On October 17, 2023, the U.S. Government Accountability Office (“GAO”) published a report on mergers and acquisitions (“M&A”) in the defense industrial base. The report details the current M&A review process of the Department of Defense (“DOD”) and provides recommendations to proactively assess M&A competition risks.
On the heels of the FTC’s opposition to Lockheed Martin’s acquisition of Aerojet Rocketdyne and Lockheed’s termination of the deal, the Department of Defense (DoD) released a report expressing concerns about the state of competition among its contractors. Of particular note, the report encourages DoD action to (1) increase oversight of M&A transactions and (2) obtain greater IP rights in matters involving defense industrial base contractors. Although the report is light on specifics and identifies objectives that are in some tension with each other, the report is a reminder to companies that the U.S. Government, the single largest purchaser in the country, remains focused on enhancing competition. To that end, we anticipate seeing Executive Branch action in the coming months that seeks to further that policy objective.
Continue Reading DoD Signals Increased Scrutiny of Gov Con M&A and Renewed Interest in Background IP Rights
(This article was originally published in Law360 and has been modified for this blog.)
Companies in a range of industries that contract with the U.S. Government—including aerospace, defense, healthcare, technology, and energy—are actively working to assess whether or not their information technology systems comply with significant new restrictions that will take effect on August 13, 2020. These new restrictions prohibit the use of certain Chinese telecommunications equipment and services, and a failure to comply can have dramatic consequences for these companies. The new restrictions also will have an immediate impact on mergers and acquisitions involving a company that does—or hopes to do—business with the Federal government. In this article, we highlight some key considerations for M&A practitioners relating to these restrictions.
On July 14, 2020, the U.S. Government’s Federal Acquisition Regulatory Council (“FAR Council”) published an interim rule to implement Section 889(a)(1)(B) of the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (“FY19 NDAA”). When the new rule takes effect on August 13, it will prohibit the Department of Defense and all other executive branch agencies from contracting—or extending or renewing a contract—with an “entity” that “uses” “covered telecommunications equipment or services as a substantial or essential part of any system.” The restrictions cover broad categories of equipment and services produced and provided by certain Chinese companies—namely Huawei, ZTE, Hytera, Hangzhou Hikvision, Dahua, and their affiliates.
The new rule will be applicable to all contracts with the U.S. Government, including those for commercial item services and commercially available-off-the-shelf products. Companies with a single one of these contracts will soon have an ongoing obligation to report any new discovery of its internal “use” of certain covered telecommunications equipment and services to the Government within one business day with a report of how the use will be mitigated ten business days later. Further, although companies can seek to obtain a waiver on a contract-by-contract basis from agencies, these waivers must be granted by the head of the agency, and may only extend until August 13, 2022 at the latest.
The new rule is the second part of a two-stage implementation of Section 889’s restrictions on covered telecommunications equipment and services in Government contracting. It builds on an earlier rule that implemented Section 889(a)(1)(A) of the FY19 NDAA on August 13, 2019 by prohibiting an executive branch agency from acquiring certain covered telecommunications equipment or services that is a substantial or essential part of any system.
The new rule is expansive in scope, and its effects will be felt far beyond the traditional defense industrial base. Thus, mergers and acquisitions practitioners are well advised to become familiar with the rule and consider how it might impact any future transaction where an acquisition target does at least some business with the Government or has aspirations to do so in the future.…
In an apparent reaction to recent efforts by the Department of Defense to obtain authority to approve mergers in the defense industry on national security grounds, the Department of Justice and the Federal Trade Commission today issued a Joint Statement explaining the standard of review that the antitrust agencies use when evaluating proposed transactions in the defense industry. In this Joint Statement, the antitrust agencies assert that by protecting competition, they already are protecting national security by maintaining multiple sources of products and services and the most innovative technologies to support our military personnel, all at competitive prices.
Continue Reading FTC and DoJ Question DoD’s Proposed National Security Trump Card