M&A transactions involving government contractors are subject to a host of regulatory and industry-specific considerations. This blog series covers key concerns that can impact a deal. Parts 1 and 2 focus on common problems that arise before and during a transaction. They are available here and here. Below we drill down on post-transaction pitfalls in government contractor M&A transactions that can jeopardize the value of the target company.

Security Clearances

Many contracts require a company to maintain a facility security clearance. The Defense Counterintelligence and Security Agency (DCSA) requires a cleared contractor to report certain changes affecting its facility clearance. These include changes in ownership, key management personnel, and name or legal structure. In connection with an acquisition transaction, DCSA will verify that the ownership change will not adversely affect the target’s eligibility for a facility clearance, which often requires further evaluation of the new parent entity or individual owners of the target. An acquirer should ensure it satisfies the facility clearance requirements and that the transaction will not negatively impact the target’s facility clearance.

Recertification

A company that qualifies as small or of a certain socio-economic status (e.g., veteran-owned, woman-owned) at the time of initial offer for a contract will maintain that status throughout the life of the contract. However, companies typically must recertify their size or socio-economic status within 30 days following consummation of certain transactions. If, following the transaction, a company is no longer eligible under the applicable status and cannot recertify as such, the procuring agency can no longer count subsequent options or orders issued pursuant to the contract toward its small business or socio-economic goals. Such a recertification may trigger the agency to terminate contracts for convenience, thus decreasing the potential value on those contracts following closing. The duty to recertify is imposed on different parties depending on how the transaction is structured. An acquirer should understand the target’s recertification requirements and evaluate how the transaction might affect the target’s size or socio-economic status and any contracts awarded under such status.

Name Changes and Database Registrations

Certain reorganizations that are routine and straightforward from a business perspective may involve additional administrative steps for government contractors. For example, in any transaction involving the conversion of an operating company from one type of entity form to another, the resulting name change will require the company to enter into a name-change agreement with the federal government. This applies to something as simple as changing “LLC” to “Inc.” A name change will also require the company to update its profile in databases such as SAM.gov, which, if not updated in a timely manner, can cause delayed receipt of payments for work performed on contracts, resulting in disruptions to cash flow and operations. Name-change agreements and updated database registrations may take time to process, so identify requirements early and ensure they are satisfied in a timely manner following closing.