Advising ESOP-Owned Government Contractor on Sale to Private Equity

Nearly two dozen Holland & Knight attorneys representing multiple practices and working from offices across the United States advised ESOP-owned, government contractor Phacil Inc. in its highly sophisticated sale to a portfolio company of a private equity firm that used this transaction as a bolt-on to its newly constructed government contracts platform. The complex deal involved extensive planning, structuring and two principal transactions, each of which closed within a day of each other in March 2019.

Holland & Knight lawyers working from six offices – Boston, Chicago, Miami, Tampa, Tysons and Washington, D.C. – completed the mergers and acquisition (M&A) deal under the overall direction of a partner in the Mid-Atlantic Corporate, Mergers and Acquisitions, and Securities Practice Group.

The change of control involved the sale by the ESOP of 100 percent of the capital stock of Phacil, and the M&A Team structured the transaction as a stock purchase. The Government Contracts Group conducted due diligence and advised on a voluntary disclosure issue that arose during the auction process. The Employee Retirement Income Security Act (ERISA) team advised on sophisticated 409A issues, which had the potential to derail the transaction. Our patent prosecution team added value to the company by helping the company file five patent applications prior to commencing the auction. These patent applications helped to attract bidders in the auction.

The most notable detail about the transactions was that in the days preceding the planned closing, the private equity buyer realized that one of its portfolio companies owned a right to bid on task orders issued under the Alliant 2 governmentwide acquisition contract (GWAC). This particular GWAC contained an atypical provision that prohibits affiliates from simultaneously owning rights to bid under the GWAC, a situation that would have happened at closing absent a divestiture of the contract by either the private equity's portfolio company or our client. When it was agreed that Phacil would divest its interest in the GWAC, which was a significant source of revenue and EBITDA for our client, our M&A Team had to devise a clawback mechanism in case the overall, change of control transaction failed to close. Because the divestiture involved a U.S. government novation, structuring the clawback was complicated and involved our Government Contracts Group. This pre-closing divestiture represented only the second-known instance of this GWAC provision affecting a proposed change of control of a U.S. government contractor.

Phacil is a leading diversified software, cybersecurity, systems engineering and managed services provider to the U.S. government. It was acquired by a leading provider of IT, cloud, cyber and infrastructure solutions to the U.S. government. The company provides services primarily to the U.S. Department of Defense, Veterans Affairs, Defense Information Systems Agency and the Intelligence Community.

Holland & Knight's nearly 2,000 attorneys practice in more than 250 areas of law. They work collaboratively to provide comprehensive representation for clients from numerous industries and are fully experienced in handling the many nuances faced by government contractors looking to sell or acquire assets. From inception to completion, they work with clients to devise strategies for success in the M&A marketplace.