By David S. Gallacher and Kerry O’Neill

Last April, we wrote about proposed changes to Department of Defense ("DoD") reporting requirements for independent research and development ("IR&D"), raising concerns about how the proposed change would tie recoverability of IR&D costs to new reporting and disclosure requirements. Recently, Defense Federal Acquisition Regulation Supplement ("DFARS") 231.205-18(c) was finalized, with changes. See 77 Fed. Reg. 4632 (Jan. 30, 2012). This final rule is a mixed bag that got some things right, but also leaves some of the most serious issues unresolved.


Continue Reading Final Rule for IR&D Reports Fails to Address Most Serious Questions

By Lucantonio N. Salvi and Marko W. Kipa

A government contracts due diligence encompasses a broad range of statutory, regulatory, and contractual issues. One issue that we always consider is compliance with the Anti-Assignment Act (the “Act”), which prohibits the transfer of a government contract to a third-party. While the Act does not strictly apply to subcontracts, we nevertheless must review them, as well as other agreements (such as teaming agreements), for contractual anti-assignment provisions. This review was facilitated in the past by the widely held view among practitioners that a stock purchase or reverse triangular merger, without more, does not generally result in an assignment and therefore does not require the counterparty’s consent. This is particularly relevant since most sales and purchases of government contractors are structured as stock purchases or reverse triangular mergers (i.e., an acquisition structure in which a subsidiary of the buyer merges into the target company and the target company becomes a wholly-owned subsidiary of the buyer once the merger is consummated).  In both cases, the separate corporate identity of the target company is preserved, and the parties generally avoid the need to obtain Government consent to novate government contracts held by the target company.  The traditionally prevalent view even finds support under federal case law in the context of government contractors. See Appeals of Newport News Shipbuilding & Dry Dock Co., ASBCA Nos. 44731, 44826, 97-1 BCA ¶ 28,835 (holding, among other things, that reverse triangular mergers are stock purchase transactions where the acquired corporations retain their separate corporate existence and in which the acquired company’s contracts are in most cases unaffected).
 


Continue Reading Meso Scale: Re-Defining The Implications Of A Reverse Triangular Merger?

By David S. Gallacher

Those familiar with Government contracting know at least a little bit about the elusive and fickle regulatory requirements for Independent Research and Development (“IR&D” or “IRAD”) costs. IR&D is a means by which the U.S. Government supports a Contractor’s independent R&D efforts. By reimbursing a Contractor’s independent R&D costs, the Government long has hoped to advance the state of the art without stifling a contractor’s innovation under the weight of a federal bureaucracy, while simultaneously banking on the fact that the U.S. Government also will benefit from the technology advancements. But two recent developments may change the essential nature of IR&D, making it less “independent” and more “dependent” on Government rights and oversight. To quote Bob Dylan – “the times they are a changin’.” 
 


Continue Reading The Times They Are A Changin’ – Independent Research and Development May Not Be So “Independent” Any More

By Marko W. Kipa

We all now realize that, contrary to the pronouncements of certain pundits, the world is not economically flat.  But it is undeniable that its citizens and businesses are more economically connected than ever before. One manifestation of this interconnectedness is the increasing number of cross-border acquisitions of business enterprises. In most cases these transactions do not become the subject of public discussion or detailed government scrutiny.  But when foreign entities seek to purchase U.S. government contractors who perform classified national security work and therefore hold facility security clearances (“FCLs”), the U.S. Government is anxious to know, among other things, the extent to which the company is the subject of foreign ownership, control or influence (“FOCI”).  Being under FOCI can sound the death knell for a company’s ability to perform classified work, with consequent loss of business that may be critical to the company’s continued status as a going concern. But that outcome can often be avoided by development and submission of a FOCI mitigation plan which, if accepted either as submitted or modified, can enable the company to continue performance of national security work.
 


Continue Reading Evaluating FOCI In The Context Of An M&A Transaction

After a decade of increasing appetite for defense dollars, the Pentagon appears to have stepped on a scale and decided to make some changes. Following-on from the Department of Defense’s June 2010 announcement regarding changing its procurement business models, Defense Secretary Robert Gates and Under Secretary of Defense for Acquisition, Technology and Logistics, Ashton Carter, recently unveiled their proposed procurement changes intended to redirect $100 billion over the next five years. Like the lifestyle changes made by contestants on television’s “The Biggest Loser,” the proposed measures, referred to collectively as a “wide ranging Efficiencies Initiative,” are an attempt to demonstrate to Congress that the Department can trim the fat, tighten the belt and use its hefty $700 billion annual budget in a healthier way.
Continue Reading Can DoD Be “The Biggest Loser”? Gates Unveils DoD’s New Fiscal Diet Plan

In McDonnell Douglas Corp. v. United States, Civil Action No. 2007-5111-5113 (Fed. Cir. June 2, 2009), the Federal Circuit, after more than a decade of A-12 litigation, upheld a termination for default, finding that the Government was justifiably insecure about the contract’s timely completion. The Court’s opinion articulates the sustainable rationale for a default termination when there is no firm contract end date or set delivery schedule.
 


Continue Reading Federal Circuit Grounds The “Flying Dorito”

Effective December 22, 2008, the U.S. Department of the Treasury (“Treasury”) issued new rules relating to the procedures that the Committee on Foreign Investment in the United States (“CFIUS” or “the Committee”) will use in reviewing foreign investments in U.S. companies.  See 73 Fed. Reg. 70702.  The revised, final rules continue to focus on the potential impact that a particular transaction may have on U.S. national security and retain many of the features of the proposed rules, which we have previously discussed here and here.


Continue Reading Treasury Issues Final Rules Describing Procedures For Reviewing Foreign Investment In U.S. Companies

Effective July 21, 2008, the U.S. Department of Defense ("DOD") issued an interim rule with a request for comments that creates a contractual obligation for all DOD contractors to comply with U.S. export control laws.  See 73 Federal Register 42274.  While, technically, the interim rule does not impose any new requirement on U.S. businesses, because all are already required to comply with U.S. export requirements, the interim rule does impose additional risks and liabilities on defense contractors because a violation of U.S. export laws could now also result in a breach of contract.  Given the fact that many companies do not fully understand the scope or intricacies of U.S. export laws, inadvertent export violations are a common occurrence.  Accordingly, this new rule could easily increase contractual (and related) risks for DOD contractors.


Continue Reading New DOD Rule Imposes Contractual Requirement For Contractors To Comply With U.S. Export Laws

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.


Continue Reading Comments On Proposed CFIUS Rules Range From Cautious Praise To Outright Criticism

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.


Continue Reading Treasury Proposes New Rules For Reviewing Foreign Investment In U.S. Companies