July 25, 2022

Due Diligence: Government Contractor Compliance

The DOJ recently settled a False Claims Act proceeding against a company that erroneously certified that it qualified as a small business in connection with 22 government set-aside contracts that it entered into subsequent to a 2011 acquisition.  According to this DLA Piper memo, one interesting aspect of the case is that the violations were discovered during the due diligence process for a potential 2019 acquisition of the company.  After reviewing the draconian sanctions associated with FCA violations, the memo says that there’s a lesson here for potential acquirors of government contractors who have been awarded set-asides based on small business status. Here’s an excerpt:

Given the risks and liabilities associated with inaccurate small business size certifications, it is important to thoroughly perform diligence on size status in connection with a pending merger or acquisition involving a contractor that performs, or has performed, government contracts set aside for small business concerns. Because the size regulations promulgated by the US Small Business Administration (SBA) are nuanced and the resulting analysis is highly fact-specific, it is not surprising to uncover inaccurate size certifications in the course of buy-side diligence or, when representing the target, in preemptively reviewing the target’s profile, as well as the target’s active and historic contract documents to be made available to prospective buyers.

If an incorrect size certification is discovered, steps should be taken both within the parameters of the M&A transaction and with regard to the government to address, and ideally mitigate, the potential liability and reputational risks.

If a size certification issue is discovered, the memo says that counsel should assess, among other things, the scope and volume of the target’s set-aside contract portfolio & other government contracts, the scope & nature of the inaccurate size certifications, the business consequences of loss of small business status or other collateral consequences, and the remedial measures and strategy for communicating with the government.

John Jenkins