Authors: Robert Nichols, Michael Bhargava, and Jessica Aldrich
BLUF — On May 7, 2026, the Department of War (DoW) proposed a new rule requiring contractors and subcontractors on unclassified contracts to disclose and update beneficial ownership and foreign ownership, control, or influence (FOCI) information and to take mitigating action as appropriate. DoW’s proposed rule in the Defense Federal Acquisition Regulation Supplement (DFARS) would expand FOCI scrutiny beyond classified contractors to include all contractors and offerors on any DoW awards over $5 million. The rule could reduce participation by foreign-owned contractors, require greater disclosure and transparency by others, and require some companies to accept FOCI risk mitigation measures. The proposed rule could also significantly increase M&A diligence, affect deal structures, and prolong deal timing for defense contractors and investors.
Comments to the proposed rule are due by July 6, 2026.
Background
The proposed rule includes both a solicitation provision and a contract clause. The solicitation provision would require offerors to represent in proposals that: 1) it has submitted the Standard Form 328 – Certificate Pertaining to Foreign Interests (SF 328) and contact information for each beneficial owner in the National Industrial Security System; 2) the information is current, accurate, and complete; and 3) if awarded, that it agrees to implement any risk mitigation measures required by the Defense Counterintelligence and Security Agency within 90 days of award.
The contract clause applies to prime contractors and includes a flow-down to subcontractors with awards over $5 million. The clause would require contractors to update the SF 328 any time there is a change to FOCI or beneficial ownership for the life of the contract.
The proposed rule generally exempts acquisition of commercial products and COTS items unless a designated DoW official determines that the contract involves a risk or potential risk to national security. That official has not yet been identified in the proposed rule.
How the Proposed Rule Will Impact Defense Contractors
Previously, only contractors with facility security clearances and classified contracts needed to undergo this level of scrutiny into their ownership structures. With the proposed rule, all DoW contractors holding contracts valued at $5 million or more will need to submit an SF 328 and update it throughout the life of the contract.
This rule could shrink the market of DoW contractors to companies that are either not impacted by FOCI or that are willing to disclose their ownership. Defense contractors with foreign ownership may need to weigh the benefits of maintaining current ownership or investment against the cost of additional transparency and potential mitigation DoW will impose. DoW estimates that this new rule will affect a pool of 37,740 offerors. This significantly broadens the field of view for DoW scrutiny and will provide the government with the desired “unprecedented level of visibility” into the ownership of the defense industrial base that DoW outlines as a basis for the proposed rule.
Prime contractors will also face additional burdens of checking subcontractor eligibility before awarding subcontracts on large programs. This could change both the subcontractor supply chains for defense work and the valuation of companies that have subcontractor supply chains that could become problematic under the proposed rule.
How the Proposed Rule Will Impact M&A of Government Contractors
DoW’s proposed rule would increase diligence and compliance obligations in defense contractor M&A by requiring disclosure of beneficial ownership and FOCI for all bids and proposals as well as contracts above $5 million, not just classified contracts.
Buyers, investors, and private equity sponsors will likely need to conduct more extensive pre-acquisition reviews of their ownership structures, foreign investors, and control rights when acquiring DoW contractors.
DoW contractors with unresolved foreign ownership issues could delay M&A transactions while the contractor is implementing mitigation. The proposed rule could also complicate pipeline projections and proposal submissions for contractors undergoing funding rounds or exploring a potential sale, which could — in turn — impact valuations. The proposed rule could also complicate post-closing integration for firms that are placed under FOCI mitigation by DCSA.
Key Takeaways
- Covered contractors and subcontractors may want to consider taking immediate steps to review any foreign ownership, investment, or control (i.e., Board seats held by non-U.S. persons) and consult counsel on potential mitigation strategies if they have significant FOCI risk.
- Private equity sponsors and strategic buyers may want to consider how they would structure investments and governance rights more carefully to avoid triggering adverse FOCI determinations or burdensome mitigation requirements.
- Transactions involving foreign investors, offshore funds, minority foreign ownership, or complex investment structures may face increased regulatory scrutiny and potentially longer deal timelines.
Nichols Law has deep experience advising government contractors, private equity sponsors, and strategic buyers on the national security and regulatory issues that arise in M&A transactions. As DoW increases scrutiny of beneficial ownership and foreign investment through this proposed rule, Nichols Law can help clients assess deal-related FOCI risks early in the transaction process, structure investments and governance rights to mitigate regulatory concerns, conduct diligence on ownership and disclosure obligations, and navigate post-closing mitigation and reporting requirements with DCSA and other government stakeholders.
