- within Compliance topic(s)
On January 7, 2026, President Trump issued a new executive order, "Prioritizing the Warfighter in Defense Contracting" (the "EO"), which states that "[a]fter years of misplaced priorities, traditional defense contractors have been incentivized to prioritize investor returns over the Nation's warfighters." The EO aims to realign these priorities by restricting defense contractors deemed "underperforming" from engaging in stock buybacks and paying shareholder dividends "at the expense of accelerated procurement and increased production capacity." It also directs rapid review, remediation, and enforcement measures it hopes will accelerate production and prioritize warfighter needs. Below we provide an overview of the EO, and outline key takeaways, and enforcement risks for potentially affected contractors.
Overview of the Executive Order
The EO directs that, effective immediately, defense contractors determined to be "underperforming" are prohibited from paying dividends or buying back their stock until they are able to deliver superior products on time and on budget. The EO seems to be premised on the view that profitability and warfighter readiness are at odds and to remedy this, investor-focused actions should be linked to production capacity and timely delivery under defense contracts.
What Does "Underperforming" Mean?
To implement this policy, the EO requires that within 30 days, the Secretary of Defense/War (the "Secretary") is directed to identify defense contractors for "critical weapons, supplies, and equipment" that are either:
- underperforming on their contracts,
- not investing necessary capital to expand production,
- not sufficiently prioritizing U.S. government contracts, or
- exhibiting insufficient production speed,
and where those contractors have engaged in stock buybacks or corporate distributions during the period of underperformance. The EO suggests that this determination will be at the sole discretion of the Secretary. At this time, however, what constitutes "underperforming" and how material that underperformance must be to trigger these actions are undefined.
What Happens if a Contractor is Determined to be "Underperforming"?
If the Secretary determines a contractor meets the "underperforming" criteria, the contractor will receive a notice describing the nature of the underperformance. Notified contractors then have a 15-day "negotiation period" during which they may engage with the Department and, where permissible, submit remediation plans (approved by their Board of Directors).
How Will This Be Enforced?
If the Department determines the proposed remediation is insufficient or disputes remain unresolved at the end of the 15-day negotiation window, the Secretary "may initiate immediate actions to secure remedies for the Secretary[.]" Such remedies may be achieved by voluntary agreements, available enforcement actions under the Defense Production Act ("DPA") authorities (which, as a reminder, include both civil and criminal penalties), and available Federal Acquisition Regulation ("FAR") and Defense Federal Acquisition Regulation Supplement ("DFARS") enforcement mechanisms.
The EO also allows the Secretary to consider (in consultation with the Secretary of Commerce) whether it would be appropriate to cease ongoing advocacy efforts or deny new advocacy cases for underperforming contractors in international Foreign Military or Direct Commercial Sales.
Although the EO provides the Secretary with immense discretion when it comes to enforcement, it does direct that the Secretary "should consider" the contractor's financial condition, program viability, and mutual benefits offered by growth opportunities from the government coupled with contractor capital investment.
Will this Affect Current Contracts?
The EO provides that the prohibition on paying dividends and buying back stock is to have an immediate effect. How that will be enforced, however, without any regulatory or contractual framework, is unknown and, if voluntarily implemented by publicly traded companies, could result in shareholder lawsuits.
Will this Affect Future Contracts?
In a word, yes. The EO requires the Secretary, within 60 days, to ensure future contracts contain provisions that prohibit stock buybacks and corporate distributions during periods of "underperformance, non-compliance, insufficient prioritization or investment, or insufficient production speed." Additionally, it requires language in future contracts mandating that executive incentive compensation be tied to on-time delivery, increased production, and facilitation of necessary investments and operating improvements (here again, as determined by the Secretary). Further, future contracts must allow the Secretary to cap executive base salaries at current levels (with inflation adjustments) upon a finding of underperformance, to enable scrutiny of the alignment of the incentive compensation to performance metrics.
What About the SEC?
The EO specifically directs the Securities and Exchange Commission ("SEC") Chairman to consider adopting amendments to SEC Rule 10b-18 that would restrict the "safe harbor" for buybacks by the type of defense contractors identified under the EO. The SEC would need to follow the existing procedures governing rule amendments, which includes comment periods typically ranging 30 to 60 days, but will likely move as quickly as possible, given the President's apparent zeal to implement the objectives of the EO. Until the amendment is adopted, defense contractors would be theoretically free to issue dividends and buy back its stock, notwithstanding the EO's "immediate effect" language.
Key Impacts to Defense Contractors
In case you did not read the section above, the potential impact to "underperforming" defense contractors could be significant. First, there are immediate implications for contractors designated as "underperforming," who will now face prohibitions on dividends and buybacks, increased government scrutiny of capital deployment decisions, and a newfound linkage between executive incentives and operational outcomes. As the EO prioritizes throughput, timeliness, and production scalability for critical items, defense contractors should expect intensified oversight of delivery schedules, bottleneck mitigation, and capacity expansion plans across programs and sub-tier supply chains.
Contractors relying on foreign military sales or direct commercial sales support may face reduced or withheld approvals if underperformance is identified, affecting pipeline visibility and competitiveness.
Additionally, going forward, future solicitations and renewals are likely to include new clauses on buybacks/distributions restrictions during defined periods, executive incentive alignment requirements, and potential base salary caps if "underperformance" is found.
Finally, contractors should also be aware of potential SEC changes to SEC Rule 10b-18 (buyback safe harbor) that would alter timing, disclosure, and risk considerations around repurchase programs for identified defense contractors.
Enforcement Risks
There also are numerous enforcement risks stemming from the EO. For example, the EO specifically contemplates leveraging existing enforcement mechanisms under the Defense Production Act, which includes both criminal and civil penalties. As such, contractors with Defense Priorities and Allocations System ("DPAS") rated orders should pay particular attention to meeting timelines for priority orders. Additionally, the EO references FAR/DFARS "mechanisms" which presumably include contract terminations (both for convenience and, more likely here, default), negative performance ratings (which may impact ability to obtain future contracts), or suspension or debarment. While many of the enforcement mechanisms existed before, the EO provides a renewed focus by explicitly encouraging their use, so contractors should expect a greater willingness by the government to invoke such mechanisms to compel contractors to expand capacity, prioritize schedules, or modify performance obligations where necessary. Assuming the SEC moves forward with the rule amendment contemplated by the EO, contractors identified as underperforming who engage in buy backs could be the subject of a civil enforcement action.
Additionally, the EO provides accelerated timelines for enforcement as the 30-day identification and 15-day negotiation/remediation windows compress engagement cycles and raise the stakes for readiness within contractors' compliance, legal, and operations teams.
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.
