Overview
FAR Subpart 42.12 prescribes the policies and procedures for the government to recognize a successor in interest to a federal contract (Novation) or a legal change in a contractor's name. While federal law (41 U.S.C. 6305) generally prohibits the transfer of government contracts, this subpart provides a mechanism for the government to protect its interests when a contractor sells its assets, undergoes a merger, or changes its corporate identity.
Key Rules
- Novation vs. Stock Purchase: A novation agreement is required when a contractor transfers its assets to a third party. However, a novation is generally not required for a stock purchase where the legal entity remains the same and continues performance, though a separate agreement may still be needed to address liabilities.
- Government Interest: The government is not obligated to recognize a successor. The Contracting Officer (CO) must determine if recognition is in the government's best interest based on the successor's responsibility and performance capability.
- Asset Requirements: For a novation to be considered, the contractor must transfer all of its assets or the entire portion of assets involved in performing the contract.
- Liability and Guarantees: In a novation, the transferee (buyer) assumes all obligations, while the transferor (seller) must guarantee the performance of the contract or provide a performance bond.
- Cost Restrictions: The government will not pay for any cost increases (taxes, expenses, etc.) that arise solely from the transfer or the novation agreement itself.
- Legal Sufficiency: Every novation or change-of-name agreement must be reviewed by government counsel for legal sufficiency before execution.
Responsibilities
- Responsible Contracting Officer (CO/ACO):
- Determined by which office administers the largest unsettled dollar balance of the affected contracts.
- Evaluates the successor’s responsibility under FAR Subpart 9.1 and potential Organizational Conflicts of Interest (OCI) under FAR Subpart 9.5.
- Distributes the final agreement and executes the Standard Form (SF) 30 to modify all affected contracts.
- The Contractor:
- Must submit a formal written request and an extensive list of documents (e.g., balance sheets, board resolutions, legal opinions, and evidence of the transferee's capability).
- Must provide 30 days' notice for comments from affected contracting offices.
- Contract Administration/Affected Offices:
- Provide comments or objections to the proposed transfer within 30 days of notification.
- Government Counsel:
- Reviews agreements for legal sufficiency prior to signature.
Practical Implications
- M&A Strategy: For companies involved in Mergers and Acquisitions, understanding 42.12 is critical. A failure to properly execute a novation can lead to a contract being terminated for default if the original contractor can no longer perform.
- Administrative Lead Time: Novations are notoriously document-intensive and time-consuming. Contractors should begin the process early in the deal cycle, as the government requires audited balance sheets and legal opinions from both parties.
- Payment Continuity: Until a novation is finalized and an SF 30 is issued, the government typically continues to pay the original contractor (the transferor). The agreement includes a clause that protects the government if it accidentally pays the "wrong" party during the transition.
- Risk Retention: The "Guarantee" requirement means that even after selling a business unit, the seller (transferor) may still be on the hook for the buyer's (transferee's) performance failures, which must be accounted for in the purchase/sale agreement.