GOVERNMENT CONTRACTS MERGERS AND ACQUISITIONS 101

Transcription

1 GOVERNMENT CONTRACTS MERGERS AND ACQUISITIONS 101 Presented by the American Bar Association Section of Public Contract Law, Government & Public Sector Lawyers Division, Young Lawyers Division and Center for Professional Development

2 American Bar Association Center for Professional Development 321 North Clark Street, Suite 1900 Chicago, IL CDs, DVDs, ONLINE COURSES, DOWNLOADS, and COURSE MATERIALS ABA self-study products are offered in a variety of formats. Find our full range of options at Submit a Question Visit to submit a question on the content of this course to program faculty. We ll route your question to a faculty member or qualified commentator in 2 business days. The materials contained herein represent the opinions of the authors and editors and should not be construed to be the action of the American Bar Association Section of Public Contract Law, Government & Public Sector Lawyers Division, Young Lawyers Division or Center for Professional Development unless adopted pursuant to the bylaws of the Association. Nothing contained in this book is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This book and any forms and agreements herein are intended for educational and informational purposes only American Bar Association. All rights reserved. This publication accompanies the audio program entitled Government Contracts Mergers and Acquisitions 101 broadcast on January 12, 2016 (event code: CE1601GCM).

3 Government Contracts Mergers and Acquisitions 101 Tuesday, January 12, :00 PM Eastern Sponsored by the ABA Section of Public Contract Law, Young Lawyers Division, Government and Public Sector Lawyers Division, and Center for Professional Development Faculty Moderator Todd R. Overman, Chair, Government Contracts Practice, Bass, Berry & Sims PLC, Presenters Mary Beth Bosco, Partner, Holland & Knight LLP, Kimi N. Murakami, Counsel, PilieroMazza PLLC, Damien C. Specht, Partner, Jenner & Block LLP,

4 Objectives Provide participants with knowledge to: Gain insight on how to perform due diligence on acquisitions involving federal contracts and compliance requirements. Identify unique structuring and regulatory issues that could impact a merger or acquisition involving a government contractor. Understand how to address these issues in purchase agreements and disclosure schedules. Looking at a Deal: Agenda Overall diligence approach and considerations Unique diligence issues for government contractors Doing the Deal: Structuring a transaction involving a government contractor asset vs. stock Discussion of representations and warranties necessary for these types of transactions Importance of disclosure schedules Regulatory hurdles DSS and CFIUS reviews/interaction; novations Once the Deal is Done: Change of control communications, post-merger integration issues, etc.

5 Looking at a Deal: Due Diligence Process The due diligence process typically involves a comprehensive review of documents related to the business being acquired, and may include visits to the Seller s locations and discussions with the Seller s management team (including management presentations). The Purchaser typically assembles a multidisciplinary due diligence team, including inside and outside counsel, business and financial personnel, and accounting and tax personnel. Legal subject matter experts involved in a transaction often include tax, employee benefits, IP, real estate, environmental, and where applicable, regulatory counsel. Many Purchasers also engage outside accounting firms to assist them in the due diligence process, especially in larger acquisitions. Counsel for both Buyer and Seller must prepare for this process because due diligence is almost always performed under significant time constraints. Due diligence serves to: confirm the valuation of the Seller s business; justify the Purchaser s business reasons for the transaction; provide a knowledge base to more effectively negotiate the definitive agreement and mitigate risks associated with the Seller s business, which may include: indemnification for specific liabilities that may arise post-closing and the amounts set aside to cover it (e.g., escrow and/or holdback); purchase price modifications (e.g., installment payments, earn-outs, etc.); and covenants for the Seller to take certain actions to mitigate such risks; allow the Purchaser to effectively review the Seller s disclosure schedules; if the Purchaser is not fully informed, the Seller may craft disclosures that are overly broad, which may shift risk for certain liabilities from the Seller to the Purchaser and undermine provisions that were negotiated in the definitive agreement; identify contingent liabilities and other risks associated with the business (e.g., pending litigation, potential environmental liabilities, organizational conflicts of interest, etc.); identify legal and contractual requirements for the proper transfer of ownership of the business to the Purchaser (e.g., corporate approvals from Seller, novations, third-party consents, etc.); and facilitate the successful integration of the Seller s business into the Purchaser.

6 Nuts and Bolts: Preparing For Government Contracts Document Request Contracts (not closed out) Types of Vehicles Modifications Task Orders Correspondence Subcontracts/Vendor Agreements Pipeline/Backlog Teaming Agreements/Joint Ventures IP/Software Development Records Funding Marking CPARs/Audits Sample Pipeline

7 Nuts and Bolts: Seller s Due Diligence Issues Seller s Diligence Materials Subject to Confidentiality Obligations The Seller may need to withhold certain materials from the due diligence process because such materials are subject to confidentiality obligations that restrict the Seller from sharing the materials with the Purchaser. Depending on the importance of such materials, the parties may develop a diligence plan that balances the Purchaser s need to review the materials against the Seller s confidentiality obligations (e.g., may obtain consent from the third party to share the materials, or the Seller may summarize the materials as best as possible without violating its confidentiality obligations). Access to Sensitive Information Even after an NDA is in place, the Seller may wish to wait until it has greater certainty that the Purchaser will complete the transaction before it discloses certain sensitive information, such as key customer contracts or pricing terms. If the Purchaser and the Seller are competitors, they may need to take additional precautions before sharing sensitive information to avoid antitrust law violations (e.g., may post sensitive information to a clean data room and allow access only to a small subset of Purchaser s due diligence team; may share only broad summaries of such information rather than raw data). Nuts and Bolts: Seller s Due Diligence Issues Certain Government Contract Related Issues Personnel Screens and Conflicts of Interest To the extent the Purchaser and the Seller are competing for the same government contracts, the Purchaser may need to erect a screen to ensure that the individuals working on contract proposals do not have access to the Seller s diligence materials. Failure to erect such a screen may prevent the Purchaser and/or the Seller from bidding on particular government contracts. More generally, conflicts of interest based on the nature of the Seller s business may limit future business opportunities for the Purchaser following the transaction. Classified Contracts and Security Clearances If the Seller has certain classified government contracts, such contracts may only be viewed by members of the Purchaser s diligence team that have the appropriate security clearances. Contracts requiring classified personnel must be identified early in the diligence process, so the Purchaser can ensure that the appropriate personnel are in place to continue performance of the contract after the transaction closes. DFARS Disclosure of Information The Contractor shall not release to anyone outside the Contractor's organization any unclassified information, regardless of medium (e.g., film, tape, document), pertaining to any part of this contract or any program related to this contract... Some agencies have similar provisions.

8 The Purchaser s Perspective Purchasers only have limited access to Seller information, so they can only focus on limited areas during diligence. Remaining areas are picked up through disclosure schedules. Identifying compliance issues during diligence allows the Purchaser to properly allocate risk. Nuts and Bolts: Buyer s Diligence Where To Start? Waterfall Public Sources SAM FPDS Commercial Services Protests/Public Litigation Issues Common To This Type of Contractor Secondary Sources CPARS/GSA Report Cards Audits (DCAA, FISMA) Claims Conference With Key Government Contracts Personnel

9 Nuts and Bolts: Key Focus Areas Ethics and Human Resources EEO-1, VETS-100, Affirmative Action Required Policies under FAR Supply Contracts Domestic preferences (Buy American Act, Trade Agreements Act, Berry Amendment, etc.) Non-Manufacturer Rule Services Contracts Service Contract Act Labor Mapping Subcontract Limitations Cost Accounting Standards, if applicable Performance Problems Nuts and Bolts: GSA Schedule Contracts A number of traps for the unwary Updated and accurate CSPF Does it really reflect Seller s sales practices? Is it updated to include new discount programs, and commercial most favored customer provisions? Domestic preference compliance Trade Agreements Act requires delivery for U.S. made or designated country end products. Price Reduction/Basis of Award Compliance Does Seller know who the BOA customer is? Are written policies and structures in place to maintain the required discount? Can sales people deviate? IFF Payments On Time

10 Identifying Small Business Contracts Not always clear from the face of the contract. Not all awards to small businesses are set aside Form 1449 Block 10, Form 26 Block Tripartite Agreement (8(a)) Look for set-aside contract provisions: FAR Notice of Total Small Business Set Aside FAR Section 8(a) Award FAR Notice of Service Disabled Veteran Owned Small Business Set Aside FAR Notice of Set Aside For Economically Disadvantaged Women- Owned Small Business Concerns FAR Notice of Set-Aside for Women-Owned Small Business- Concerns Eligible Under the Women-Owned Small Business Program Unique Transfer Issues for SB Contracts Transfer rules are not found in contract documents Look to the regulations Look for on/off ramping provisions in the contracts Some contracts may require termination upon transfer. Transaction may limit the company s ability to compete for continuing work.

11 Will It Transfer: 8(a) Contracts Generally, no. 8(a) contract must be performed by 8(a) participant that initially received it, unless a waiver is granted if ownership changes or contract is transferred or novated for any reason. 13 CFR (a) Waiver of this requirement may be available if: Transferring to another 8(a) business, or [T]ermination of the contract would severely impair attainment of the agency's program objectives or missions. 13 CFR (b) Will It Transfer: Small Business Set-Asides Generally, yes. When a business certifies as small at the time of initial offer, it is considered small throughout the life of that contract. 13 CFR (g). The Agency can no longer claim small business credit for the award. 13 CFR (g)(2)(i). A similar rule applies to Service Disabled Veteran Owned Contracts, 13 CFR (e)(1)(i), and HUBZone contracts, 13 CFR (h)(1)(i).

12 Will It Transfer: Multiple Award Contracts When a business certifies as small at the time of its initial offer, it is considered small throughout the life of that contract, including for all orders placed against the contract, unless CO requires recertification. 13 CFR (g). Must be evaluated on a case by case basis Does CO require recertification for each task order? Does contract contain on/off ramp provisions? Doing the Deal: Overview How to structure the transaction? stock sale, asset sale, vs. merger the novation process What representations and warranties should be included? Importance of Disclosure Schedules

13 Background Transfer of Government Contracts Prohibited by the Anti-Assignment Act (41 U.S.C. 15(a)) 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. All rights of action, however, for any breach of such contract by the contracting parties, are reserved to the United States. Anti-Assignment Act: Background Since the Civil War (enacted in the mid-19 th century). Policy behind the Anti Assignment Act is the basic tenet of public contracts law, that the USG has selected a particular contractor through the procurement process, and that contractor is the party who will perform the work.

14 Background Novation Process To allow for the assignment and transfer of contracts, the FAR provides a process known as a novation by which the government will give consent and waive the prohibition of the Anti-Assignment Act. Through a three-party novation agreement, the government expressly agrees to the transfer of a government contract from one contractor, as transferor, to another, as transferee. Novation Regulations (FAR, Part 42) Affirm Prohibition of the Anti-Assignment Act: 41 U.S.C. 15 prohibits transfer of Government contracts from the contractor to a third party. FAR (a). Structure of Transaction Transfer of government contracts permitted when the government within its discretion recognizes a third party as the successor in interest through the novation process. It s the USG s decision: when it is in the Government s interest not to concur in the transfer of a contract from one company to another company, the original contractor remains under contractual obligation to the Government, and the contract may be terminated for reasons of default, should the original contractor not perform. FAR (c) (emphasis added).

15 Structure of Transaction Asset Sale Stock Sale Merger Asset Sale Novation Required for Asset Sales The government may, when in its interest, recognize a third party as the successor in interest to a Government contract when the third party s interest in the contract arises out of the transfer of (1) All the contractor s assets; or (2) The entire portion of the assets involved in performing the contract. FAR (a).

16 Asset Sale Novation Required for Asset Sales Examples of such transactions include, but are not limited to (i) sale of these assets with a provision for assuming liabilities; (ii) transfer of these assets incident to a merger or corporate consolidation; and (iii) incorporation of a proprietorship or partnership or formation of a partnership. FAR (a) Practice Points Asset Sale Description of the assets : Cannot be the contract (only); must include the assets involved in performing the contract such as employees, any IP (licenses), equipment, cash If factually plausible, characterize the contract and the related assets as a division Cannot be an empty contract vehicle Engage the Contracting Officer (at the appropriate time) having the seller/contract holder socialize the potential sale and transfer of the contract; important to include them in the process

17 Asset Sale Advantages Buyer generally prefers asset sales can pick and choose which liabilities it assumes There may be tax benefits to buyer allocation and depreciation of assets Disadvantages Novation of all federal government contracts is required Tax burden to seller payments may be subject to taxation at both corporate and individual level All assets to be transferred must be specified More complexities to transfer title Consent must be obtained or notice given to transfer agreements Requires additional documents to be drafted Can be more costly than stock purchase Stock Sale Novation Generally Not Required for Stock Sales A novation agreement is unnecessary when there is a change in the ownership of a contractor as a result of a stock purchase, with no legal change in the contracting party, and when that contracting party remains in control of the assets and is the party performing the contract. FAR (b)

18 Stock Sale Advantages Seller generally prefers stock sale All known and unknown liabilities transferred to buyer Novation of federal government contracts is not required Transaction may be less complicated Fewer complexities to transfer title Disadvantages Buyer assumes all liabilities Higher level of due diligence by buyer Merger/Corporate Reorganizations Corporate reorganizations the by operation of law exception Not in the FAR but well-established by case law Classic examples: Intestacy and bankruptcy Certain types of corporate transactions: Corporate mergers, consolidations or reorganizations Standard mergers of subsidiary into parent or the reverse vs. less standard mergers of sister subsidiary into sister subsidiary

19 By Operation of Law Exception Talking points with contracting officer (subsidiary into parent merger, for example): This is a corporate reorganization Does not involve an outside third party buyer New subsidiary (in this example) will take full responsibility for the contract Simply requesting that the contract holder be changed from the parent contracting party to the new whollyowned subsidiary But be prepared to do a novation if Contracting Officer does not agree. Change of Name Change of name agreement (FAR ) List of all contracts to be transferred Contract number Contract type Name and address of contracting office Opinion of legal counsel of contractor How is change of name different from novation? Fewer documents to be submitted Takes less time Less complicated

20 Purchase Agreement Practice Tips for Asset Purchase Agreement Include novation as a condition subsequent in post closing covenants Include rescission and unwind provisions or purchase price reduction if novation is not approved within a set period of time For the interim period between closing and novation, provide for a subcontract arrangement for buyer to begin performance Purchase Agreement Practice Tips for Asset Purchase Agreement Indemnification provisions Under the three party novation agreement, USG requires that the seller and buyer guarantee payment of all liabilities and performance of all obligations for the entire period of performance. Must include, therefore, indemnification provisions to cover seller for the period when buyer is performing after closing and to cover buyer for the period when seller was performing prior to transfer of the contract.

21 Representations & Warranties Further assurances (regarding novation) Maintenance of existence of seller Government contracts Outstanding bids Disclosure Schedules Consents and Notifications Governmental Approval CFIUS, for example Government Contracts FAR Notification of Ownership Changes FAR Post Award Small Business Program Re-representation Other

22 Doing the Deal: Regulatory Hurdles Overview: Who and What is Covered? What are the Regulatory Requirements? Facility Clearances Export Controls Committee on Foreign Investment in the United States (CFIUS) Novation How do these requirements affect mergers & acquisitions? Regulation Depends on Who is Involved and What is Being Sold For companies with facility clearances, the first question is who is the buyer? Is foreign equity, debt, or other significant foreign revenue or interest involved in the deal? If yes, then regulatory approvals are needed from the Defense Security Service (DSS). For targets exporting defense articles and services, the first question is what will be required by the Department of State in connection with the International Traffic and Arms Regulation (ITAR) registrations and licenses. Both buyer and seller may need to be registered.

23 Regulation Depends on Who is Involved and What is Being Sold For targets exporting dual-use goods, software or technologies, the first question is what will be required by the Department of Commerce in connection with Export Administration Regulation (EAR) registrations and licenses. Both buyer and seller may need to be registered. For targets whose business implicates national security and infrastructure, the first question is whether the buyer is a foreign entity. The second question is whether the Committee on Foreign Investment in the United States (CFIUS) will want to review the transaction. For all transactions involving government contractor targets, the first question is what is the structure of the transaction. If it is an asset sale, then a novation agreement with the target s contracting agencies will be involved. Summary Factor Classified Information Defense Articles Dual-use Technologies National Security or Infrastructure Asset Sale Regulatory Agency DSS State Department Commerce Department CFIUS Contracting Agency

24 Intersection of Regulatory Regimes DSS CFIUS ITAR Defense Security Service Authority: The National Industrial Security Program Operating Manual (NISPOM) controls the authorized disclosure of classified information released by the U.S. Government Executive Branch Departments and Agencies to their contractors. The Secretary of Defense, through DSS, administers the NISPOM, with input of the Secretary of Energy, the Chairman of the Nuclear Regulatory Commission (NRC), and the Director of the Central Intelligence Agency (CIA) for their sectors. 32 C.F.R. 117 contains additional regulations relating to Foreign Ownership Control and Influence (FOCI).

25 Facility Clearance (FCL) Requirements; NISPOM Ch. 2 1 Basic Requirements: Contractor must be sponsored by USG or a cleared contractor. Contractor must need access to classified information in connection with a specific project. Contractor must be organized and existing under the laws of any of the 50 states, DC or Puerto Rico, and be located in the U.S. or its territorial areas. The contractor must have a reputation for integrity and lawful conduct in its business dealings. The company and its key managers must not be barred from participating in USG contracts. Requirements potentially impacted by M&A: The contractor must not be under FOCI to such a degree that the granting of the FCL would be inconsistent with the national interest. The designated senior management official and the FSO must always be cleared to the level of the FCL. A parent must have an FCL at the same level, or higher, as the subsidiary, unless excluded by DSS. FOCI Definition; NISPOM Ch. 2 3 A U.S. company is considered under FOCI whenever a foreign interest has the power, direct or indirect, whether or not exercised, and whether or not exercisable through the ownership of the U.S. company's securities, by contractual arrangements or other means, to direct or decide matters affecting the management or operations of that company in a manner which may result in unauthorized access to classified information or may adversely affect the performance of classified contracts.

26 FOCI Restriction A U.S. company determined to be under FOCI is ineligible for an FCL, unless and until security measures have been put in place to negate or mitigate FOCI. When a contractor determined to be under FOCI is negotiating an acceptable FOCI mitigation/negation measure, an existing FCL shall continue so long as there is no indication that classified information is at risk of compromise. FOCI Indicia DSS looks at a number of factors to determine whether a company is subject to FOCI and, if so, what mitigation measures to impose. Mitigation measures become progressively more onerous as FOCI becomes more significant. The NISPOM lists these FOCI evaluation factors: Record of economic and government espionage against U.S. targets. Record of enforcement and/or engagement in unauthorized technology transfer. The type and sensitivity of the information that shall be accessed.

27 FOCI Indicia The source, nature and extent of FOCI, including whether foreign interests hold a majority or substantial minority position in the company, taking into consideration the immediate, intermediate, and ultimate parent companies. A minority position is deemed substantial if it consists of greater than 5 percent of the ownership interests or greater than 10 percent of the voting interest. Compliance record with U.S. laws, regulations and contracts. The nature of any bilateral and multilateral security and information exchange agreements that may pertain. Ownership or control, in whole or in part, by a foreign government. Certificate Pertaining to Foreign Interests (SF328) A company is required to complete an SF 328 when applying for an FCL or when significant changes such as a change in ownership -- occur to information previously submitted. The SF 328 has 10 questions:

28 SF 328 Form FOCI Mitigation Measures; NISPOM Ch When foreign ownership is not involved (i.e., loans by foreign entities, significant sources of foreign income, foreign officers), mitigation measures may include: Termination or modification of loans or contracts; Diversification of foreign-source income; Adoption of special board resolutions; Formation of special oversight committees.

29 FOCI Mitigation Measures; NISPOM Ch When foreign ownership is involved: When foreign interest does not own voting interests sufficient to elect, or otherwise is not entitled to representation on the company's governing board, an exclusionary resolution(s) by the governing board shall normally be adequate. When the foreign interest does own voting interests sufficient to have board representation, then DSS will ask for either a Voting Trust (VTA) or Proxy Agreement (PA). The PA and VTA are substantially identical arrangements whereby the voting rights of the foreign owned stock are vested in cleared US citizens approved by DSS. FOCI Mitigation Measures; NISPOM Ch When the cleared company is not effectively owned or controlled by a foreign entity but the foreign interest is entitled to representation on the company's governing board and will not operate through a PA or VTA, DSS may require a Security Control Agreement. When the cleared company is effectively owned or controlled by a foreign entity, and the foreign interest is entitled to representation on the board, DSS may require a Special Security Agreement (SSA). SSAs require that each contracting agency prepare a National Interest Determination (NID) to determine that the release of proscribed information to the company shall not harm the national security interest of the United States prior to entering a contract with the company.

30 FOCI Mitigation Measures Summary Corporate Structure No Board representation Board representation Foreign entity does not effectively own or control cleared contractor but has a Board presence Foreign entity does effectively own or control cleared contractor and has a Board presence Mitigation Measure Exclusionary Resolution stating that foreign shareholder will be barred from access to classified information PA or VTA: The PA and VTA are substantially identical arrangements whereby the voting rights of the foreign owned stock are vested in cleared US citizens approved by DSS. SCA: SCAs change the manner in which the corporation operates, requiring outside directors who are cleared US citizens, a Government Security Committee (GSC), and export and technology control plans. Same as SCA, but require a NID specific to each program, project, or contract. How Does This Affect M&A? Both buyer and seller have an interest in continuation of the FCL. A conversation about the buyer s experience with classified contracts, if any, should happen early in the process. Will the buyer have any issues with DSS? A conversation about the buyer s ownership, source of funding, and any foreign revenue sources needs to happen early in the process. If there is foreign ownership, is buyer willing to accept an SCA, SSA, or PA or VTA?

31 How Does This Affect M&A? Establishment of the board and management composition of the acquired company should also be done as early as possible in order to determine whether exclusionary resolutions are required. Buyer and seller must work together to develop a FOCI mitigation plan and obtain DSS consent to the plan. If foreign ownership is involved, DSS approval must be obtained before closing. DSS Pre-closing Approval Process Requirements set forth at 32 C.F.R When a merger, sale, or acquisition involving a foreign interest and a contractor is finalized prior to having an acceptable FOCI mitigation or negation agreement in place, DSS will invalidate any existing FCL until such time as DSS determines that the contractor has submitted an acceptable FOCI action plan (see DoD M) and has agreed to interim measures that address FOCI concerns pending formal execution of a FOCI mitigation or negation agreement.

32 DSS Pre-closing Approval Process When foreign ownership is present, parties must engage DSS early in the process in order to avoid closing delays. Parties will develop a commitment letter describing the mitigation measures to be implemented post-closing, i.e., VTA, PA, SSA, SCA. DSS must approve prior to closing. Export Controls Notifications Directorate of Defense Trade Controls (DDTC) : If no foreign interest involved, a material change notice must be submitted within 5 days of closing. Seller notice must contain: Identification and effective date of transaction. Surviving registration code. Point of contract. Certification. Before and after charts.

33 Export Controls Notifications Buyer notice must contain: Identification of transaction and effective date. Description of buyer s activities. Statement of changes to be made to the buyer s registration statement (if one exists) as a result of transaction. Examples: addition or deletion of board members or officers, addition of new categories of defense-related products, addition of the new subsidiary, identification of any licenses to be transferred. Statement that buyer assumes responsibility for the licenses, agreements, or other approvals. Export Controls Foreign Ownership 22 C.F.R : A registrant must notify the Directorate of Defense Trade Controls by registered mail at least 60 days in advance of any intended sale or transfer to a foreign person of ownership or control of the registrant or any entity thereof. 22 C.F.R, 20.37: Foreign ownership means more than 50 percent of the outstanding voting securities of the firm are owned by one or more foreign persons. Foreign control means one or more foreign persons have the authority or ability to establish or direct the general policies or day-to-day operations of the firm. Foreign control is presumed to exist where foreign persons own 25 percent or more of the outstanding voting securities, unless one U.S. person controls an equal or larger percentage. 22 C.F.R : Prior approval by the Directorate of Defense Trade Controls is required for any amendment making a substantive change.

34 Export Controls Foreign Ownership 60-day Pre-Notification Requirements: Notification must be submitted on the letterhead of the registered party, signed by a senior officer listed in Block 7 of the DS-2032; Brief explanation of the transaction (e.g. purchase, merger, etc.); Anticipated date of the transaction; DDTC registration codes for all involved parties; Before and after organizational charts; Names, addresses, and telephone numbers of all firms involved; Name of the ultimate as well as intermediate owners; Indication of whether a CFIUS filing will be submitted; Statement of Registration Certification (see ITAR 122.2(b)). Export Notification Quick Reference Chart. Buyer Target Firm Action Registered, U.S. Owned & Controlled Registered, U.S. Owned or Controlled Both parties submit 5-day notifications. Must notify DDTC which registration code will expire. Registered, U.S. Owned & Controlled Unregistered U.S. Firm -- with no registered U.S. subsidiaries Unregistered U.S. Firm -- with a registered U.S. Subsidiary Unregistered U.S. including those Foreign Owned or Controlled Registered, U.S. Owned or Controlled Registered, U.S. Owned or Controlled Buyer submits 5-day notification, only if target firm will be engaged in ITAR-related activity. Otherwise, notification is not required. Target firm submits 5-day notification. Both registered parties submit 5-day notifications. Must notify DDTC which registration code will expire. Foreign Owned or Controlled - with a registered U.S. Subsidiary Registered, U.S. Owned or Controlled The foreign owned U.S. subsidiary and the target registered party submit 60-day and 5- day notifications. The buyer must notify DDTC which registration code will expire. Foreign Owned or Controlled - with a registered U.S. Subsidiary Unregistered, U.S. Owned or Controlled Foreign owned U.S. subsidiary submits 60- day and 5-day notifications, if the target firm will be engaged in ITAR-related activity. Otherwise, notification is not required. Foreign Owned or Controlled Firm - with no U.S. registered subsidiaries U.S. Registered Firm U.S. registered firm submits 60-day and 5- day notifications.

35 CFIUS Review CFIUS Committee is comprised of 12 member agencies, chaired by Treasury. Parties have the option to submit the transaction for review. However, if not submitted, there is no limitation on the time for a CFIUS review. If submitted, safe harbor provision is applicable. CFIUS Committee can force unwinding of the transaction. Two key questions: Is there foreign ownership? Is there a national security impact? CFIUS Review Neither question has a straightforward answer: Foreign control is defined as the power to determine, direct, or decide matters affecting an entity. Control can be acquired in many ways, including through the ownership of a majority or dominant minority of the total outstanding voting securities, proxy voting or contractual arrangements. National security is not defined. It includes critical infrastructure, such as major power facilities, and critical technologies, such as export-controlled information.

36 Three phases: CFIUS Review Pre-filing (usually done before signing): 7-14 day prefiling discussion process with CFIUS to make sure application is complete. Post-signing routine review : In most cases, CFIUS will issue a no action letter within 30 days. 45-day investigation: If CFIUS determines that the transaction raises significant national security issues, it will undertake a more thorough 45-day investigation. This usually results in a mitigation agreement, but the President has 15 days after conclusion of the 45-day investigation to block the transaction. Finally Novation FAR Primarily applies to asset deals, but contracting officers have discretion to apply to corporate reorganizations or stock transactions. Novation process begins after closing, but can be previewed with Contracting Officer prior to closing. Novation process can take months. Parties should prepare subcontracts between the seller/target and the buyer as part of transaction documents. If approved, the buyer, seller and government enter into a novation agreement recognizing the buyer s assumption of the contracts, including all liabilities.

37 Novation Submission Requires Coordination Novation submission must include: The document describing the proposed transaction, e.g., purchase/sale agreement or memorandum of understanding. A list of all affected contracts between the transferor and the Government, as of the date of sale or transfer of assets, including the total dollar value and remaining unpaid balance. Evidence of the transferee's capability to perform. A certified copy of each resolution of the corporate parties' boards of directors authorizing the transfer of assets. A certified copy of the minutes of each corporate party's stockholder meeting necessary to approve the transfer of assets. Novation Submission Requires Coordination 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 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. Balance sheets of the transferor and transferee as of the dates immediately before and after the transfer of assets, audited by independent accountants. Evidence that any security clearance requirements have been met. The consent of sureties if bonds are required, or a statement from the transferor that none are required.

38 Once the Deal is Done Not Done Yet Managing Change of Control Communications Understand prime contract requirements and trigger points: FAR (Notification of Ownership Changes) (within 30 days of closing) FAR (Post-Award Small Business Program Representation) (within 30 days of closing) Special Section H clauses may require notice upon change of ownership, and in rare cases, pre-closing notice and/or consent. Regulatory notices: NISPOM requires cleared contractors to report changes in ownership to DSS, whether or not foreign interests or ownership is involved. Submission will include revised SF 328, organizational chart, and KMP List. Export Control notices. Understand subcontract requirements and incorporate into communications plan. Once the Deal is Done Not Done Yet Other issues to consider: Managing multiple agency novation requests (DCMA, GSA and other agencies that want to process their own novations despite FAR direction). Confirming contract modifications once novation approved. Updates to SAM and other public databases. Integration of cost accounting systems. Consolidation of GSA Schedules and/or harmonizing labor categories.

39 Summary Unique issues for M&A of Government Contractors Diligence process and issues for buyers and sellers. Structure of transaction will impact deal terms and regulatory requirements. Identification of foreign interest is critical in transactions involving cleared contractors. Change of control notices is critical step postclosing.