Who’s Your Contractor Now?

1. Who’s Your Contractor Now? Contractor Assignments, Name Changes and Factoring Agreements

2. What is Assignment? • As a general legal matter, it is the formal transfer of a property right from one person or entity to another. • In contracts, it is the act by a contracted vendor of transferring all or some of their rights in the contract to another person. This can mean all or part of the work, the right to payment, or some other aspect of the contract. • Is subcontracting an assignment? • No, although they are similar. Subcontracting is simply an agreement between the vendor and its supplier/sub to perform some of the work. The subcontractor does not “step in” to a contractual relationship with the state.

3. Can contractors freely assign their state contracts? • Generally NO. The Procurement Manual (PM) and the Contract Management Guide (CMG) both contain references to this as a recommended clause: • No Assignment by Contractor - The Respondent shall not assign its rights under the Contract or delegate the performance of its duties under the Contract without prior written approval from the {AGENCY}. • The CMG explains the policy this way: “Contractors should not be allowed to assign any portion of the contract or its performance, to others, for example, to subcontractors, without the prior written consent of the agency. Contractors remain responsible for the performance of the contract notwithstanding any such assignment or subcontract. This ensures that the evaluated and selected entity will actually be responsible for performance and that proposed transactions may be reviewed for compliance with the conflict of interest and related party provisions.”

4. Are full or partial contract assignments ever allowed? • Sometimes. If the existing vendor sells some or all of its business (more on this later), or if there is some reason given by the contractor for pursuing the assignment, TPASS has approved a few. • By and large we discourage vendors from assigning our contracts. It can create the appearance that state contracts can be “bought” after the competitive bidding process. If there was any element of vendor compliance or capabilities analyzed in the bidding/evaluation process, the procurement process is undermined by allowing free assignment.

5. Exception to the prohibition • In the PM, there is a procedure allowing for assignment of the right to receive payment. • Section 2.37 of the PM states: “Once an agency receives a notice of a financial assignment, it is legally bound to make payment to the assignee. “ • This means that a state agency must pay whoever the contracted entity directs it to. • WATCH OUT, though! The PM and the Comptroller’s Fiscal Management website make clear that assignments must be clearly documented by the contractor, NOT the assignee (the company/person receiving the assignment).

6. Payment assignments - more • A payment assignment must be clearly documented by the original payee as follows: “Requests for assignments must be in writing from the contractor receiving the order on the company letterhead with the signature of an authorized representative.” • Who is an authorized rep? An officer, director, or general counsel of an entity, or (if specified in the contract) the person designated to speak on behalf of the contractor. • Main concern about payment assignments? Are we in fact sending the money to a third party as required by the assignment and consistent with our contractual obligations?

7. Can any contract manager approve a payment assignment? • If the contract was procured by your agency (delegated or pursuant to your statutes), you can approve the assignment. • Be careful – make sure you receive documentation from your original contractor showing it requested the assignment, and check the documentation of the transfer. • For Term, TxMAS or TPASS Managed contracts, the assignment must be reviewed and approved by TPASS. • If a user agency approves an assignment of a TPASS-issued contract – what then? • The user agency doesn’t technically have the authority to amend a contract they didn’t sign. For the most part, the contractor has violated the “controlled correspondence” sections of our contract, not to mention the “no assignments” clause which requires prior notice.

8. What is “factoring”? • “Factoring” agreements are essentially commercial loans that are based on a business’s right to receive future payments (accounts receivable). • The business sells its accounts receivable to a bank or factoring company at a discount. • Some factoring arrangements are not only for discrete payments due, but for all future payments due and payable under a contract. • The problem with “full” assignments? The vendor will be sending products or delivering services and not getting paid for them! We’ve seen this, and it can get ugly.

9. Potential factoring problems • In the case of an “ongoing” assignment of payment, you now have an entity receiving money that has no performance obligations to the state. The assignee is only interested in getting its money – not in how well or efficiently the products or services are being delivered. • Payment issues (late payments, interest, price adjustments, etc.) can create friction between your “two” contractors. For example, if your contract price adjustment index shows prices should be reduced, the factoring company will be receiving fewer dollars per unit delivered. Is that covered in their agreement? • By and large, the contract between the original contractor and the factoring provider will guide those two parties – the state should stay out of their issues.

10. Name changes and sales • Technically, all company name changes and sales are assignments, since we executed the contract with the previous company/name. • Recent experience has shown TPASS that what companies say in their press releases and customer mailings often does not match the real structure of the transaction. • For example, a new company recently mailed all its customers (including several state agencies) a letter saying it had “purchased” a state-contracted company. When asked for details, it was clarified that it had purchased only the assets of the contractor, not the entire company.

11. “Corporate” sale versus “asset” sale – why does it matter? • The difference between a sale of corporate assets and a sale of the corporation itself is very important. • In the corporate sale, the purchasing company literally becomes the corporation they purchase. • State corporate laws differ in minor ways but under most state corporate laws (including Delaware) BOTH the purchased company and the purchaser company “continue to exist” in the new merged form. • This is so because the buyer is buying all of the assets and liabilities of the corporation.

12. Asset sales – why they need more scrutiny • In an asset sale, the buyer is purchasing only “pieces” of a company. Generally, of course, a buyer will take only the best parts, leaving the liabilities and underperforming assets behind. • Major issues arise in asset sales of state contracts. • First and foremost, did the buyer (in its agreement or its request to the state to modify the contract) agree to all terms and conditions? • If the contract is all or part services, does the purchaser have all of the same capabilities? • If the evaluation was based in some part on samples or specific brand goods, will the buyer be supplying exactly what was evaluated?

13. How do you determine asset vs. corporate? • We still struggle with this in TPASS – so we developed some forms and internal guidance. • The forms are available for anyone’s use – just contact us and we’ll get you copies. • One thing we have found to be helpful – get permission to speak with higher levels of management or the purchasing company’s attorney. Often sales or customer relations staff don’t understand the complexities of the corporate transaction. They usually stick to the script they were provided to explain the transaction. • You (or your lawyers) may need to seek copies of the actual corporate transaction documents to satisfy yourself on the particulars of an asset sale.

14. Name changes • If your contractor decides to change names – what does it matter? • The name on the contract won’t match, and the name on purchase orders, contract and invoices must match to enable payment in USAS! • Is the vendor changing its Vendor Identification Number (VID) in the state system? • If so, the change may be more than just a name change – there may be some change to the corporate structure or ownership. • If not, it may simply be a name change – but it should still be corrected for the contract and proper payment.

15. The REAL minefield – bankruptcy! • If a transfer of a contract is accomplished as part of a sale of all or part of a company that is in bankruptcy, you probably do not have any choice but to accept the assignment! • If you or your agency is notified of a bankruptcy proceeding involving one of your contractors, notify your lawyers immediately. • There are lawyers at OAG that can help your agency’s attorneys with the bankruptcy issues. • The earlier you know about the proceeding, the more time your agency has to react and possibly have formal input during the legal proceeding. You may be able to influence the court’s choices on assigning the contract.

16. More on bankruptcy • If the contract is one that is critical to some agency operation, definitely get involved quickly and at the highest levels of your agency possible. • Can you cancel a contract if you don’t like that the contractor declares bankruptcy? • NO!! Even if you do cancel their contract, and even if you do so before the vendor files for bankruptcy, the bankruptcy court can exercise jurisdiction over your contract and reinstate the contract after if it was canceled! • Can you write contract terms that affect this outcome? • The standard answer is no, but some bankruptcy lawyers advise that you can carefully craft provisions that allow you to consider the financial condition of your contractor. • TALK TO YOUR LAYWER! There are many possible outcomes in bankruptcies – get involved early and track the proceedings.

17. Questions??? David D. Duncan david.duncan@cpa.state.tx.us (512) 463-9482