FCA Regulatory Implications Impact Mergers and Acquisitions, Says PilieroMazza

In the complex landscape of mergers and acquisitions involving government contractors, the False Claims Act (FCA) has emerged as a critical consideration that can significantly impact transaction outcomes. Industry experts emphasize that both buyers and sellers must thoroughly address FCA concerns before finalizing any deal, especially when the target company faces ongoing investigations or potential risks related to the Act.

Government contracting specialists note that FCA issues can derail otherwise promising acquisitions or lead to substantial post-transaction liabilities if not properly addressed during the due diligence process. The Act, which imposes liability on individuals and companies who defraud governmental programs, carries significant financial penalties that can affect company valuations and transaction structures.

Legal experts from PilieroMazza, a law firm specializing in government contracting matters, have identified several types of FCA risks that specifically emerge during the acquisition of government contractors. These risks include historical compliance issues, ongoing investigations, questionable billing practices, and certification-related concerns that may not be immediately apparent without thorough examination.

During the due diligence phase, potential buyers are advised to implement specialized protocols designed to identify FCA exposure. This includes reviewing compliance programs, examining government contracts for potential performance issues, analyzing pricing methodologies, and scrutinizing internal reporting mechanisms for handling compliance concerns. Companies should also review any past government audits, investigations, or employee complaints that might signal potential FCA violations.

Industry analysts point out that the government contracting sector presents unique challenges during M&A transactions due to the complex regulatory environment. Government contractors operate under strict compliance requirements that extend beyond typical commercial business operations, creating additional layers of potential liability that must be carefully assessed.

For buyers, mitigating FCA risk requires a multi-faceted approach. This typically includes implementing robust indemnification provisions that specifically address FCA claims, securing representations and warranties insurance with appropriate coverage for government contracting risks, and potentially structuring the transaction to isolate or limit exposure to problematic contracts or business segments.

Disclosure requirements present another significant consideration. Sellers must navigate carefully between fulfilling their obligation to disclose potential issues while not unnecessarily alarming buyers. Meanwhile, buyers must determine whether discovered FCA risks require disclosure to government agencies post-acquisition, even if the seller had not previously made such disclosures.

Financial experts highlight that fraudulent conveyance issues can arise if a seller transfers assets while aware of pending FCA liability. Courts have demonstrated willingness to pursue recovery from the acquiring company in such scenarios, making thorough pre-transaction assessment critical for buyers.

The stakes in these transactions remain particularly high given that FCA penalties can include treble damages and substantial per-claim penalties. Recent Department of Justice statistics show continued aggressive enforcement of the False Claims Act, with recoveries exceeding $2.2 billion in the previous fiscal year, a significant portion coming from the government contracting sector.

Market observers note that heightened regulatory scrutiny has pushed FCA considerations from a secondary concern to a central due diligence focus in government contractor acquisitions. Companies are increasingly engaging specialized legal counsel with FCA expertise early in the transaction process rather than treating it as a routine compliance check.

As the federal government continues to increase spending on contracted services across defense, healthcare, infrastructure, and technology sectors, M&A activity involving government contractors is expected to remain robust. Industry experts anticipate that sophisticated buyers will continue developing more advanced strategies to identify and mitigate FCA risks as these transactions grow more complex and regulatory oversight intensifies.