Contractor Mergers and Acquisitions: Issues to Watch.

• Author: Chierichella, John

Mergers, acquisitions and investments involving government contractors and subcontractors present unique challenges. The risks can be mitigated but first they must be understood.

Government consent is required to transfer government contracts through asset purchases and mergers, but not stock purchases. Consent is usually obtained through a novation agreement. Novations require submission of detailed information and typically take between two and six months after closing.

The process can be burdensome and time consuming, and the government can withhold consent and terminate the contracts. The novation agreement contains unfavorable provisions, such as requiring the seller to guarantee the buyer's performance of the contract after closing. But structuring a deal as a stock sale avoids these risks.

The False Claims Act allows the government to recover up to three times its actual damages, plus fines and penalties, if a contractor knowingly or recklessly submitted a false claim, which is often an invoice. Common FCA triggers include knowingly or recklessly invoicing for work not performed, delivering work that does not meet contract requirements and making false certifications --for example, regarding product testing. The mere threat of an FCA suit can extract a sizable settlement. Thus, buyers should require disclosure of FCA actions or investigations, evaluate the seller's policies and procedures to ensure they are not reckless or indifferent as to compliance, and obtain representations relating to the absence of potential FCA liabilities.

Other risks are audits and investigations. Government contractors are audited and investigated by an alphabet soup of agencies--the Defense Contract Audit Agency, the Defense Contract Management Agency, the Department of Justice, the Government Accountability Office, the office of the inspector general, the office of federal contract compliance programs and the Small Business Administration.

Contractors must file a mandatory disclosure where they have credible evidence of an FCA violation or certain crimes relating to government contracts. Government audit reports and mandatory disclosures are valuable tools for identifying and quantifying risk. Sophisticated buyers typically request these documents as well as representations and warranties regarding the seller's knowledge of pending audits investigations and FCA actions.

Intellectual property is another concern. The government generally obtains broad...