Originally published by Law360 Government Contracts, Law360 Mergers & Acquisitions, and Law360 Private Equity, December 2016
When acquiring a government contractor, review and analysis of the target's current government contracts is a central focus of due diligence for purposes of assessing the legal and business risks. Pending bids and proposals, however, also present unique issues and challenges and could have a significant impact on the anticipated value of the business. Post-acquisition, the loss of resources from a former parent company or affiliated company may jeopardize the target company's pending proposals. This situation could arise both where the proposal is successful and a protester challenges the award to the successor contractor, and where the successor contractor is not the successful awardee and itself seeks to challenge the procuring agency's award decision. This article discusses recent decisions issued by the U.S. Government Accountability Office and the U.S. Court of Federal Claims and highlights key issues for both sellers and buyers arising from pending proposals. The decisions highlight the potential impact a merger or acquisition may have on a target company's outstanding proposals and the importance of careful review of these proposals during due diligence.
The issues presented by pending proposals, like all issues presented in a due diligence review and risk assessment, must be considered in the context of the broader deal. Typically, this will involve negotiation of key provisions in the acquisition and ancillary agreements, U.S. Securities and Exchange Commission filings in the context of a public deal, Hart-Scott-Rodino reviews, and approvals by the U.S. Department of Justice or the Federal Trade Commission and avoidance of "gun-jumping" under the antitrust laws. Additionally, there is often the need to maintain secrecy and limit knowledge of the deal to a confined, manageable deal team with a "need to know."
For a publicly traded company, prior to a public announcement of an acquisition, it would be unlawful for the company to share information about the proposed transaction with the procuring agency or others in advance of the public announcement or the required filing with the SEC. Regulation FD (Fair Disclosure) prevents a public company from selectively disclosing material nonpublic information to certain individuals or entities without making public disclosure of such information. The upshot is that when a target has a significant portfolio of pending proposals that could be material to the deal and the future value, and sustainability of the acquired business, the acquirer should appoint a team to review each pending proposal and, based on its terms, decide what needs to be disclosed to the contracting agencies, or risk disqualification or loss of a contract in a post-award protest. This also means that notice to agencies must be coordinated with notices to the SEC and public announcements. Risks concerning pending proposals may, of course, also arise in acquisitions of privately held companies.
A central question in conducting a government contracts due diligence is whether the target company, as the original offeror that submitted the proposal, will be the same company that receives the award and performs the contract in key material respects. This is a fact-intensive analysis. Companies run into trouble when the target relied, either explicitly or implicitly, on the resources of its former corporate parent or affiliates in its proposal. These resources can include corporate organizational resources, processes and support functions; the management team; proposed contract personnel or key personnel; corporate experience; past performance references; and technical, financial and other assets, such as facilities, licenses in intellectual property, or research and development capabilities.
Lessons From Recent Cases
Recent bid protest decisions involving corporate transactions and pending proposals offer a cautionary warning to buyers and sellers as they consider these issues. Indeed, reports on the sale earlier this year by Lockheed Martin of its Information Systems & Global Solutions business to Leidos indicated that the combination has resulted in the loss of $5 billion in business. See GAO Denies Lockheed Protest of $500M Tech Contract, Law360, (Oct. 6, 2016). How can similar results be avoided?
In Lockheed Martin Integrated Systems Inc., B-410189.5; B-410189.6 (Sept. 27, 2016), GAO upheld the exclusion of protester LMIS from consideration for award of a task order contract for technical services based on "unquantifiable cost and risk associated with [its] planned spin-off of its information business segment" and sale to Leidos Holdings. GAO relied on press releases and a "Cautionary Statement Regarding Forward Looking Statements," which is standard disclaimer language used by publicly traded companies to avoid liability under federal securities laws for nondisclosure. GAO latched on to statements in the disclaimers that there were "many uncertainties that could affect [protester's] and Leidos Holdings' operations, markets, products, services, prices and other factors" and that material differences "could include business disruption, operational problems, financial loss, legal liability to third parties, and similar risks, any of which could have a material adverse effect on [protester's] consolidated financial condition, results of operations or liquidity." GAO found that these risks and uncertainties could create "an environment of risk for costs," a probable change in proposed direct labor and indirect cost rates, "unquantifiable cost risks," and a new corporate structure that could impact future performance, among other findings. Based on these findings, GAO...