October 25, 2019 Public Contract Law Journal

Including a Definition of “Operation of Law ” in the Federal Acquisition Regulation : A Roadmap for Government Contractors Engaging in Merger & Acqisition Transactions

by Yingzhi Li

Yingzhi Li (yli5@law.gwu.edu) is a J.D. candidate at The George Washington University Law School and a member of the Public Contract Law Journal. She would like to thank Professor Collin Swan of The George Washington University Law School for his support and feedback. She would also like to thank her family for their unconditional love and support.

I.  Introduction

On February 22, 2013, a Delaware Chancery Court’s decision significantly affected the discussion regarding the assignment of government contracts. In Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH., Roche Holding Ltd. (“Roche”) acquired BioVeris Corporation (“BioVeris”) through a reverse triangular merger, in which a wholly-owned subsidiary of Roche merged into BioVeris, making BioVeris the surviving company with Roche as the sole shareholder.1 At the time of the merger, BioVeris had a contractual agreement with the plaintiff containing an anti-assignment clause prohibiting the assignment of certain intellectual property rights without the consent of the plaintiff.2 When confronted with the question of whether an assignment occurred during the transaction, the court concluded that a reverse triangular merger does not result in the assignment of the target’s contractual rights by operation of law.This decision raises a serious question as to whether reverse triangular mergers will be exempted from the Anti-Assignment Act (AAA) in the government contracts context.

In the current market environment, merger and acquisition transactions still retain popularity with most corporations. In 2018, the announced global merger and acquisition transaction volume reached $4.1 trillion, which is the third highest ever recorded.4 Many corporations focusing on strengthening existing capabilities, expanding current markets, or looking for innovations would consider mergers and acquisitions as an appealing approach.5 Government contractors also actively participate in the merger and acquisition market in order to grow and diversify their business.6 With government contract services transactions up twenty percent for the two year period ending 2016,7 this trend will likely continue as a business tactic in a competitive market.

As for government contractors, several specific considerations must be accounted for when structuring and executing a merger and acquisition transaction.8 One of the most important issues relates to the assignment of government contracts, which is governed by the AAA.9 The AAA refers to two statutory provisions: the Assignment of Contracts Act10 and the Assignment of Claims Act.11 The general rule under the AAA is that companies holding federal government contracts and claims are prohibited from assigning these contracts and claims to other parties.12

However, there are several exceptions to the assignment prohibitions. The Federal Acquisition Regulation (“FAR”) establishes that companies may be waived from the prohibition if (1) the government accepts the assignment of the government contract by signing a novation agreement with the contractor and the assignee of the contract;13 or (2) “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.”14 In addition, federal case law has created an “operation of law” exception, which allows that if the assignment occurs by “operation of law,” then no consent from the government is required.15 Therefore, when structuring a merger and acquisition transaction, the first important consideration for companies is whether the transaction structure they choose to conduct would require a novation agreement from the government, or whether the transaction falls within the scope of the “operation of law” exception.

Unfortunately, the FAR does not provide any statutory definition or scope of the “operation of law” exception. Instead, the exception is generally established by case law.16 Due to the absence of regulatory instruction, case law has created significant confusion over whether a novation agreement is required in certain corporate transactions.17 Thus, companies are forced to consider whether the transaction structure they prefer is exempt from the AAA.18

A popular type of corporate transaction in the mergers and acquisitions market is the reverse triangular merger.19 However, no federal court has addressed the issue of whether an assignment of a contract that results from a reverse triangular merger is within the scope of the “operation of law” exception. Besides, contracting officers have discretionary authority on whether to execute a novation agreement to the contractors or not.20 Without a statutory definition of the “operation of law” exception, contracting officers will be more inclined to comply with the FAR, which requires consent for a transfer of assets “incident to a merger or corporate consolidation” instead of defer- ring to judicial decisions.21

This Note suggests that reverse triangular mergers should fall within the scope of the “operation of law” exception. Furthermore, the FAR Council should amend the FAR to specify the scope of the “operation of law” exception and include reverse triangular mergers within the scope. This Note first presents the history and the development of the AAA followed by an introduction to novation agreements and the “operation of law” exception. Next is a discussion of the effect of reverse triangular mergers in commercial transactions. This is followed by analysis explaining why the assignment from reverse triangular mergers should fall within the scope of the “operation of law” exception by comparing reverse triangular mergers with other transactions that fall within the exception. After that discussion, this Note provides a solution to the issue, namely, that the FAR Council should amend the FAR to specify the scope of the “operation of law” exception and include reverse triangular mergers in that scope.

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