Our latest installment of our Back to Basics series explores novation agreements and their related cousin name change agreements. A novation agreement is needed when a contractor is transferring (or assigning) federal government contracts to another company. The government has discretion in approving such a transfer, and this post will explore how that process works.
What is a Novation?
A novation is governed by FAR Subpart 42.12. “41 U.S.C.6305 prohibits transfer of Government contracts from the contractor to a third party” but the government may allow a transfer when a contractor sells “[a]ll the contractor’s assets” or the “entire portion of the assets involved in performing the contract.” FAR 42.1204.
Novations are necessary to recognize “a successor in interest to Government contracts when contractor assets are transferred[.]” FAR 42.1200(a).
But a novation agreement is not always needed. As the FAR explains, “[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 42.1204(b).
Who is responsible for reviewing a novation request?
Sometimes this is the tough part of requesting a novation, figuring out what contracting officer (CO) in the government is responsible for reviewing it. The FAR provides two options:
- If there is, an “administrative contracting officer (ACO)” the responsible contracting officer is that ACO or the “ACO responsible for the corporate office” of the entity.
- If there is no ACO, then it goes to “the contracting officer responsible for the largest unsettled (unbilled plus billed but unpaid) dollar balance of contracts shall be the responsible contracting officer.” .
In our practice, it is best practice to try and figure out what CO will be responsible for reviewing the novation request. If that can’t be determined, then it’s best to analyze what CO applies, and start with that CO, but copy all other applicable COs to try and get a response.
What goes in a novation request?
As a general matter, the FAR usually requires transferors and transferees to submit extensive documentation, listed in FAR 42.1204(e)-(f), to support a novation request. This includes, among other things, documentation of the transferee’s capability to perform, a certified copies of company resolutions approving the transfer, opinions from both parties’ legal counsel, and other documents. FAR 42.1204(e)-(f).
The rules do allow for modification of this list: “If the Government has acquired the documents during its participation in the pre-merger or pre-acquisition review process, or the Government’s interests are adequately protected with an alternative formulation of the information, the responsible contracting officer may modify the list of documents to be submitted by the contractor.” FAR 42.1204(g).
In our experience, one document that can be hard to come up with is “Balance sheets of the transferor and transferee as of the dates immediately before and after the transfer of assets, audited by independent accountants.” It is the audited aspect that can be difficult. So, it’ may make sense to ask the CO to modify this requirement and allow unaudited balance sheets.
As another point, the novation agreement language itself is included in the regulation at 42.1204(i), but the “format may be adapted to fit specific cases and may be used as a guide in preparing similar agreements for other situations.” It’s best not to change any of the key provisions too much, or the government may reject such changes.
How does a company get a novation agreement approved?
The FAR states that the CO:
shall determine whether or not it is in the Government’s interest to recognize the proposed successor in interest on the basis of-
(1) The comments received from the affected contract administration offices and contracting offices;
(2) The proposed successor’s responsibility under subpart 9.1, Responsible Prospective Contractors; and
(3) Any factor relating to the proposed successor’s performance of contracts with the Government that the Government determines would impair the proposed successor’s ability to perform the contract satisfactorily.
FAR 42.1203. This can be boiled down to whether the government has concerns about the buying company’s ability to do the work. So, the key work is convincing the government that quality will not suffer after the transfer. The government, based on our experience, will approve most novations that transfer all of a contractor’s assets, but it is discretionary. The government is more hesitant when just one contract is transferred, although those can be approved as well.
What is a name change request?
A name change request is similar to a novation, but less complicated. “If only a change of the contractor’s name is involved and the Government’s and contractor’s rights and obligations remain unaffected, the parties shall execute an agreement to reflect the name change.” FAR 42.1205. Typically, the government will recognize the name change, but it can take some time.
Did the RFO change this process?
Not very much. In the Revolutionary FAR Overhaul (or just the “RFO” as explored in our posts), this has been left mostly unchanged, but has been streamlined and renumbered as follows: “Subpart 42.9, Novation and Change-of-Name Agreements, is renumbered from subpart 42.12. and streamlined.”
Novation is one aspect of federal contracts about which not much is written. If a contractor is considering an asset sale, though, it must plan for and conquer the novation process. Please reach out to our attorneys with questions about this process.
Questions about this post? Email us. Need legal assistance? Call us at 785-200-8919.
Looking for the latest government contracting legal news? Sign up for our free monthly newsletter, and follow us on LinkedIn, Twitter and Facebook.