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April 24, 2024 - Acquisition Regulations

Airing of Grievances: FAR Council Invites Novation Comments

SBA Issues Final Rule on Appeals Process for PPP Loan Review Decisions

Is it finally time to fix the outdated, incomplete, and often misunderstood novation regulations? Maybe. On April 5, 2024, the FAR Council released a Notice and Request for Comments requesting comments from federal contractors related to novation and change-of-name agreements under FAR 42.12. In particular, the FAR Council asks contractors to weigh in on whether the collection of contractors’ information under FAR 42.12 is necessary for the proper performance of the functions of federal government acquisitions. In addition, the FAR Council wishes to receive feedback on its estimated burden of this collection; ways to enhance the quality, utility, and clarity of the information to be collected; and ways to minimize the burden of the information collection on respondents. Comments are due by June 4, 2024. As anyone who has done a novation knows, practice has moved so far beyond these regulations that it is about time contractors shared their frustrations with this process. Of course, this may also open the door to new unnecessary requirements, so the overall process bears watching.

Contractors find themselves engaged in the processes set out in FAR 42.12 for various mundane reasons, including rebranding, sale/acquisition of assets, corporate conversions, internal restructurings, and more.  Unfortunately, novation is rarely mundane, as written, unwritten, real, and imaginary rules are then applied over the course of the months before approval. Indeed, despite assisting with countless novation packages, we regularly are called upon by clients to assist with ongoing agency requests for new, additional information that has no basis for collection in the regulations.  Realistically, some government officials may only see a handful of novation packages over the course of their career, and others may (for good reason) have little background in the mechanics of mergers and acquisitions, often misunderstanding the triggering events for novations. This combination can often result in unnecessary complications, delays, uncertainty, and legal fees.

By the book, for a name change, contractors are required to supply the government with three copies of a name change agreement and one copy of (i) the document effecting the name change, authenticated by a proper official of the state having jurisdiction; (ii) an opinion of the contractor’s legal counsel stating that the change of name was properly effected under applicable law and showing the effective date; and (iii) a list of all affected contracts and purchase orders remaining unsettled between the contractor and the government.  See FAR 42.1205. The regulations don’t say that the three copies of the name change agreement need to be wet signed, but many government officials nonetheless impose this unwritten rule.

For a novation, contractors face an increased burden, being required to supply the government with three signed copies of the proposed novation agreement with one copy, as applicable, of (i) the document describing the proposed transaction (purchase/sale agreement); (ii) a list of all affected contracts between the transferor and the government; (iii) evidence of the transferee’s capability to perform; and (iv) any other relevant information requested by the responsible contracting officer.  FAR 42.1204(e). Further,  the contractor also must provide (i) an authenticated copy of the instrument effecting the transfer of assets; (ii) a certified copy of each resolution of the corporate parties’ boards of directors authorizing the transfer of assets; (iii) a certified copy of the minutes of each corporate party’s stockholder meeting necessary to approve the transfer of assets; (iv) an authenticated copy of the transferee’s certificate and articles of incorporation (if the entity was formed for the purpose of receiving the assets involved in performing the government contracts); (v) the opinion of legal counsel for the transferor and transferee stating that the transfer was properly effected under applicable law and the effective date of transfer; (vi) balance sheets of the transferor and transferee as of the dates immediately before and after the transfer of assets, audited by independent accountants; (vii) evidence that any security clearance requirements have been met; and (viii) the consent of the sureties on contracts in which bonds are required, or a statement from the transferor that none are required. FAR 42.1204(f). Here, too, the bureaucrats regularly reject novation packages for failing to comply with the non-existing requirement for wet signatures. And auditors are rightly confused as to how it would be possible (or reasonable) to perform a full audit on a company’s finances on sequential days.

Thanks to the FAR Council’s invitation for comments, contractors now can do more than grumble under their breath or complain to each other about the manifold inefficiencies and useless red tape. The FAR Council has now provided contractors the ability to weigh in directly on whether the collection of the above information is necessary for the proper performance of the functions of federal government acquisitions, including whether the information has practical utility, the accuracy of the estimate of the burden of the information collection, and ways to minimize the burden of the information collection on respondents, including the use of automated collection techniques or other forms of information technology. Do you have other suggestions for how the government can improve these archaic processes? The FAR Council wants to hear from you, and we encourage all interested parties to weigh in.

The notice can be found on the Federal Register website.