Contract integration - Restructuring, Novations, CAS and CAGE Codes (Oh my...)

[Mister Sister]

I've contemplated where to post this question in the forum - it's a combination of Contract Admin, M&A and CAS. I'm not looking for a theoretical dissertation on External Restrucuting (DFARS 231.205-70). Nor am I looking for guidance on the novation process or CAS GDMs. My question is more operational regarding CAS, CAGE Codes, and a post integration Day One model.  Scenario below: 

• Company A acquires Company B as a stock purchase (acquired an entire entity not just its contracts). 
• Because it is a stock purchase - there is no novation required. (FAR 42.12)
• Company A and Company B have their own CAGE codes (obviously). 
• Can Company A integrate Company B (and its contracts) into it's CAS Structure (common overheads and G&A - not as a separate segment), without a formal novation of the contract?
  • Sub scenario A : if there is an external restructuring proposal  and advance agreement in place?
  • Sub scenario B : If there is no external restructuring proposal and advance agreement in place? 

Our CACO is saying that without a novation agreement Company B must be treated as a separate CAS segment, with its own rates. However, I see nothing within CAS, FAR or DFARS or even DCMA guidance that would indicate this is the case.  Are there any case-laws that would suggest this is not permissable?

If you're wondering why I would do this: 

• Under this scenario, since there is no novation - the provision in the novation agreement that prohibits increased costs does not kick in.
• Under sub-scenario A - I would still be on the hook for the GDM and prohibition on increased costs resulting from the CAS cost accounting practices changes. However, under sub-scenario B - assuming there is an external restructuring proposal and an approved adance agreement, (after a determination of > 2:1) savings, the prohibition on CAS increased costs would not apply. 
• It makes more business sense for me not to novate if I don't need to. 

[here_2_help]

So, yes. Complicated stuff.

1. FAR 42.1204(b) states 

Quote

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. (Emphasis added.)

2. Your CACO seems to be saying that the integration of Company A and Company B creates a legal change to the (original) contracting party, and/or that the (original) contracting party has lost control of its assets, and/or the (original) contracting party is no longer the party performing the contract(s). Do you agree or disagree? What is the rationale for your position?

3. Without going into a theoretical dissertation, the external restructuring proposal and resulting agreement makes certain otherwise unallowable costs allowable if the contractor can show an overall cost-savings from their incurrence. The need for such should have little if anything to do with integration, unless the integration is driving the incurrence of the costs or is necessary to achieve the cost savings.

4. In the past I have successfully argued that an internal restructuring involving an integration of multiple business units did not, in and of itself, create any changes to cost accounting practice and that no cost impact calculations were necessary. Not sure if that same argument would work in an external restructuring environment.

Hope this helps.

[Mister Sister]

2 hours ago, here_2_help said:

2. Your CACO seems to be saying that the integration of Company A and Company B creates a legal change to the (original) contracting party, and/or that the (original) contracting party has lost control of its assets, and/or the (original) contracting party is no longer the party performing the contract(s). Do you agree or disagree? What is the rationale for your position?

 

Great question.  I'll answer it with another question - what is ment by "assets"? (assets of the program of the business operations?).  All assets of Company B have been acquired by Company A as part of the stock purchase.  The people performing the work are the same. They are just badged as Company A employees. 

 

[Retreadfed]

5 hours ago, Mister Sister said:

Can Company A integrate Company B (and its contracts) into it's CAS Structure (common overheads and G&A - not as a separate segment),

Can you explain what you mean by this?  Would A and B continue to maintain their separate corporate identities or would B be merged into A and cease to exist as a corporation?

[here_2_help]

2 hours ago, Mister Sister said:

Great question.  I'll answer it with another question - what is ment by "assets"? (assets of the program of the business operations?).  All assets of Company B have been acquired by Company A as part of the stock purchase.  The people performing the work are the same. They are just badged as Company A employees. 

There is nothing in FAR or CAS that defines the term "asset" -- though CAS identifies both tangible and intangible "capital assets." There is nothing in the regulations to suggest that FAR 42.1204 uses the term "asset" any differently than the standard accounting or GAAP definition; i.e., "Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events." Assets are recorded on the company's balance sheet.

42.1204(a) identifies two types of assets: (1) "all the contractor's assets" on the balance sheet, or (2) "The entire portion of the assets involved in performing the contract." Thus, it appears that the FAR envisions a purchase of the entire company or just that portion of the company related to performing a single contract.

Now, having answered your question, I hope you have been thinking about mine. You don't have to post your response here, of course. But I hope you have a strong position ready to give to your CACO to support why Company A is not a successor in interest with respect to Company B.

[Neil Roberts]

2 hours ago, Mister Sister said:

All assets of Company B have been acquired by Company A as part of the stock purchase.  

 

Mister, you have asked what an asset is. Investopedia defines it as follows:

An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company's balance sheet and are bought or created to increase a firm's value or benefit the firm's operations.

 

If B was going to sign contracts with me, I would be concerned with whether it is just a shell since it has no assets to control to perform the work and doesn't have any assets on its balance sheet. Since the employees are badged to A, B apparently has no control over that either. I would propose signing a contract with A, who has real control and assets. I do not understand the basis for B still being a company, how it "sells" its value to its customers, and what work is contemplated for the future. My take is that per FAR 42.1204, the Government and A should consider evaluating a contract transfer.

[Neil Roberts]

3 hours ago, Mister Sister said:

All assets of Company B have been acquired by Company A as part of the stock purchase. 

Why were all assets of B acquired by A "as part of the stock purchase," and which party is responsible for associated financial liability for such assets? A party can purchase all the stock without purchasing assets.

[Mister Sister]

16 hours ago, Neil Roberts said:

Why were all assets of B acquired by A "as part of the stock purchase," and which party is responsible for associated financial liability for such assets? A party can purchase all the stock without purchasing assets.

All of the assets and liabilities now are part of Comany A. 

[Mister Sister]

18 hours ago, Retreadfed said:

Can you explain what you mean by this?  Would A and B continue to maintain their separate corporate identities or would B be merged into A and cease to exist as a corporation?

No they have one corporate identify post close of the deal.  But my question remains - can Company A bill under Company's A structure without a formal novation of the contracts?  

[Neil Roberts]

A is not a party to the contract. Non parties to a contract most likely have no rights under the contract to bill Party B for work required to be performed by Party C. Functions that pay invoices are sensitive to that. You may try billing a small trial amount at risk and see what happens. Most contracts indicate who is entitled to submit invoices and rarely have I seen it be a 3rd party. My response has nothing to do with CAS. My response is about contracts as I know them.   

[Mister Sister]

On 12/22/2020 at 4:50 PM, Retreadfed said:

Can you explain what you mean by this?  Would A and B continue to maintain their separate corporate identities or would B be merged into A and cease to exist as a corporation?

The two would be merged. Company B would no longer exist.  Can the CAGE codes be merged under Company A's segment without novating contracts; changing CAGE Codes etc.