Overview
This section prescribes the policies and procedures for recognizing a third party as a successor in interest to a Government contract (novation) when the contractor’s assets are transferred. It clarifies that while the transfer of Government contracts is generally prohibited by law, the Government may recognize a successor if it is in the public interest and involves the transfer of all assets or the entire portion of assets involved in the contract.
Key Rules
- Prohibition and Exception: 41 U.S.C. 6305 generally prohibits the transfer of Government contracts; however, the Government may recognize a third party as a successor when it is in the Government's interest and arises from a transfer of all assets or the specific assets required for contract performance.
- Stock Purchases: A novation agreement is usually unnecessary for stock purchases where the legal contracting entity does not change and remains in control of the assets.
- Consequences of Non-Concurrence: If the Government does not approve a novation, the original contractor remains legally obligated to perform, and the contract may be terminated for default if they fail to do so.
- OCI Evaluation: The Contracting Officer must evaluate potential Organizational Conflicts of Interest (OCI) created by the transfer and may require a waiver if a conflict cannot be resolved.
- Transferor Liability: The original contractor (transferor) must waive rights against the Government but must also guarantee the performance of the transferee (successor).
- Cost Limitations: The Government will not pay for increased costs, taxes, or expenses resulting from the transfer that it would not have been obligated to pay otherwise.
- Documentation Requirements: Contractors must provide extensive documentation, including audited balance sheets of both parties, legal opinions, board resolutions, and evidence of the transferee’s capability to perform.
Practical Implications
- M&A Planning: Contractors involved in mergers or asset sales must treat novation as a high-stakes administrative hurdle, as the Government is not required to consent and the process requires significant lead time to compile the mandatory legal and financial documentation.
- Residual Risk: Because the transferor must guarantee the performance of the transferee, a company selling a business unit remains financially and legally "on the hook" for the successful completion of the contracts by the buyer.