Alert 12.22.25
Alert
01.22.26
(This is the first of two alerts examining this issue.)
On January 7, 2026, President Donald Trump issued the “Prioritizing the Warfighter in Defense Contracting” Executive Order (EO). The EO directs the U.S. Secretary of War (Secretary) to establish a process for reviewing defense contractors for critical weapons, supplies and equipment that, as determined by the Secretary, are underperforming on their contracts; have not invested sufficient capital in necessary production capacity; have not sufficiently prioritized U.S. government contracts; or maintain insufficient production speed. The EO does not provide guidance as to any specific criteria to be used in determining what constitutes underperformance, granting full discretion to the Secretary.
The January 7 EO comes approximately two months after the Secretary’s November 2025 issuance of “Transforming the Defense Acquisition System into the Warfighting Acquisition System to Accelerate Fielding of Urgently Needed Capabilities to Our Warriors,” which articulated a broader policy objective of accelerating defense acquisition timelines, increasing production capacity and reducing barriers to rapid deployment of military capabilities. Taken together, the November and January actions reflect a coordinated effort to shift defense acquisition policy toward speed, scale and accountability.
The January 7 EO also builds on themes the President had articulated publicly prior to its issuance, including criticism of defense contractors for prioritizing stock buybacks and shareholder returns over production capacity and timely delivery of military capabilities. In a Truth Social post issued shortly before the January 7 EO, the President stated that defense contractors should not be permitted to “pay dividends or buy back stock” while failing to deliver weapons and equipment on time and on budget.
Under the January 7 EO, defense contractors determined to be underperforming will no longer be permitted to conduct stock buybacks or issue dividends during periods in which such underperformance, insufficient investment, insufficient prioritization or insufficient production speed, as defined at the Secretary’s discretion, persists. The EO further provides that, within 30 days of the EO’s issuance, and on an ongoing basis thereafter, the Secretary must identify underperforming contractors and provide notice to those contractors. The identified contractors, in turn, will have only 15 days to submit a remediation plan approved by the contractor’s board of directors.
If remediation efforts are unsuccessful, or if the Secretary is unable to resolve disputes with a contractor, the EO authorizes the Secretary to pursue measures to address contractor performance. These measures may include voluntary agreements with the contractor, use of authorities available under the Defense Production Act, and existing enforcement mechanisms available under the FAR and DFARS. In determining whether and how to pursue such actions, the EO directs the Secretary to take into account the contractor’s financial condition, the economic viability of relevant programs, and the potential mutual benefits of sustained government growth paired with contractor investment.
Additionally, within 60 days of the EO’s issuance, the Secretary is further directed to ensure that prospective defense contracts and contract renewals include new contractual provisions. As described in the EO, these provisions would:
The EO also directs the Secretary to determine whether the U.S. government should “cease ongoing advocacy efforts or deny new advocacy cases for underperforming contractors competing for an international Foreign Military or Direct Commercial Sale.” In addition, the EO authorizes the Securities and Exchange Commission (SEC) to consider amending Rule 10b-18 under the Securities Exchange Act of 1934. Currently, Rule 10b-18 provides a safe harbor from market manipulation liability for issuer stock repurchases conducted in accordance with specified conditions relating to the timing, price, volume and manner of such repurchases by public companies, including government contractors. The EO contemplates limiting access to this safe harbor for certain underperforming defense contractors.
Looking Ahead
As has been the case with other EOs issued by this Administration, the specificity and detail around the implementation of this EO remains to be seen. Nonetheless, defense contractors should now take stock of the current status of existing defense contracts, identifying those with issues related to delivery, quality, schedule and cost, as those are the metrics that are already tracked by agencies and that, if not in compliance, can be easily targeted by the Secretary to justify a determination of underperformance. Contractors should also assess which, if any Foreign Military Sales (FMS) or non-U.S. Direct Commercial Sales (DCS) transactions could be implicated based on potential deficiencies in performance on U.S. government contracts. We note that, in addition to the specific restrictions outlined in the EO, contractors that are found to be in violation of the new requirements could also face traditional ramifications including, for example, breach of contract claims, termination for default and negative past performance evaluations. In addition, we have seen the Government become increasingly aggressive in pursuing contractors under the False Claims Act for violation of contract provisions and for making incomplete or inaccurate certifications in connection with federal contracts. This new requirement may heighten that risk, as well.
Pillsbury will continue to monitor follow-up actions from the U.S. Department of War on the January 7 EO, including the promulgation of any regulations or standards for the determination of contractor underperformance.