national contract management association potomac chapter novations and name changes

1. National Contract Management AssociationPotomac Chapter February 21, 2007

3. Former Systems Engineering Technical Assistance (SETA) Contractors and Consultants acquired / merged with Airframe / Systems Contractors New potential OCI issues Initial “Authors” now have vested interest in actual acquisition because of their new parent DoD potentially looses valued support services or loses prime contractor’s ability to compete on SDD / production efforts Former Systems Engineering Technical Assistance (SETA) Contractors and Consultants acquired / merged with Airframe / Systems Contractors New potential OCI issues Initial “Authors” now have vested interest in actual acquisition because of their new parent DoD potentially looses valued support services or loses prime contractor’s ability to compete on SDD / production efforts

4. NOTE: In the mid 1990s, the US Navy encouraged US prime contractors providing military hardware (Lockheed, Northrup, Raytheon, etc) to become full service providers of products and services. No one thought about the Federal Acquisition Regulations (FAR) that prohibited product providers from testing their own products under a separate contract. Thus the US defense industry started to consolidate: product companies merged and bought services companies. Today, all of the major defense companies have large services companies as a part of their government business base.NOTE: In the mid 1990s, the US Navy encouraged US prime contractors providing military hardware (Lockheed, Northrup, Raytheon, etc) to become full service providers of products and services. No one thought about the Federal Acquisition Regulations (FAR) that prohibited product providers from testing their own products under a separate contract. Thus the US defense industry started to consolidate: product companies merged and bought services companies. Today, all of the major defense companies have large services companies as a part of their government business base.

5. Name Change or Novation Name Change Only a change of the contractor’s name Government’s and contractor’s rights and obligations remain unaffected Government may sometimes treat an upward merger (i.e., a merger of a subsidiary into its parent) as a name change Novation Transfer of contractor’s assets to a third party - Either all of the contractor’s assets or the entire portion of the assets involved in performing the contract. Examples: Sale of these assets with a provision for assuming liabilities; Transfer of these assets incident to a merger or corporate consolidation; and Incorporation of a proprietorship or partnership, or formation of a partnership. NOT APPLICABLE to a change in the ownership of a contractor due to a stock purchase, IF No legal change in the contracting party, and That party remains in control of the assets and is the party performing the contract.

6. Name Change or Novation (cont’d) The transferor is being merged out of existence. The transferor does not exist and cannot guarantee performance, as provided for in the novation agreement found in FAR 42.1204. The regulations in FAR Subpart 42.12 relating to assignments implement either the statutory prohibition against Assignment of Contracts found in 41 USC 15, or the Assignment of Claims statute. These statutes are intended to prevent the Government from dealing with strangers to its claims and contracts and to prevent fraud. Case law in this area often construes only one of the statutes, but the holdings apply equally to both statutes. The statute prohibiting assignments of contracts says, in relevant part: "No contract or order, or any interest therein, shall be transferred by the party to whom such contract or order is given to any other party, and any such transfer shall cause the annulment of the contract or order transferred, so far as the United States is concerned." The leading case is a decision of the United States Supreme Court, in which it ruled that if all of the assets performing a contract (or all of the assets of the company itself) are acquired by another entity, no prohibited assignment has occurred. The rule was articulated in Seaboard Air Line Ry. v. U S, 256 U.S. 655 (1921) in the context of the Assignment of Claims statute. In that case, a Florida company with a pending claim against the Government was wholly merged into Seaboard and the Government attempted to have the claim dismissed under the assignment statute. The Supreme Court ruled that no prohibited assignment had occurred because the transfer was by operation of law and involuntary.

7. Regulations Government FAR Subpart 42.12 FAR 42.1204 – Novation Agreements FAR 42.1205 – Name Change Agreements DFAR Subpart 242.12 242.1204 addresses restructuring costs 242.1204 provides language to modify novation agreement in FAR 42.1204 Related FAR 4.1102, Central Contractor Registration (CCR) FAR 52.204-7, CCR

8. Role of Administrative Contracting Officer FAR 42.1202 Responsible ACO (If there is an ACO) ACO responsible for transferring contracts, OR ACO responsible for corporate office, if affected contracts are in more than one plant or division Transferor is responsible for processing the novation agreements If no ACO CO responsible for largest unsettled (unbilled plus billed but unpaid) dollar amount of contracts If several transferors involved ACO administering largest unsettled dollar balance, OR CO (or ACO) designated by the agency having the largest unsettled dollar balance, if none of the contracts have an ACO Exception FAA contracts – Only the FAA COs can handle novations or name changes U.S. Postal Service contracts – Only the Postal COs can handle novations or name changes Neither entity are pursuant to the FAR and, therefore, require their own processes be followed with their personnel

9. Name Change Proposal

10. Name Change Proposal Three (3) signed copies of Name Change Agreement (Sample agreement under FAR 42.1205) Document effecting the name change, authenticated by proper State official Legal Opinion Stating change of name was properly affected under applicable law and showing effective date Contracts list – All contracts remaining unsettled between contractor and Government Contract number, type, name and address of contracting officer Government may request total contract value and remaining unpaid balance

11. Novation Proposal

12. Novation Proposal “(1) The document describing the proposed transaction, e.g., purchase/sale agreement or memorandum of understanding.” Cover Letter will describe the proposed transaction (2) Contract List Discussed at end of presentation

13. Novation Proposal “(3) Evidence of the transferee's capability to perform.” evidence was provided during the pre-merger and pre-acquisition review process. The audited annual report is provided. “(4) Any other relevant information requested by the responsible contracting officer.” None anticipated?

14. Novation Proposal “(f)(1) An authenticated copy of the instrument effecting the transfer of assets; e.g., bill of sale, certificate of merger, contract, deed, agreement, or court decree.” “(g) If the Government has acquired the documents during its participation in the pre-merger or pre-acquisition review process, or the Government's interests are adequately protected with an alternative formulation of the information, the responsible contracting officer may modify the list of documents to be submitted by the contractor. “

15. Novation Proposal (f)(2) A certified copy of each resolution of the corporate parties' boards of directors authorizing the transfer of assets. (f)(3) A certified copy of the minutes of each corporate party's stockholder meeting necessary to approve the transfer of assets.

16. Novation Proposal “(f)(4) An authenticated copy of the transferee's certificate and articles of incorporation, if a corporation was formed for the purpose of receiving the assets involved in performing the Government contracts.” Not applicable? “(f)(5) The opinion of legal counsel for the transferor and transferee stating that the transfer was properly effected under applicable law and the effective date of transfer.” Short, but compliant

17. Novation Proposal “(f)(6) Balance sheets of the transferor and transferee as of the dates immediately before and after the transfer of assets, audited by independent accountants.” Available in the form of audited annual reports “(f)(7) Evidence that any security clearance requirements have been met.” List of Cleared Facilities

18. Novation Proposal “(f)(8) The consent of sureties on all contracts listed under paragraph (e)(2) of this section if bonds are required, or a statement from the transferor that none are required.” “Contractor name, the transferor, affirms that no bonds are required as a result of this transfer.” “Contractor name, the transferor, affirms that no bonds are required as a result of this transfer.”

19. Novations — Contract List “(f)(2) A list of all affected contracts between the transferor and the Government, as of the date of sale of transfer of assets, showing for each, as of that date, the- (i) Contract number and type; (ii) Name and address of the contracting office; (iii) Total dollar value, as amended; and (iv) Approximate remaining unpaid balance.” Contractor should request that the contract list not include the remaining unpaid balance

20. Contracts Lists Contracts List should be segregated into DCMA Administered DoD, not administered by DCMA NASA Civilian Agencies GSA BPAs Ordering Agency (Optional) Individual Orders (Optional) Commercial, State and Local (Not provided to Government)

21. Next Steps – Post Novation/Name Change Novation/Name Change agreement alone is not sufficient Need to modify all affected contracts DoD For DCMA Administered contracts, DCMA will issue one modification listing all of the contracts For other DOD contracts, will need to get separate modifications Civil/GSA For Civilian agencies, including GSA, will need to get separate modifications The ACO or CO responsible for the novation or name change should send the executed agreement to the contracting officers for all affected contracts. Recommend that contractors also forward a copy of the executed agreement to their contracting officers, or confirm receipt of such agreement

22. Best Practices Form internal IPT involving Contracts, Finance/Accounting, Security, HR, Compliance Establish a detailed schedule Meet regularly as proposals are being prepared, through receipt of last contract modification Check status for all functions Form external IPT with DCMA, DCAA, Key COs (i.e., GSA) Establish a detailed schedule Step through proposal requirements to get early confirmation of what should be in the novation/name change proposal Set agenda, and issue minutes to confirm all agreements, understandings, and assignments. Meet regularly to check status

23. Best Practices Communication Provide early notification to contracting officers as a heads up Communicate internally to personnel (contracts, finance, operations, etc.) so they are also aware Contract Lists Start preparing early; this can be the long pole in the tent Include all contracts that have not been final paid Order or segregate lists as follows: DCMA Administered Contracts DoD Contracts NASA Contracts GSA Contracts Civilian Agency Contracts FAA – Require separate novation/name change proposal U.S. Postal Service - Require separate novation/name change proposal

24. Other Issues CAGE Codes Need to determine which ones survive. Be sure not to delete any that may be used for facility security purposes. CCR Registration Need to determine which one to use. May need to get a new CCR Registration. Can cause some confusion when the name change or novation has not been completed, and you are bidding new proposals under the new entity name. D&B May need to update information in D&B to ensure CCR is correct. Contract Closeouts Try to closeout old contracts so they do not have to be name changed or novated. GSA Provide them with a heads up so they are aware.

25. QUESTIONS???