company (Pavion) ceased to qualify as a small business concern after its predecessor company was acquired in 2016 by the private equity firm Tower Arch Capital.

The company was then pulled into hot water because after the merger/ acquisition of a government contracting small business, the company mistakenly or not, falsely certified themselves as qualified small businesses in the System for Award Management (SAM.gov). Following its acquisition by Tower Arch Capital, Pavion and its subsidiaries were awarded 117 set-aside small business contracts across twenty different federal agencies that they were ineligible to receive.

Hire the right government contract attorneys to assess whether after a merger or acquisition a particular company will remain its small business status.

• Failure to assess your small business status after a merger or sale of a government contracting business can be costly.

Due Diligence

In any merger or acquisition involving companies with federal government contracts, conducting a thorough examination of existing contracts is of utmost importance. This involves carefully assessing the terms and conditions of the contracts, including performance obligations, deliverables, and compliance history. By undertaking comprehensive due diligence, potential risks and liabilities can be identified, enabling informed decision-making during the transaction.

A. Thorough examination of existing federal government contracts: Review all contracts, agreements, and grants that the target company has with federal government agencies. This examination should include contracts at all levels of the government, such as contracts with federal departments, agencies, or even state and local government entities that receive federal funding. Obtain copies of these contracts and evaluate their terms and conditions to determine if TAA or BAA compliance obligations are explicitly outlined.

A general concern is whether the merged company maintains its small business status after the merger. See below.

B. Assessing contract terms, performance obligations, and compliance history: Carefully analyze the specific provisions within the contracts to determine the extent of TAA or BAA compliance requirements. Pay attention to clauses that address the origin of products, domestic manufacturing requirements, or any exceptions or waivers that may apply.

Evaluate the performance obligations of the target company to identify any potential compliance gaps or deviations. Additionally, assess the target company’s compliance history with respect to these contracts by reviewing any past audit reports, compliance certifications, or related documentation.

C. Identifying potential risks and liabilities: During the examination, be vigilant in identifying potential risks and liabilities associated with TAA or BAA compliance. This includes assessing whether the target company has been meeting the regulatory requirements, whether any non-compliance issues have been identified or reported, and whether any penalties or liabilities have been incurred. Additionally, consider any pending investigations, disputes, or claims related to TAA or BAA compliance that could impact the target company’s future obligations or financial standing.

By conducting a comprehensive examination of existing federal government contracts, assessing contract terms and performance obligations, and identifying potential risks and liabilities, acquirers can gain a clear understanding of the target company’s compliance status. This information is crucial for making informed decisions during the M&A process, including evaluating the financial impact of any compliance issues and determining the necessary steps to address or mitigate potential risks. Engaging legal and compliance experts with expertise in government contracts can provide valuable guidance and support throughout this examination process, ensuring a comprehensive assessment of TAA or BAA compliance.

Contract Novation and Assignment

Understanding the process of contract novation and assignment is crucial in mergers and acquisitions involving federal government contracts. Contract novation refers to the transfer of contractual rights and obligations from one party to another, while contract assignment involves the transfer of rights but not the obligations. It is essential to ensure compliance with regulatory requirements during this process. Seeking necessary approvals from government agencies is a key step in ensuring a smooth transition of the contracts to the acquiring entity.

A. Understanding the process of contract novation and assignment
B. Ensuring compliance with regulatory requirements
C. Seeking necessary approvals from government agencies

Change of Control

A change in control resulting from a merger or acquisition can have a significant impact on federal government contracts. It is essential to evaluate this impact thoroughly, considering factors such as contract pricing, performance, and deliverables. Notifying and seeking consent from the government contracting agency is crucial to address any concerns and ensure compliance during the transition.

Change of control,  under 13 CFR 121.103, when there is a merger and acquisition of a small business that has government contracts, is a critical issue before the M&A takes place.  Consulting with a government contracts attorney that also is familiar with SBA small business rules can be very helpful when assessing a potential government contractor M&A.

Intellectual Property and Data Rights

The protection of intellectual property and data rights is a critical concern in mergers and acquisitions involving government contracts. It is important to identify and safeguard intellectual property assets and comply with contract terms and government regulations regarding their usage. Any conflicts or restrictions on intellectual property and data usage must be addressed appropriately to ensure compliance and protect the interests of all parties involved.

A. Identifying and protecting intellectual property and data rights
B. Ensuring compliance with contract terms and government regulations
C. Addressing any conflicts or restrictions on intellectual property and data usage

Compliance with Small Business and Socioeconomic Requirements

Compliance with small business and socioeconomic requirements is a significant consideration in mergers and acquisitions involving federal government contracts. Assessing the impact on set-aside contracts and subcontracting goals is necessary to maintain compliance. Developing strategies to preserve compliance or seek necessary waivers is crucial in meeting the specific requirements imposed by the government.

A. Assessing compliance with small business and socioeconomic requirements
B. Evaluating the impact on set-aside contracts and subcontracting goals
C. Developing strategies to maintain compliance or seek necessary waivers

Organizational Conflict of Interest (OCI)

Identifying and addressing potential organizational conflicts of interest is vital in mergers and acquisitions involving government contracts. Organizational conflicts of interest can arise when the merger or acquisition creates a situation where a company’s objectivity or ability to provide unbiased services is compromised. Mitigating conflicts and seeking necessary approvals ensure transparency and compliance with OCI regulations.

A. Identifying and addressing potential organizational conflicts of interest
B. Mitigating conflicts and seeking necessary approvals
C. Maintaining transparency and compliance with OCI regulations

Key Personnel and Customer Relationships

The impact of the merger or acquisition on key personnel and customer relationships should be carefully assessed. It is important to evaluate contractual obligations and restrictions related to key personnel, such as non-compete agreements and employment contracts. Strategies for retaining talent and maintaining customer relationships are crucial to ensure a smooth transition and continuity of business operations.

A. Assessing the impact of the merger or acquisition on key personnel
B. Addressing contractual obligations and restrictions related to key personnel
C. Strategies for retaining talent and maintaining customer relationships

Financial Considerations

Evaluating the financial impact of the merger or acquisition on federal government contracts is a key concern. This involves assessing contract pricing, cost structure, and financial projections to ensure the financial viability and success of the merged entity. Additionally, considerations such as whether small businesses will maintain their small business status, whether current government contracts need to be novated, and whether the current business needs to be compliant with the Buy American Act (BAA) or Trade Agreements Act (TAA) are crucial factors to address.

A. Evaluating the financial impact of the merger or acquisition on federal government contracts
B. Assessing contract pricing, cost structure, and financial projections
C. Addressing potential financial risks and ensuring financial viability

Will small businesses maintain their small business status after the acquisition or merger?

When it comes to the merger and acquisition (M&A) of companies with government contracts, the involvement of small businesses holds significant importance. Small businesses play a critical role in the economy, fostering innovation, job creation, and competition. Therefore, considering their inclusion in M&A deals involving government contracts is crucial for several reasons.

Firstly, government agencies often have goals and initiatives aimed at promoting small business participation in federal contracting. These agencies set aside a certain percentage of contracts specifically for small businesses, providing opportunities for growth and sustainability. By including small businesses in M&A transactions, the acquiring company can leverage its existing government contracts, allowing for continued participation and compliance with these goals.

Secondly, small businesses bring unique capabilities and expertise to the table. They are often agile, flexible, and specialized in niche areas. Incorporating small businesses into M&A deals allows the acquiring company to tap into these specific skill sets, technologies, or intellectual property, which may be crucial for successful contract execution. It can lead to enhanced competitiveness, increased innovation, and improved overall performance.

Furthermore, the participation of small businesses in M&A transactions involving government contracts can help foster economic development. Small businesses are known to contribute to local communities by creating jobs and stimulating economic growth. By preserving and expanding its involvement through M&A, the acquiring company can continue supporting these economic benefits.

Moreover, government agencies value the stability and continuity of contract performance. M&A transactions have the potential to disrupt ongoing contracts and projects. However, by including small businesses as part of the deal, the acquiring company can mitigate such risks. Small businesses familiar with the contract requirements and processes can ensure a smoother transition, minimizing disruptions and maintaining the delivery of critical services to the government.

 Merger and Acquisition – Will current government contracts need to be novated under FAR 42.1204?

Determining whether government contracts must be novated as part of a merger and acquisition (M&A) involving small business companies with government contracts is a critical consideration. Novation refers to the process of transferring contractual rights and obligations from one party to another, typically when there is a change in ownership or structure. Here’s why this issue is crucial:

1. Contractual Compliance: Government contracts often contain specific provisions related to novation. These provisions outline the requirements for transferring the contract to a new entity, ensuring compliance with applicable laws, regulations, and the terms of the contract itself. Failing to comply with novation requirements can result in contract termination, loss of future business opportunities, or legal consequences.

2. Continuity of Operations: Novation ensures continuity of operations for government contracts. It allows the acquiring entity to step into the shoes of the original contractor and fulfill the obligations outlined in the contract. Without proper novation, the acquiring company may face challenges in performing the contract, potentially disrupting critical government services or projects.

3. Transfer of Responsibilities: Novation transfers not only the rights but also the responsibilities associated with the government contract. This includes assuming any liabilities, warranties, and performance obligations. Understanding these obligations is crucial to mitigate risks and ensure a smooth transition during the M&A process.

4. Consent and Approval: Novation typically requires consent and approval from the government contract agency involved in the contract. See FAR Part 42.1204. The agency will evaluate the new entity’s qualifications, financial stability, and capability to perform the contract. Failure to obtain proper consent or meet the agency’s requirements can lead to the contract being deemed non-transferable, jeopardizing the M&A deal.

5. Small Business Programs: Small businesses often participate in government contracting through specialized programs that provide preferences, set-asides, or incentives. Novation can have implications for these programs, as the eligibility of the new entity to participate may be affected. Understanding the impact on small business programs is vital to maintain the benefits associated with these initiatives.

6. Compliance with Laws and Regulations: Government contracts are subject to various laws, regulations, and compliance requirements. During an M&A, it is essential to assess whether the acquiring company complies with these legal obligations. Novation may trigger additional regulatory scrutiny or reporting obligations, such as anti-corruption laws or security clearances.

Given the critical nature of government contracts and the potential consequences of non-compliance, thoroughly evaluating whether novation is required as part of an M&A involving small business companies with government contracts is crucial. Engaging legal counsel experienced in government contracting can provide guidance and ensure compliance with applicable regulations, mitigating risks and facilitating a successful transition for all parties involved.

Merger and Acquisition – Does the current business need to be BAA or TAA compliant?

Finding out if merged or acquired companies are Trade Agreements Act (TAA) compliant or Buy American Act (BAA) compliant is an essential step in ensuring compliance with these regulations in the context of mergers and acquisitions (M&A). Companies undergoing M&A activities need to thoroughly assess the compliance status of their newly acquired entities to avoid any violations and maintain regulatory adherence.

To determine TAA or BAA compliance, the following steps can be taken:

1. Due Diligence: During the due diligence phase of the M&A process, companies should conduct a comprehensive review of the target company’s contracts, agreements, and procurement records. This analysis helps identify whether the target company has been following TAA or BAA requirements in their procurement practices.

2. Contractual Obligations: Reviewing the target company’s existing contracts and agreements is crucial. This assessment should focus on identifying any clauses or provisions that relate to TAA compliant or BAA compliance. These clauses may explicitly require compliance with TAA or BAA regulations or outline specific exceptions or waivers applicable to the company’s products or services.

3. Supplier and Product Evaluation: Companies should assess the target company’s suppliers and products to determine their origin and compliance with TAA or BAA requirements. This evaluation includes examining the source of raw materials, components, and manufacturing processes employed by the suppliers. It is important to ascertain whether these suppliers are located in designated trade agreement countries or meet the domestic manufacturing criteria outlined by the BAA.

4. Government Contracts and Grants: If the target company has been awarded government contracts or grants, it becomes crucial to review the terms and conditions of these agreements. Such contracts typically have explicit requirements for TAA or BAA compliance. Analyzing these contracts helps determine the extent of compliance and the potential impact on the merged or acquired entity.

5. Legal and Compliance Expertise: Engaging legal and compliance experts familiar with TAA and BAA regulations can provide valuable guidance throughout the M&A process. These professionals can help identify compliance risks, provide interpretation of complex regulations, and ensure proper adherence to the applicable laws.

Once the compliance status of the merged or acquired company is established, appropriate actions can be taken to address any identified non-compliance. This may involve implementing remedial measures, renegotiating contracts, seeking waivers where applicable, or pursuing alternative procurement strategies to meet the requirements of TAA or BAA.

It is important to note that the TAA and BAA are specific to government procurement, and compliance with these regulations is essential for companies seeking to secure government contracts. Private sector trade agreements and commercial transactions may have different requirements and regulations.

Overall, thorough due diligence and compliance assessments are essential for companies engaged in M&A activities to identify potential compliance issues and mitigate risks associated with TAA or BAA non-compliance. Taking the necessary steps to ensure compliance helps preserve the company’s reputation, maintain eligibility for government contracts, and minimize any legal and financial consequences that may arise from violations of these regulations.

Post-Merger Integration

Developing a comprehensive integration plan for federal government contracts is vital for a successful merger or acquisition. This involves coordinating contract novation, personnel transitions, and compliance efforts. Effective communication with government agencies and stakeholders throughout the integration process ensures a smooth transition and minimizes disruptions.

A. Developing a comprehensive integration plan for federal government contracts
B. Coordinating contract novation, personnel transitions, and compliance efforts
C. Communicating with government agencies and stakeholders throughout the integration process

Communication and Stakeholder Management

Ensuring effective communication with government contracting agencies is key to a successful merger or acquisition. Managing stakeholder expectations and concerns, including employees, customers, and government agencies, is crucial for maintaining positive relationships. Addressing potential disruptions or issues proactively fosters transparency and helps build trust.

A. Ensuring effective communication with government contracting agencies
B. Managing stakeholder expectations and concerns
C. Addressing any potential disruptions or issues proactively

Regulatory and Legal Compliance

Maintaining compliance with relevant laws, regulations, and policies is essential throughout the merger or acquisition process. Adhering to reporting requirements and documentation standards ensures transparency and demonstrates a commitment to compliance. Engaging legal counsel with expertise in government contracting can provide guidance and assistance with navigating the complex regulatory landscape.

A. Maintaining compliance with relevant laws, regulations, and policies
B. Adhering to reporting requirements and documentation standards
C. Engaging legal counsel for guidance and assistance with government contracting concerns

Risk Mitigation Strategies

For immediate help with mergers and acquisitions of companies with federal government contracts, call our government contract attorneys at 1.866.601.5518.