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Novation when entity conversion - LLC to corporation?


MDJohn

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Newly formed ABC, LLC just won a government contract as a prime contractor. LLC is planning to convert its entity form to a corporation by the name of ABC, Inc. No other changes.

All will take place Delaware, which allows an LLC to convert to the corporate form by filing a certificate of conversion and certificate of incorporation. There will be no distinct assignment agreement. The assets and liabilities of the LLC will become the assets and liablities of the corporation by operation of law.

Does ABC, LLC need to get a novation of the government contract?

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I would notify the government. FAR mentions submission of payment for contract and CCR not matching.

FAR 42.12

This subpart prescribes policies and procedures for --

(a) Recognition of a successor in interest to Government contracts when contractor assets are transferred;

(B) Recognition of a change in a contractor’s name; and

© Execution of novation agreements and change-of-name agreements by the responsible contracting officer.

See FAR 4.1102 ( c )(1)

(i) If a contractor has legally changed its business name, "doing business as" name, or division name (whichever is shown on the contract), or has transferred the assets used in performing the contract, but has not completed the necessary requirements regarding novation and change-of-name agreements in Subpart 42.12, the contractor shall provide the responsible contracting officer a minimum of one business day's written notification of its intention to change the name in the CCR database; comply with the requirements of Subpart 42.12; and agree in writing to the timeline and procedures specified by the responsible contracting officer. The contractor must provide with the notification sufficient documentation to support the legally changed name.

(ii) If the contractor fails to comply with the requirements of paragraph (g)(1)(i) of the clause at 52.204-7, Central Contractor Registration, or fails to perform the agreement at 52.204-7(g)(1)(i)©, and, in the absence of a properly executed novation or change-of-name agreement, the CCR information that shows the contractor to be other than the contractor indicated in the contract will be considered to be incorrect information within the meaning of the "Suspension of Payment" paragraph of the EFT clause of the contract.

FAR 52.407 (g)(1) Central Contractor Registration

(i) If a Contractor has legally changed its business name, "doing business as" name, or division name (whichever is shown on the contract), or has transferred the assets used in performing the contract, but has not completed the necessary requirements regarding novation and change-of-name agreements in Subpart 42.12, the Contractor shall provide the responsible Contracting Officer a minimum of one business day's written notification of its intention to:

(A) Change the name in the CCR database;

(B) Comply with the requirements of Subpart 42.12 of the FAR;

© Agree in writing to the timeline and procedures specified by the responsible Contracting Officer. The Contractor must provide with the notification sufficient documentation to support the legally changed name.

(ii) If the Contractor fails to comply with the requirements of paragraph (g)(1)(i) of this clause, or fails to perform the agreement at paragraph (g)(1)(i)© of this clause, and, in the absence of a properly executed novation or change-of-name agreement, the CCR information that shows the Contractor to be other than the Contractor indicated in the contract will be considered to be incorrect information within the meaning of the "Suspension of Payment" paragraph of the electronic funds transfer (EFT) clause of this contract.

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The FAR stuff quoted by Postaward makes a distinction between a "change of name" agreement and a contract transfer. If the entity performing the work isn't changing, then I believe that the only requirement is to submit a change of name agreement.

Hope this helps.

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Thanks. Contractor will notify the CO, but in these cases it's often good to be able to educate the CO, because COs know many things but often don't know the specifics of corporate law. In that way, we and the CO can work together on accomplishing the right result. For example, in this case, corporate law is very clear that the change from an LLC to a corporation is much more than just a change of name. It is the extinguishment of one entity (the LLC) and the creation of a new enitty (the Inc.). However, the Inc is the successor-in-interest of the LLC and, by operation of law, all the assets, liabilities, rights and obligations of the LLC become those of the Inc.

It seems to me that in this case, because the contract is assigned to the new corporation by operation of law, then no novation is required. A search of the WIFCON archives uncovered a spirited dicussion in 2002 about novations by operation of law in a bankruptcy setting (See http://www.wifcon.com/arc/forum406.htm) . My goal is to determine if there is clear guidance - 10 years later - on whether or not a novation is required in connection with an ordinary entity conversion. If the CO intreprets the Anti-Assignment Act and the FAR in the same way as I do, then the contractor can make all its notifications to make sure the records are up to date and that it gets paid, but can avoid the cost and paperwork of a novation.

Thanks,

John

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