United States: What You Need To Know About Mergers And Acquisitions Involving Government Contractors And Their Suppliers - Volume 3 - What Happens To Pending Proposals?

Volume 3—What Happens to Pending Proposals?

Thus far in this ten-part series, we have discussed whether and how existing contracts with the Government can be transferred to the buyer or surviving entity when an acquisition, merger, or consolidation occurs. Today, we leave the world of existing contracts and turn to bids and proposals that are pending when the deal closes. What happens to those as-yet-unaccepted offers? Is there anything you can do to enhance the likelihood that the Government will be willing to accept such offers notwithstanding the organizational change? And, if you are in second place when the award is made to a "reorganized" offeror, are there possible protest grounds lurking in the deal that you could assert to obtain the award?

As a threshold matter, the anti-assignment acts that we discussed in our prior postings apply to contracts only. Nothing in the language of the statutes suggests their applicability to bids or proposals. The Government Accountability Office, however, has long applied the principles applicable to the transfer of contracts under those statutes to bids and proposals. E.g., Numax Electronics, Inc., 54 Comp. Gen. 580 (1975), 75-1 CPD ¶ 21. As stated in Ionics Inc., B-211180, 84-1 CPD ¶ 290:

The transfer or assignment of rights and obligations arising out of proposals is permissible only where the transfer is to a legal entity which is the complete successor in interest to the offeror by virtue of merger, corporate reorganization, the sale of an entire business, or the sale of an entire portion of a business embraced by the proposal.

This rule is applied with equal force by the Court of Federal Claims, L-3 Communications Integrated Systems, L.P. v. United States, 84 Fed. Cl. 768 (2008), and finds expression as well in the Federal Acquisition Regulations, FAR 14.404-2(l).

It seems like such a simple rule. What could go wrong? Several things. For example, the Government can reject the bid or proposal, even if it was acquired in connection with a transfer of all of the assets of the transferor, if the transferor's assets were not substantial. In such a case, the transaction will likely be viewed as a sale of the bid or proposal, and nothing more, and trafficking in Government contracts is, after all, one of the evils at which the anti-assignment acts are directed. Mil-Tech Sys., Inc. v. United States, 6 Ct. Cl. 26, 34 (1984); see also Premier Security, B-275908, July 14, 1997, 97-2 CPD ¶ 15 (sustaining a protest where the other assets of company were of negligible value).

Mil-Tech is a particularly interesting case because it involved a stock sale. Technically, the identity of the offeror had never changed; there was no transfer of the offer from one company to another, only a transfer of stock from one shareholder to another. But, the facts reveal the basis for the decision – the Small Business Administration had denied Mil-Tech a Certificate of Competency because its sole shareholder was on probation for a misdemeanor tax violation. The shareholder sold his stock to his brother for a nominal sum, which plainly suggested that the "meat" of the transfer was the pending Mil-Tech offer. Reviewing the record, the contracting officer rejected the offer. Reviewing that same record, the GAO found that there had been no "transfer" of the bid because Mil-Tech had been, and remained, the bidding entity, and sustained Mil-Tech's protest. On reconsideration, the GAO reversed its initial decision. When Mil-Tech took the matter to the Court of Federal Claims, the COFC sided with the agency. The facts and procedural history of Mil-Tech give life to the proposition that "decisions regarding matters of corporate status and restructuring are highly fact-specific, and turn largely on the individual circumstances of the proposal transactions and timing." IBM U.S. Federal, B-409806 et al., Aug. 15, 2014, 2014 CPD ¶ 241.

Leaving aside idiosyncratic fact patterns like the one reflected in Mil-Tech, the key requirement for the recognition of a transferred bid or proposal is that the original offeror (or the transferred unit of the offeror) remains intact with access to the same resources and with an intention to honor the performance commitments made in the proposal. See IBM U.S. Federal, supra ("it does not appear that SAIC's corporate restructuring is likely to have any significant cost or technical impact on performance of the requirements."); Magneco Inc., B-235338, Sept. 1, 1989, 89-2 CPD ¶ 207 (denying a protest where all aspects of the division that submitted the proposal will be sold). In such cases, the offeror is still eligible for award. IBM U.S. Federal, supra; Magneco Inc., supra. A succinct articulation of the rule can be found in Consortium HSG Technischer Service GmbH and GeBe Gebäude-und Betriebstechnik GmbH Südwest Co., Management KG, B-292699.6, June 24, 2004, 2004 CPD ¶ 134 (upholding award to a joint venture even though the ownership of one member of the joint venture changed):

[T]he record shows only that the corporate shares of SGM changed hands. In addition, the new owners have indicated that the entity formerly known as SGM remains intact, has the same location and offices, and intends to honor its prior commitments . . . . Put simply, there is nothing in this record that suggests that the licenses and permits, the specialized personnel, the information conveyed during the oral presentation, or the administrative resources offered by SGM have been rendered unavailable, or in any way changed by this transaction.

(citations omitted). By contrast, where, as a result of the corporate transaction, the initial offeror no longer has access to the resources mentioned in the proposal, or will no longer be able to perform as described in the proposal, the award is unlikely to withstand scrutiny. FCi Federal, Inc., B-408558.7, B-408558.8, Aug. 5, 2015, 2015 CPD ¶ 245 (sustaining a protest where "as a result of the sale . . . the original proposal, upon which the award decision was based, no longer reflects the intended approach to performance."); see also Wyle Labs., Inc., B-408112.2, Dec. 27, 2013, 2014 CPD ¶ 16 (sustaining a protest where, as the result of a spin-off, the new prime contractor will have fewer resources than the original offeror) (reconsideration denied in NASA-Reconsideration, B-408112.3, May 14, 2014, 2014 CPD ¶ 155); AIU North America, Inc., B-283743.2, Feb. 16, 2000, 2000 CPD ¶ 39 (sustaining a protest where corporate resources mentioned in proposal were not transferred in the sale).

Although there are no FAR provisions instructing offerors in this situation, the GAO has held that an offeror, which undergoes a corporate transaction while its proposal is pending, should inform the contracting officer of the transfer to ensure that all pre-award evaluations – particularly responsibility determinations – are conducted appropriately and based on accurate information regarding the offeror. Ionics Inc., B-211180, March 13, 1984, 84-1 CPD ¶ 290; see also FCi Federal, Inc., supra.

Thus far, our focus has been on the substance of the transaction in which the bid or proposal was transferred. But, apart from the "substantiality" of the assets transferred and the consistency or inconsistency of the assets transferred with the representations made in the bid or proposal, there are other factors that an enterprising bid protest lawyer may look for to upset an award to the transferee. For example, if the offer's Past Performance submissions are based in part on work performed by a unit that will no longer be affiliated with the contractor after award, the reasonableness of the Past Performance evaluation will be called into question. Similarly, if the solicitation requires a facility security clearance as of the date of the award, and the transfer results in the lapse of the clearance, questions may arise with respect to the offeror's compliance with a minimum mandatory requirement of the solicitation. Perhaps an otherwise "clean" organizational conflict of interest certification will be compromised by the transfer, or the transfer may introduce a level of foreign, ownership, control or influence over the offeror that compromises its eligibility. These are the types of collateral issues that deal counsel and consultants should be addressing when evaluating the value of the transferee's pending bids and proposals.

Next month, we will begin a discussion of the due diligence process. What are the red flags? What are the potential consequences? And just how good are those representations and warranties?

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.

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