June 8, 2022 - False Claims Act

Five Million Reasons for Government Contracts Lawyers to Assist with the Acquisition of Companies That Perform Government Contracts

Due diligence is an important preliminary step before one company acquires another or an investor puts millions behind an existing firm. When a target company performs government contracts or subcontracts, it is critical that experienced government contracts attorneys be part of the due diligence team—ideally for both the buyer and seller, but certainly for the buyer. A recent Justice Department press release announcing a $5.2 million settlement illustrates the potential consequences of not heeding that advice. 

Based on the Justice Department’s likely one-sided recitation of the alleged facts, a large business acquired a small business in 2011. The small business of concern manufactured aerospace engine components for commercial and military use.  According to the press release, the 2011 acquisition created affiliation between the small manufacturer and the companies owned and controlled by its new corporate family and the individuals who owned those companies. As a result of this new affiliation, the Justice Department alleged that the manufacturer lost its small business status under the governing Small Business Administration regulations and should have recertified itself as other than small in 2011. Instead, in what may well have been an oversight, the company never updated its size status and continued bidding on (and winning) new small business set-aside contracts for the next five years, apparently without anyone in the company or its new corporate family sounding the alarm bells.   

The press release states that this problem finally came to light eight years too late in 2019, when it was uncovered during due diligence in connection with a contemplated new transaction to sell the company to a third party. This unfortunate timing for sellers is fairly common and all the more reason for companies in a sale process to do self-diligence and for buyers to make sure they have sophisticated regulatory counsel. The company then properly disclosed the issue to the government and eventually entered negotiations to avoid allegations that the company violated the False Claims Act by fraudulently obtaining small business set‑aside government contracts. The settlement cost the company $5,227,355.28. 

There are a number of morals to this story:

  1. Experienced government contracts attorneys should participate in due diligence when one company contemplates purchasing a company that does business with the government. Government contractors (including companies whose primary business may not be directly with the government) are subject to a host of complicated and often poorly understood compliance obligations. Buyers need to understand how well sellers have complied with those obligations, and sellers are well-advised to identify and rectify potential problems before putting themselves on the market. It is very difficult to do either task well without specialized government contracts attorneys. 
  2. Potential sellers should take a similar lesson, as there are few worse developments for a company than discovering a significant noncompliance in the middle of a sale process. Instead, if this issue had been discovered in advance of that process, it could have been resolved without putting the sale in jeopardy.
  3. After a deal closes, there may be a number of post-closing activities that one or both parties must undertake to remain (or become) compliant with contractual and regulatory obligations. These may include notice requirements and changes in status representations for small business programs (as in the press release), updating SAM.gov profiles, providing accurate disclosures under pending proposals, and rectifying problems discovered in due diligence. Government contracts attorneys can help ensure full compliance with these requirements.
  4. Whether or not specialized counsel was involved in a transaction, companies can still benefit from post-closing guidance around the sort of work the combined enterprise can bid. This includes small business status considerations, but also the rules for relying on an affiliate’s capabilities or past performance, or in harmonizing (or instituting) the companies’ procurement-related policies.