Given the continued high volume of mergers and acquisitions (M&A) transactions in the federal marketplace, buyers and sellers need to be aware of the developing body of case law at Government Accountability Office (GAO) and Court of Federal Claims (COFC) regarding how acquisitions are impacting pending bids and the steps that parties can take to protect those bids in certain situations.
This post will highlight recent cases and provide practical guidance on diligence, deal timing and communications with government customers regarding transactions. Additionally, this post will outline bid protest decisions involving asset deals and corporate reorganizations, and their impact on pending bids.
The types of acquisitions can greatly impact the probability of success for pending bids. The most common types of acquisition structures in the government contracts space are the following:
- Stock – requires notice, but no novation
- Asset – requires both novation and notice
- Merger – requires both novation and notice
Rules of the Road for Pending Bids
The Anti-Assignment Act prohibits the transfer of a government contract to another party without post-closing novation. It is important to remember that the assignment of a bid or proposal is not precluded if one of the following is true:
- The transfer occurs by “operation of law.”
- The transfer is to a legal entity that is the complete successor in interest to the bidder by virtue of merger, corporate reorganization, the sale of the entire business, or the sale of an entire portion of a business embraced by the bid or proposal.
The GAO has stated that when an offeror is the target of a transaction that is “imminent and essentially certain,” the agency must consider the impact of the transaction on the procurement before making an award. This means that the timing of the closing is in control of the offeror, or similar to the disclosing of the transaction to the Securities Exchange Commission (SEC). It is recommended to be transparent in an effort to avoid the procuring agency learning of the acquisition through press releases.
When the agency considers the impact of a potential transaction, it conducts a fact-specific inquiry to determine if the transaction will have a “material effect” on contract performance. Factors include the following:
- Will the resultant company have access to same corporate and technical resources as they did previously?
- Will past performance references remain relevant?
- Will the company retain management and key personnel referenced in the bid?
- What type of contract is it (FP vs. CPFF)?
The adequacy of the agency’s consideration or failure of these factors is tested in bid protest proceedings.
Four Lessons Learned from Recent Bid Protest Decisions Impacting Pending Bids
1. The transaction may give the government a basis to exclude a seller’s proposal.
It is important to consider whether or not the seller has the assets to perform the work and if the work will be performed in accordance with the proposal after the acquisition is complete. GAO has previously upheld the exclusion of an offeror due to risk associated with its planned spin-off of a business segment. Additionally, GAO confirmed that an agency reasonably excluded a proposal because it stated that the buyer, which had acquired the contract assets offeror, would perform the work and lead the team after novation.
2. The transaction may give other offerors a basis to protest awards to the seller.
The GAO has sustained multiple protests due to acquisitions or changes in corporate structure, specifically in the following instances:
- Where an agency made award on the basis of a proposal that no longer reflected the manner in which the contract would be performed, failing to consider the impact that a stock acquisition of the awardee had on an outstanding bid.
- Where the awardee’s corporate structure had changed since the submission of a bid.
3. The buyer may not have standing to protest.
If the buyer could not offer an identical proposal and is not the complete successor-in-interest, there may not be standing to protest. An example of this is Universal Protest Service, L.P v. United States, in which the assets and services promised in the seller’s proposal contained multiple references to other entities in its corporate family.
4. The seller may not have standing to protest.
In an asset deal, if the buyer would hold all the assets necessary to perform the work and seller would be a contractor in name only, the asset sale seller arguably has no economic interest in the award other than ensuring it received the full price.
Practical Guidance to Avoid or Mitigate the Risk of Losing Bids
Bid protests arising out of M&A transactions is a real risk, and lessons learned from bid protest decisions can help mitigate risk and protect the pipeline. In order to avoid or lessen the risk of losing bids, due diligence should focus on the target’s current and pending bids in all types of transactions. Be sure to provide notice to the procuring agency in an effort to control the narrative once the acquisition is imminent and essentially certain. It is also important to account for pending bid and novation risk in valuation.
For more information on pending bids as they relate to the government contracts space please contact the authors.