New Executive Order Requires Limits on Stock Buy-Backs, Dividends and Executive Compensation for Certain Defense Contractors

On January 7, 2026, the President issued an Executive Order (“the Order”) directing the Department of War (the “Department”) to (1) conduct a review of “defense” contractors that engaged in stock buy-backs or corporate distributions during a “period of underperformance or insufficient prioritization, investment, or production speed” and (2) implement new contract clauses to (a) prohibit stock buy-backs or corporation distributions during any “period of underperformance or insufficient prioritization, investment, or production speed,” (b) require that executive incentive compensation be tied to government contract performance rather than standard financial metrics, and (c) enable the Department to cap contractor executive base compensation in the event of contract underperformance, non-compliance, insufficient prioritization, insufficient investment, or insufficient production speed.

Key takeaways for Contractors:

• Financial flexibility is now tied to performance. The Order links stock buybacks, distributions, and executive compensation to contractor performance, prioritization and production speed.
• A new review process drives enforcement. The Department is required to identify contractors supporting critical defense programs that are underperforming or insufficiently prioritizing government needs while continuing stock buybacks or corporate distributions.
• Underperformance is currently undefined. The EO does not identify the metrics by which a contractor’s performance will be measured. A key question is whether “underperformance” will be a subjective determination by the Secretary of War, and whether the analysis will consider if a contracting agency’s actions contributed to cost overruns or delays on critical defense contracts.
• Enforcement may extend beyond prime contractors. By expressly invoking the Defense Production Act ("DPA"), the Order signals that performance and prioritization concerns could implicate not only prime contractors, but also subcontractors and suppliers.
• Future contracts will incorporate new terms. New awards, renewals, and extensions are expected to restrict buybacks and distributions during periods of underperformance, and tie executive incentive pay to operational results.
• Legal questions remain. Recent court decisions emphasize that presidential directives affecting contractors must rest on specific statutory authority—an issue that may shape how the Order is ultimately implemented.

Contractor Review and Remediation Process

The Order establishes a formal, ongoing review mechanism for identifying defense contractors that are underperforming while continuing to use capital for stock buybacks or corporate distributions.  Specifically, Section 3(a) directs that within 30 days¹— and on a continuing basis thereafter—the Secretary of War must identify contractors “for critical weapons, supplies, and equipment” that are:

• underperforming on their contracts;
• not investing their own capital into necessary production capacity;
• not sufficiently prioritizing United States Government contracts; or
• operating with insufficient production speed, as determined by the Secretary;
• and that, during that same period, have “engaged in any stock buy-back or corporate distribution.”

If a contractor is identified through this process, the Secretary is required to provide notice describing the nature of the underperformance or related deficiencies. The Order then contemplates engagement rather than immediate sanctions, authorizing the Secretary to work with the contractor to address those issues, including by allowing the contractor to submit a board-approved remediation plan within 15 days of notification.²

If the remediation plan is insufficient, the Order contemplates three separate potential actions:

• Contractual Remedies Available to the Government. The Department may utilize existing enforcement mechanisms, including authorities available under the DPA, Federal Acquisition Regulation (“FAR”) and the Defense Federal Acquisition Regulation Supplement (“DFARS”).  While the Order does not specify particular contract actions, the enforcement tools it references would presumably include traditional remedies already available to the government, such as termination for default or termination for convenience, or injunctive relief under the DPA. The Department may also construe conducting stock buy-backs or corporate distributions during periods of deemed government contract under-prioritization as willful violations of an order under the DPA, thereby justifying additional DPA-specific penalties, up to and including a $10,000 fine and year in prison.³ The explicit inclusion of the DPA is also significant because, unlike traditional contract remedies—which generally operate only against parties in contractual privity with the government—the DPA authorizes government action across the defense industrial base.⁴  
• Withdrawing support for Foreign Military and Direct Commercial Sales. The Department must consider whether it is appropriate to cease ongoing advocacy efforts or deny new advocacy cases for an international Foreign Military or Direct Commercial Sale. 
• SEC Engagement. The Securities and Exchange Commission (“SEC”) must consider whether to amend Rule 10b-18 to exclude companies that do not submit a sufficient remediation plan from the safe harbor that otherwise protects companies from accusations of market manipulation when repurchasing their own stock. Those companies could still legally buy back their stock, but they would do so without the automatic protection that Rule 10b‑18 normally offers. Their repurchases would be exposed to greater regulatory and litigation risk of being challenged as manipulative.

New Contract Clause

 Section 4(b) of the Order directs the Secretary, within 60 days, to take steps to ensure that future defense contracts—including renewals—restrict certain financial and compensation practices when specified performance conditions are met.  In particular, future contracts must include terms that prohibit stock buybacks and corporate distributions during any period in which a contractor is found to be underperforming, not complying with its contract, insufficiently prioritizing the contract, not investing adequately in production capacity, or operating with insufficient production speed, as determined by the Secretary.  

The Order also directs the Secretary to ensure that future contracts address how executive compensation is structured. Specifically, contracts must require that executive incentive compensation not be tied to short-term financial measures such as free cash flow or earnings per share driven by stock buybacks.  Instead, incentive compensation must be linked to operational measures such as on-time delivery, increased production, and investments and operating improvements needed to expand United States stockpiles and capabilities. In addition, the Order requires that contracts permit the Secretary, upon a finding of underperformance or related deficiencies, to cap executive base salaries at current levels, with increases allowed only for inflation and consistent with applicable law, for a period sufficient to review how incentive compensation is structured.

Traditionally, new, broadly applicable contract clauses would be added to the FAR or DFARS through the notice-and-comment rulemaking process. However, given the Order’s statement that this policy will be “effectively immediately,” the administration will likely rely on the deviation process to expedite implementation, as it did for the revolutionary FAR overhaul last year or the Department will negotiate bespoke individualized contract clauses.

Limits on Executive Authority Under Federal Procurement Law

It is important to note that the operative provisions of the Order directing the Department to restrict capital allocation and executive compensation through future contract clauses—raise questions about the scope of the Executive Branch’s authority to impose these types of requirements on federal contractors.  Those questions turn in large part on how courts have interpreted the Federal Property and Administrative Services Act (“FPASA”), the statute most often invoked to justify the President’s authority to impose requirements on federal contractors through executive action.

FPASA includes a statement of purpose providing that the Act is intended to ensure an “economical and efficient system” for federal procurement and contracting.⁵  It authorizes the President to “prescribe policies and directives . . . necessary to carry out” the statute.⁶  Historically, courts have upheld executive orders affecting contractors so long as there was a “sufficiently close nexus” to economy and efficiency in procurement.⁷  More recent appellate court decisions, however, have applied a narrower view of FPASA authority. In challenges to COVID-era contractor vaccine mandates, several courts recognized that FPASA’s general purpose clause alone cannot support broad regulatory requirements imposed on contractors.⁸

The interpretive shift was articulated most clearly by the Ninth Circuit in State of Nebraska v. Su, 121 F.4th 1 (9th Cir. 2024), which addressed the federal-contractor minimum-wage executive order.  The court found that 40 U.S.C. § 101 is a statement of purpose, not an operative grant of authority, and that 40 U.S.C. § 121(a) authorizes presidential directives only to carry out specific provisions of FPASA—not to create new regulatory regimes untethered from the statute’s operative text.⁹  In the court’s words, the President cannot “carry out” FPASA by exercising a power the statute does not confer.  

Viewed against this legal backdrop, the operative provisions of this Order present the same structural question.  Restrictions on stock buybacks, corporate distributions, and executive compensation imposed through procurement contracts implicate areas—corporate finance and governance—that traditionally sit outside the core of federal procurement regulation. The Order also departs from traditional procurement practice by treating production capacity and internal investment decisions as measures of contractor performance. Because these factors are not ordinarily contractual requirements, their use as triggers for enforcement action raises additional questions about whether the Order extends beyond established concepts of performance under federal contracts. The central legal issue is whether FPASA, or another statute,¹⁰ provides a sufficient basis for using procurement authority to impose those types of financial and compensation controls as a condition of contracting.

Next steps for contractors

Although the Order does not amend existing contract terms, it establishes a framework that is expected to influence how performance, compliance, and financial practices may be evaluated for certain critical (but undefined) defense contractors.

Accordingly, Contractors should consider the following steps:

• Expect heightened scrutiny of performance and investment decisions, related to programs involving critical weapons, supplies, and equipment. The Order signals more active monitoring of delivery, production capacity, and prioritization of government requirements.
• Prepare for closer coordination across legal and financial sectors, as performance issues may now have direct implications for capital allocation and executive compensation.
• Plan for changes in future contract terms, including potential restrictions on buybacks, distributions, and executive compensation for new awards, renewals, and extensions.
• Monitor Department implementation, including guidance on the review process and any related FAR or DFARS activity, as well as implementing action from the SEC.

[1] February 6, 2026.

[2] For contractors already under review at the time the Order was issued, Section 3(b) permits the Secretary to rely on existing reviews rather than initiating a new process.

[3] 50 U.S.C. § 4513; 15 C.F.R. § 700.74 

[4] See, e.g., 50 U.S.C. §§ 4511, 4513, 4556.

[5] 40 U.S.C. § 101. 

[6] 40 U.S.C. § 121(a). 

[7] See, e.g., AFL-CIO v. Kahn, 618 F.2d 784, 792 (D.C. Cir. 1979); UAW-Labor Employment & Training Corp. v. Chao, 325 F.3d 360, 366 (D.C. Cir. 2003).

[8] See, e.g., Georgia v. President of the United States, 46 F.4th 1283, 1298 (11th Cir. 2022) (“An executive order cannot rest merely on the ‘policy objectives of the [FPASA].’”); Louisiana v. Biden, 55 F.4th 1017, 1023 n.17 (5th Cir. 2022), and Kentucky v. Biden, 23 F.4th 585, 604 (6th Cir. 2022) (“Statements of purpose may be useful in construing enumerated powers later found in a statute’s operative provisions. . . . But statements of purpose are not themselves those operative provisions, so they cannot confer freestanding powers upon the President unbacked by operative language elsewhere in the statute.”). 

[9] Su, 121 F.4th at 9 (“In short, § 121 does not give the President unrestrained authority to issue any procurement policy that he desires. The President can only use § 121 to issue a policy that carries out an operative provision of the FPASA.”).

[10] There may be an available argument that the DPA authorizes the procurement actions directed in the Order.  Generally speaking, Title I of the DPA empowers the President to require companies to prioritize performance under certain government contracts and to allocate materials, services, and facilities as necessary to promote the national defense.  The government has most often used this authority to issue “rated” orders to contractors for critical materials, equipment, and services, which orders require contractors to prioritize them over other non-rated and commercial orders, but DPA authority was also used (less conventionally) during the COVID-19 pandemic to direct meat and poultry processors to adopt practices to keep processing plants open and to disallow exports of PPE.  Implementing the Order’s government contractor restrictions related to corporate finance and governance would be an unprecedented application of DPA Title I authority, but the Order’s emphasis on companies prioritizing the production of weapons, supplies, and equipment critical to the defense industrial base seems to generally align with the purpose and historical function of the DPA.