United States: Corporate Transactions As A Basis For Protest (Post-Award Protest Primer #18)

Last Updated: July 27 2018
Article by Damien C. Specht, Daniel E. Chudd and James A. Tucker

Most corporate transactions go forward without protests. Several prominent protest decisions over the last few years, however, have drawn attention to the complicated and sometimes unpredictable effect corporate transactions can have on pending procurements. This uncertainty is exacerbated by the (often required) secrecy around pending transactions and the fact that potential corporate transactions may be contemplated but not materialize at all. When you mix in the reality that Government procurement cycles are getting longer and longer, parties engaged in transactions need to consider the specific risks that a transaction may have on pending proposals. These risks extend not only to post-award bid protests before the GAO (which are the subject of this series), but also to size protests before the Small Business Administration and other litigation that is outside the scope of this article.

Transactions During the Pendency of a Procurement

The fundamental concern around corporate changes while a proposal is pending is that an agency may make an award decision based upon a proposal that may no longer reflect the offeror's capabilities or intended approach to performance. FCi Federal, Inc., B-408558.7, B-408558.8, Aug. 5, 2015, 2015 CPD ¶ 245 is a good example of this. There, offerors submitted proposals in April 2014, and the agency made award in July of that year. A protest followed, which the GAO sustained in October, recommending that the agency conduct a new responsibility determination. The agency then undertook the recommended corrective action, without reevaluating proposals. In April 2015, the agency announced that it found the original awardee to be responsible and authorized performance to proceed.

Unfortunately for the awardee, it was acquired by another company during the pendency of the corrective action. A second protest followed. The GAO found that the awardee's proposal "relied, in material respects, on the resources and support of its former parent[s'] . . . management capability, corporate resources, corporate experience, past performance, and financial resources." But, as a result of the recent transaction, those corporate parents would no longer supply any of those resources or play the substantial role in performance previously anticipated. The GAO sustained the protest on these grounds – even though none of these concerns would have been an issue at the time the proposal was submitted or the original award decision was made over a year earlier.

Anticipated Transactions

The well-known protest of Wyle Laboratories, Inc., B-408112.2, Dec. 27, 2013, 2014 CPD ¶ 16, presents another scenario. In that case, the awardee's proposal noted that a corporate transaction was anticipated, which would result in the offeror's separation into two new entities sometime after award. During discussions, the agency asked about the transaction, and the offeror answered the agency's questions. The awardee's final proposal revision, however, based its proposed costs and technical approach on the existing company's "organizational structure, its assets, and its resources," without providing what the GAO characterized as "any meaningful information" on the potential impact to technical approach or cost.

The agency expressly "set aside the matter [of the corporate restructuring] during the course of evaluation" and made award to the offeror based upon the proposal submitted, as if the transaction would not occur. Although the transaction occurred after award, the GAO found the Agency's approach to be unreasonable because "the awardee's proposal, and the agency's evaluation thereof, failed to reasonably reflect the manner in which the contract will be performed, the level of costs likely associated with performance, and the corporate entity that will perform the contract." As a result, the GAO found there was "inadequate support for the agency's assessment of projected cost savings and, similarly, no reasonable basis for award."

It is it unlikely that Wyle Laboratories would have come out the same way if the transaction had anticipated the offeror being acquired by a larger organization. That type of transaction necessarily poses less risk to an agency (and therefore makes competitive prejudice more difficult to show) than a divestiture, where the offeror may become something materially less advantageous than its proposal described.

Anticipated transactions will not always cause procurement problems, however. When the outcome of a potential transaction is sufficiently tenuous and uncertain, the GAO may find no basis for sustaining a protest. See, e.g., VSE Corp.; University of Hawaii—Costs, B-407164.11; B407164.12, June 23, 2014, 2014 CPD ¶ 202 (press release announcing a company's intention to plan to examine a possible future corporate restructuring was not sufficiently concrete to require the agency to consider it in the course of the procurement). On the other hand, if a transaction's impacts are uncertain but the likely transaction itself is not, an agency might well find that the level of cost and technical uncertainty is enough to throw the offeror out of the competition altogether. See Lockheed Martin Integrated Sys., Inc., B-410189.5; B-410189.6, Sept. 27, 2016, 2016 CPD ¶ 273.

Acquiring a Conflict of Interest

Organizational Conflicts of Interest (OCIs) are a third protest risk posed by potential transactions. We previously dedicated a blog post to OCIs as a standalone protest ground. McCarthy/Hunt, JV, B-402229.2, Feb. 16, 2010, 2010 CPD ¶ 68 illustrates the danger of OCIs when a corporate acquisition is in the works – even if the acquisition involves a subcontractor rather than the offeror itself. McCarthy/Hunt involved a competition for a design/build construction contract. During the pendency of the procurement, the awardee's proposed design subcontractor was in on-again-off-again merger/acquisition negotiations with a third party – a deal that closed not long after the contract was awarded. It is not clear from the decision whether the prime contractor/awardee was even aware of the pending transaction prior to contract award.

It turned out that the company that ultimately acquired the proposed subcontractor had a contract with the agency, under which it had provided the agency with advice concerning the design portion of the solicitation at the same time the company was pursuing acquisition of the proposed subcontractor. In that position, the ultimate acquirer also was in a position to know "the agency's priorities, preferences, and dislikes relating to this broadly defined project."

Once the subcontractor's acquisition concluded and was made public, a bid protest followed, alleging that the awardee was affected by OCIs as a result of the planned and ultimately concluded acquisition of its subcontractor by the third party. The GAO agreed, finding that the acquisition infected the awardee with biased ground rules and unequal access OCIs. The GAO rejected arguments that the relationship between the subcontractor and its acquirer was too attenuated to create an OCI until the transaction was completed, that only a limited number of people knew about the intended transaction, that the transaction negotiations appeared unfruitful during much of the course of the competition, and that the acquirer was not in a position materially to advantage the awardee even if it had attempted to do so.

The GAO recommended that the agency eliminate the awardee from the competition and make a new award determination.

Takeaways

The main takeaway is that, although transactions happen all the time, and awards are rarely lost or even protested because of a corporate transaction, actual or potential transactions can wreak havoc in a pending procurement. If a transaction might result in contract performance or costs being materially different from what was proposed and evaluated, or might generate conflicts of interest that have not been neutralized, avoided, or mitigated, there may be a valid ground of protest.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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