Thursday, February 4, 2016

Does a Contractor Name Change Require a Novation Agreement?

From time to time, companies are bought and sold, divisions are spun off or sold, and mergers and business combinations occur. Laws prohibit transfer of Government contracts from a contractor to a third party unless the Government, when it is in its interest, recognizes a third party as the successor in interest to a Government contract. The third party's interest must have arisen out of the transfer of all the contractor's assets or the entire portion of the assets involved in performing the contract. When it is not in the Government's interest and the assets are transferred anyway, the Government has the right to terminate the contract for default.

If the Government agrees to the transfer of assets, a "novation agreement" is required. A novation agreement is a legal instrument executed by three parties - the contractor (or the transferor), the successor in interest (or the transferee), and the Government - by which, among other things, the transferor guarantees performance of the contract, the transferee assumes all obligations under the contract, and the Government recognizes the transfer of the contract and related assets.

FAR (Federal Acquisition Regulations) 42.12 prescribes policies and procedures for recognizing a successor in interest to Government contracts when contractor assets are transferred (which requires a novation agreement) and recognition of a change in a contractor's name (which does not require a novation agreement but requires a "change-of-name" agreement). FAR 42.12 also contains examples of novation terminology and content.

A simple name change does not require a novation agreement so long as the contractor's rights and obligations remain unaffected. Nor does a change in organizational structure, say from a sole proprietorship to an LLC require a novation agreement. The Government however will require a "change-of-name" agreement which must include an authenticated document effecting the name change, an opinion from the contractor's legal counsel stating that the change of name was properly effected under applicable laws, the effective date of the name change and a listing of all contracts remaining unsettled between the contractor and the Government (see FAR 42.1205).

Contractors contemplating buying or selling business segments need to assess the Government's interest when conducting due diligence reviews.

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