United States: What You Need To Know About Mergers And Acquisitions Involving Government Contractors And Their Suppliers

Volume 1 – The Structure of the Deal and Government Consent

With today's posting, we begin a ten-part series on unique issues that arise in connection with the acquisition or disposition of a company that performs government contracts or subcontracts. These issues obviously come into play when the target company fits the bill as an established "government contractor," replete with all of the infrastructure, systems, and processes that one normally associates with that term.  They also come into play, however, in connection with companies that sell standard commercial items to the Government under the auspices of the General Services Administration's schedule contracts and companies that operate at all tiers within the Government's supply chain.  They apply whether such companies are selling specialized products manufactured  to Government specifications or commercial items adopted or adapted for use, ultimately, by the Government.

Over the next ten months, we will examine a number of these issues, including the Government's right to approve or disapprove of the transaction; pre-closing and post-closing notifications; the impact of the transaction on pending bids and proposals; the effect of the transaction on a company's continuing eligibility for procurement preferences, such as small business set-asides; special issues posed by cross border transactions and classified contracts; the trap posed by lurking "organizational conflicts of interest"; the effect of the transaction on the recovery of certain costs; the effect of post-closing changes in cost accounting practices; and the liabilities that may lie in wait for the acquiring entity.

Today's inaugural installment in this series focuses on the government contracts considerations that should be taken into account in deciding on the form that the transaction will take, e.g., a stock purchase, an asset transaction, or a merger.  We recognize that there are many considerations that will drive this decision that are wholly unrelated to government contracts, principal among them tax considerations.  It is not the purpose of this posting to discuss those other considerations, or to suggest that government contract considerations should be elevated above them in the hierarchy of transactional considerations.  Our purpose, rather, is to identify the issues so that they can be taken into account as part of the overall evaluation of the structure and not become an eleventh hour surprise for dealmakers anxious to close and put the transaction to bed.

So, with that prologue, why does it matter, from a government contracts perspective, what form the deal takes? The answer to this question can be found in two federal statutes, i.e., 41 U.S.C. § 6305 (formerly 41 U.S.C. § 15) and 31 U.S.C. § 3727, which prohibit, respectively, the transfer of government contracts, or of interests in government contracts, and the assignment of claims and interests in claims against the Government.  There are several reasons for these statutes, e.g., to discourage speculation in government contracts that can then be "flipped" for profit after award; to make sure that the Government knows with whom it is dealing and that it obtains the benefits anticipated when it chose the contractor in the first instance; and to avoid duplicative claims and payments under the contracts.

If these anti-assignment statutes apply to the transaction, the Government will have the right to approve of the transfer of contracts effected under the deal and treat the acquirer/assignee as the successor-in-interest to the prior contractor. By the same token, if a prohibited transfer takes place without the required Government consent it "annuls the contract or order."  41 U.S.C. § 6305(a).  Under the FAR, absent the required Government consent, "the original contractor remains under contractual obligation to the Government, and the contract may be terminated for reasons of default, should the original contractor not perform."  FAR 42.1204(c).  Needless to say, this is not the kind of post-closing development that will be warmly welcomed by the buyer, whose initial notice of the problem may come when the Government declines to pay invoices submitted by a "stranger" to the contract.

It becomes important, thus, to know what transactions are subject to the anti-assignment statutes, and therefore require Government consent, and which are not. The answer is not always altogether clear:

Stock Purchases — Acquisitions made by way of a stock purchase should not implicate the anti-assignment statutes.  The entity in privity of contract with the Government does not change; the only change is in the identity of the shareholder(s).  Because the contracts will be performed by the same entity, utilizing the same facilities, assets, personnel, skills, and experience applied by the acquired entity before the stock purchase, none of the policy reasons that underlay the anti-assignment statutes are implicated by this type of transaction.  Although there is no case that actually squarely so holds, the Federal Acquisition Regulation does not list stock purchases among the transactions that trigger the need for Government consent. See FAR 42.1204(a).  To the contrary, FAR 42‑1204(b) expressly excepts stock purchases from the requirement for Government consent.

Asset Purchases —  FAR 42.1204(a) identifies a sale of assets as a transaction that requires Government consent.  This makes sense if one examines the policy reasons for the anti-assignment statutes – the performing entity is no longer the entity to which the contract was awarded in the first instance and the prospect of conflicting claims and misdirected payments is obvious.  The case law uniformly recognizes the Government's approval rights in connection with asset transactions.  The types of asset sales that will be favorably considered for consent by the Government generally include the sale of all of the assets of the original contractor, or the sale of all of its assets involved in performing the contract, with a provision for the assumption by the acquiring entity of the liabilities associated with the acquired contracts.  The Government will not want to chase an entity with which it no longer has privity of contract to enforce liabilities not assumed by the new contractor.

Mergers and Consolidations – Up to now, the answers have been fairly straightforward, with predictable outcomes. This is where the road gets curvy, hilly, and bumpy.  There are a number of cases – including Supreme Court, Court of Claims, and Armed Services Board of Contract Appeals precedent – holding that a merger or consolidation effects a transfer of assets "by operation of law" that is not subject to the anti-assignment statutes and for which Government consent is not required.  Unfortunately, the FAR provides that consent is required for a transfer of assets "incident to a merger or corporate consolidation."  FAR 42.1204(a)(2)(ii).  While one might assume that the U.S. Supreme Court trumps the FAR, contracting officers do not necessarily subscribe to that view and, in the world of government contracting, they rule the roost.  While one can occasionally encounter a contracting officer who will actually listen on this score, and the ASBCA has held that a reverse triangular merger is not subject to the anti-assignment statutes, most contracting officers will adopt a reflexive response that they must comply with the FAR as written.  When this happens, despite the parties' compelling legal arguments for the inapplicability of the statutes, there is no way effectively to resolve the issue in advance of closing and the course almost invariably charted by the parties is to (a) advise the contracting officer of the transaction, (b) seek agreement that a novation is not necessary, (c) failing that (as will usually be the case) precondition him/her so that consent can be readily obtained promptly after closing, and (d) bemoan in private the FAR's reversal of Supreme Court precedent.

Incorporation of a Proprietorship or Partnership or Formation of a Partnership – The FAR is pretty clear on this.  Consent is required and, again looking at the problems that the anti-assignment statutes are designed to avoid, this makes sense.  The transaction creates a different legal entity and the Government's recourse in the event of performance problems may be radically different.

Restructures and Reincorporations – "[B]usiness restructurings, such as reincorporation, which involve no change in ownership of the business" are regarded as transfers by operation of law that are not subject to the consent requirements of the anti-assignment statutes.  Once the reorganization involves changes in ownership, the need for Government consent becomes an issue.

Assignments in Bankruptcy –  The question here is whether the assumption of an executory government contract by the debtor in possession is a prohibited transfer that is subject to the Government's consent prerogatives.  This involves the intersection of the anti-assignment statutes and 11 U.S.C. § 365(c)(1).  This latter statute provides that the "trustee may not assume . . . any executory contract . . . if . . . applicable law . . . excuses a party . . . to such contract . . . from accepting performance from . . . . an entity other than the debtor or debtor in possession..."

Unfortunately, there are cases that come down on both sides here, holding in contradictory fashion that (1) Section 365(c)(1) does not prohibit a debtor in possession from assuming an executory contract, with or without the other party's consent, e.g., In re James Cable Partners, L.P., 154 B.R. 813 (M.D. Ga., 1993); and (2) a debtor in possession cannot assume an executory contract if applicable law would prohibit an assignment to a hypothetical third party.   In re Catapult Entertainment, Inc., 165 F. 3d 747 9th Cir. 1998).  These cases proceed on the assumption that  "a solvent contractor and an insolvent debtor in possession going through bankruptcy are materially distinct entities."  In the Matter of West Electronics, 852 F.2d 79, 83 (3rd Cir. 1988).  Under these latter cases, thus, the Government can exercise its consent rights under the anti-assignment statutes to block the assumption of the contract by the debtor in possession.

Before closing, let's focus for a moment on pending bids and proposals. There is nothing in the anti-assignment statutes that mentions bids and proposals, which obviously are not "contracts" and are clearly pre-contractual in nature.  Nonetheless, the FAR incorporates the basic principles outlined above, which empower contracting officers to reject bids and proposals that have been "transferred." See FAR 14.404-2(j).  We leave a more meaningful discussion of that issue for a future posting.

Next month – The foregoing post discusses the need for Government consent to the transfer of contracts. Next month, we will discuss the consent process, e.g., the who, what, when, and how of the Government's three-party novation agreements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
17 Oct 2017, Seminar, California, United States

Please join us for Sheppard Mullin's Labor & Employment Law Update & Happy Hour Seminar Series. 2017 presents significant developments in California labor and employment laws that will affect the way you run your day-to-day business operations. We will provide analysis and insight on these new laws, as well as offer practical advice and helpful tools for employers to protect their organizations from liability in the workplace.

17 Oct 2017, Seminar, California, United States

Covering topics such as promotions and sweepstakes, mobile advertising challenges, privacy considerations, claim substantiation and more, this expansive program will equip you with the tools you need to practice advertising law today.

18 Oct 2017, Seminar, Santa Clara, United States

The All Hands Meeting is a unique, multifaceted and affordable annual event tailored to the special needs of in-house professionals whose companies rely upon intellectual property. Scores of cutting-edge CLE presentations address the spectrum of legal, regulatory and ethical issues this community faces on a daily basis.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.