Novation Agreements - Part II

Novation agreements are required whenever a contractor is acquired by a third party. Sometimes the Government will block such moves as in such notable cases involving Lockheed and Northrup, General Dynamics and Newport News, and Litton Industries and Newport News. The Government has also blocked some acquisitions of DoD contractors by foreign entities. If the Government is not convinced that an acquisition is in its best interests, it is not bound to novate contracts to the new or to the acquiring company.

When a contractor asks the Government to recognize a "successor in interest", the contractor must submit to the Government

• The proposed novation agreement
• The document describing the proposed transaction, e.g. purchase/sale agreement or memorandum of understanding
• A list of all affected contracts between the transferor and the Government, as of the date of sale or transfer of assets showing 
• contract number and type
• name and address of the contracting office
• total dollar value, as amended,, and
• approximate remaining unpaid balance
• Evidence of the transferee's capability to perform
• Any other relevant information requested by the contracting officer.

Several years ago, there was an acquisition involving a contraction contractor. The acquiring company did not perform adequate due diligence and after the transaction was finalized, discovered that several large Government construction contracts were in significant loss positions, so significant that it drove the acquiring company into bankruptcy. (Although the bonding companies stepped in to finish the work, completion was significantly delayed as a result). Since then, the Government has been heavily emphasizing reviews of the financial capability of acquiring companies when considering novation agreements.

The requirement to provide "any other relevant information requested by the contracting officer" is the gateway for requiring voluminous amounts of additional detail. This might include such information as board of directors meeting minutes, shareholder meetings, articles of incorporation, legal counsel correspondence, financial statements, security clearances, and many others.

Companies who are contemplating acquiring Government contractors and Government contractors who are seeking to be acquired, need to expect and anticipate a prolonged determination process.