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An Overview of the Private Company Merger and Acquisition Process for Government Contractors Posted by bobwebb
(809)
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| I.TRANSACTION BASICS
There are three basic types of merger and acquisition transaction: (1) asset purchase, (2) stock purchase and (3) merger. Consideration paid for the acquisition may include cash, stock of the buyer, assumption of seller liabilities or a combination of them. Factors including tax and financial accounting considerations, impact on earnings and cash flow, risk management, transaction mechanics and required corporate, governmental and third-party approvals are taken into account in determining transaction structure and form of consideration. The tax treatment of the transaction is often the most important factor. If the selling shareholders are key persons (whether continuing as employees or not), a portion of the consideration may be allocated to future employment compensation, covenants not to compete, or “Stay-Put” arrangements.
A.Asset Purchase. In an asset purchase, the buyer acquires only identified assets and liabilities of a company, not the company itself. With successful negotiation, the purchaser can select which of the seller’s assets to acquire (such as inventory, equipment, contract rights and intellectual property) and which not to acquire (such as contaminated real estate or obsolete inventory). Within limits, the buyer can also negotiate which outstanding or contingent liabilities to assume and not to assume. Buyer need to assess applicable state laws and determine if “successor liability” may apply – a common law doctrine applied by some states and in certain conditions which imposes upon the buyer of a business liability for certain obligations of the seller, even in the case of an asset purchase.
For tax and liability reasons, it is often said that buyers prefer to buy assets and sellers prefer to sell stock. As a practical matter, in most cases the substantial tax disadvantages of an asset deal to stockholders of the seller (likely double taxation at the corporate and stockholder levels) lead to a stock or merger transaction. As a result, asset purchases are most common in the acquisition of divisions of companies or specific contracts via novation, rather than entire companies.
B.Stock Purchase. In a stock purchase, the purchaser buys the outstanding stock of a corporation directly from the corporation’s stockholders. The corporation need not be a party to the transaction and remains unchanged after the closing (other than having different ownership), retaining all of its assets and liabilities. Existing employment agreements and non compete agreements remain in place (though buyers often require that these be renegotiated to ensure the retention of key persons). Stock purchases are typically preferred by sellers because all liabilities are transferred along with the company, there is no double taxation, and there is no need to liquidate the company after the transaction.
C.Merger. In a merger, one corporation merges with another to become a single ongoing corporation. One company is designated the “surviving,” and the other the “disappearing” corporation. By operation of law, the surviving corporation acquires all of the assets and succeeds to all of the liabilities of the disappearing corporation, and the disappearing corporation ceases to exist as a separate legal entity.
As with the other types of transactions, in a merger, the stockholders of the acquired corporation typically receive cash, stock of the surviving corporation, or some combination of stock and cash. A merger may be taxable or non-taxable to the acquired corporation’s stockholders, depending on the mix of consideration received by such stockholders.
In most cases the merger must be approved by the boards of directors and stockholders of both corporations. While rarely exercised, stockholders of the acquired corporation who formally oppose the merger may “perfect dissenters’ rights” to have value of their stock determined by a judicial procedure involving an appraisal rather than accept the value negotiated as part of the transaction. As a result, many merger agreements give the buyer an “out” if more than a small percentage of the seller’s stockholders perfect their dissenters’ rights.
D.Variations. There are numerous variations on these structures, such as
•reverse triangular mergers, in which the buyer incorporates a subsidiary that merges into the target company, and
•two-step transactions, in which the buyer acquires a controlling interest in the target by a stock purchase, and follows that transaction with a merger in order to eliminate or “freeze out” the remaining minority stockholders.
E.Transaction Stages and Timing. The typical acquisition of a substantial business involves two preparatory stages from the seller’s perspective, followed by three key events for both buyer and seller. For a selling corporation, the preparatory stages are: (I) positioning for possible sale, and (II) marketing the company. For both buyer and seller, the three key events are: (1) a letter of intent or term sheet; (2) a binding definitive purchase or merger agreement; and (3) closing. In some cases, particularly those involving public companies or smaller targets, there may be no letter of intent, and the signing of the agreement and the closing may be simultaneous.
In most cases, completing a substantial transaction from LOI to closing in two months would be considered lightning speed, while a transaction completed in a heavily negotiated or regulated context may take six months or longer.
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[2808]
DSS Guidance to Industry Reference USCYBERCOM Communications Tasking Order (CTO) 10-133
(12/20/10) DSS Guidance to Industry Reference USCYBERCOM Communications Tasking Order (CTO) 10-133, "Protection of Classified Information on Department of Defense (DoD) Secret Internet Protocol Router Network (SIPRnet)":
DSS understands there have been several questions regarding the issuance of the recent USCYBERCOM CTO 10-133. Please be advised this issuance applies only to contractors with whose information systems have connectivity to the SIPRNet. Additional guidance can be obtained through your local DSS ISFO/ODAA representative.
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[2712]
(06/30/10) ISFO Process Manual Update
Change in the Spill Overwrite Requirement Listed in Appendix S of the ISFO Process Manual, dated March 2010 – Effective immediately, sanitization of media will be complete when three overwrite cycles have been completed. Currently, the ISFO Process Manual states in Appendix S-2 #4 that the wiping utility “Must be able to sanitize by overwriting with a pattern, and then its complement, and finally with another unclassified pattern (e.g., “00110101” followed by “11001010” and then followed by “10010111” [considered three cycles]). Sanitization is not complete until six passes of the three cycles are successfully completed.” DSS is updating the ISFO Process Manual stating that “Sanitization is not complete until the three cycles (overwrites) are successfully completed.”...
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[2259]
National Industrial Security Program (NISP) Cleared Contractor Facilities Periodic Reinvestigations for Cleared Personnel
6/9/2010 notice from DSS:
Effective immediately, the Defense Industrial Security Clearance Office (DISCO) will identify and subsequently notify NISP cleared contractor facilities of cleared personnel who are eligible or overdue for a periodic reinvestigation (PR). Eligibility for a PR is contingent upon the access level and the closed date of the investigation. Contractor facilities are highly encouraged to begin identifying those employees who maintain a security clearance and are eligible for a PR. This will allow the cleared contractor facility to reconcile any discrepancies between the Joint Personnel Adjudication System (JPAS) and the actual employment or clearance status of the employee. Once a cleared contractor facility is notified a PR is due for its employee, the...
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[2234]
The Information Security Oversight Office (ISOO)
The Information Security Oversight Office (ISOO) is responsible to the President for policy and oversight of the Government-wide security classification system and the National Industrial Security Program. ISOO receives authority from:
* Executive Order 12958, as amended "Classified National Security Information" [PDF]
* Executive Order 12829, as amended "National Industrial Security Program" [PDF]
ISOO is a component of the National Archives and Records Administration (NARA) and receives policy and program guidance from the National Security Council (NSC).
ISOO has three components:
The Classification Management Staff:
Develops security classification policies for classifying, declassifying and safeguarding...
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[1850]
(6/28/10) NEW!!!! Electronic Communications Plan (ECP) Released
The Defense Security Service is pleased to release an Electronic Communications Plan (ECP) template for use by facilities cleared under the National Industrial Security Program (NISP). This new product supports the National Industrial Security Program Manual (NISPOM) and provides tools to mitigate Foreign Ownership Control or Influence. The ECP template will assist Industry with developing appropriate security countermeasures to effectively monitor electronic communications and ensure that unclassified systems/networks are protected from FOCI.
Effective immediately, those companies that are in the FOCI mitigation process and will require an ECP, must comply with the requirements of the new template within 45 days of the execution of the FOCI mitigation agreement.
...
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[1723]
DSS releases 2008 "Targeting U.S. Technologies: A Trend Analysis of Reporting from Defense Industry"
The DSS Counterintelligence Office has released the 2008 "Targeting U.S. Technologies: A Trend Analysis of Reporting from Defense Industry." This DSS report is based on an analysis of Suspicious Contact Reports received from defense industry and identifies the most frequently targeted U.S. technologies, reflects the most common collection methods utilized, identifies entities attempting the collection, and identifies the regions where these collection efforts originate. The "Targeting U.S. Technologies: A Trend Analysis of Reporting from Defense Industry" is available via the DSS.mil website.
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[1611]
6/12/09 - DSS announces 2009 Cogswell Winners.
James S. Cogswell Outstanding Industrial Security Achievement Awards for 2009
ALEXANDRIA, Va. – June 12, 2009
The Defense Security Service (DSS) is pleased to announce the recipients of the 2009 James S. Cogswell Outstanding Industrial Security Achievement Award. The 14 facilities selected for the award will receive recognition at the annual training seminar of the National Classification
Management Society (NCMS) on June 17, 2009, in Anaheim, California.
The Cogswell award, established in 1966, is named in honor of the late Air Force Col. James S. Cogswell, the first chief of industrial security within the Department of Defense.
Cogswell was responsible for developing the basic principles of the Industrial Security Program, which include an...
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[1478]
National Industrial Security Program (NISP) Fact Sheet
April 2009 - issued by DSS
National Industrial Security Program (NISP) Fact Sheet
The NISP was established by Executive Order 12829 to ensure that industry safeguards the classified information in their possession or to which they have access while performing work on contracts, programs, bids or research and development efforts. The Defense Security Service (DSS) administers the NISP on behalf of the Department of Defense as well as 23 non-DoD federal agencies within the Executive Branch. Presently, DSS has Industrial Security oversight responsibility for over 12,000 cleared companies participating in the NISP.
To have access to U.S. classified information and participate in the NISP, a company or other designated operating entity in private industry or...
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[1472]
SLOTS AVAILABLE FOR DOD SECURITY SPECIALIST COURSE, OCTOBER 19-30, 2009
SETA Flash - August 21, 2009
Space is still available for October 19-30, 2009, iteration of the DoD Security Specialist course. This entry level course introduces the student to security disciplines, policies, procedures, and their interaction and implementation as they apply to the Department of Defense (DoD) Security Specialist career field. The course provides a common body of knowledge that promotes understanding of the scope, importance, and interdependency of the information, physical, industrial, personnel, communications, operations security programs, and other specialized areas. The intensive curriculum relates the programs to the installation level and demonstrates interrelationships.
The course integrates programs through discussion, study, and exercises...
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[1391]
Profile of Kathleen M. Watson - Director of the Defense Security Service
Kathleen M. Watson was named Director of the Defense Security Service (DSS) on Feb. 18, 2007. She is a member of the Senior Executive Service.
DSS ensures the protection of U.S. and foreign classified or sensitive information in the possession of industry; facilitates the personnel security process; delivers security education and training; and, provides information technology services in support of Department of Defense (DoD) and partner agency industrial and personnel security missions.
Prior to being assigned to DSS, Ms. Watson was a staff attorney in the DoD Office of General Counsel where she provided legal support to the Office of the Under Secretary of Defense for Intelligence.
Prior to her DoD assignment, Ms. Watson had a long and distinguished...
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