Government Contracts Lawyer & Attorney : Sheppard Mullin Law Firm : Bids, Licenses, Awards, Conflict of Interest.

As discussed in a prior posting on this blog, the U.S. Department of the Treasury published on April 21, 2008 proposed rules designed to strengthen the process by which the Committee on Foreign Investment in the United States ("CFIUS") reviews and approves certain business transactions involving foreign investment. The proposed rules were issued under the Foreign Investment and National Security Act of 2007, Pub. L. No. 110-49 (“FINSA”), which requires a more intense CFIUS process that allows the government more discretion in investigating and altering business transactions that may impact national security.  The U.S. Department of the Treasury invited comments on the proposed rules through June 9, 2008.  Now that the comment period is over, we thought it might be worthwhile to see what types of comments were received.  Not surprisingly, it is a mixed bag.

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On April 21, 2008, the U.S. Department of the Treasury ("Treasury") proposed new rules relating to the procedures that the Committee on Foreign Investment in the United States (“CFIUS”) should use in reviewing (and potentially halting) foreign investments in U.S. companies based on a potential impact on national security.  See 79 Fed. Reg. 21861.  While Congress previously mandated that changes be made to the CFIUS process following the much ballyhooed Dubai Ports World controversy in 2006, the current rules are merely proposed, and are not yet final.  Treasury is accepting comments on the proposed rules until June 9, 2008.

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A government contractor participating in an acquisition transaction must comply with both commercial and government-specific regulations. And there are numerous issues unique to government contractors that threaten a successful closing. If not identified or mitigated in a timely fashion, a contractor might unknowingly assume liabilities or fail to consummate the deal altogether. One issue involves the transfer of government contracts, which generally requires the government's consent, or a "novation." If the contractor does not novate the contract in accordance with designated rules, a buyer faces the possibility that its newly acquired contracts will be terminated for default. This could leave the contractor without the benefit of its bargain and with a "scarlet letter" on its record. While several exceptions to the general rule prohibiting the sale or transfer of government contracts have been carved-out in applicable regulations and case law, there are also structural alternatives available to the contractor that may not be so obvious. It is imperative that these options be considered and evaluated in order to attain the contractor's specific needs and expectations.

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Authored by:

Marko W. Kipa

(202) 772-5302

mkipa@sheppardmullin.com

and

Lucantonio Salvi

(202) 218-0004

lsalvi@sheppardmullin.com

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