On January 7, 2026, President Trump issued an executive order titled “Prioritizing the Warfighter in Defense Contracting” (the Order). The Order directs the Secretary of War (the Secretary) to identify “underperforming” defense contractors that are not investing their own capital into necessary production capacity, not sufficiently prioritizing US government contracts, or whose production speed is insufficient as determined by the Secretary. The Order seeks to prohibit designated contractors from conducting stock buybacks and issuing dividends to shareholders until the performance issue is cured. Additionally, future contracts will be required to link executive compensation with performance metrics, and defense contractors must cap executive base salaries during times of underperformance.
The Order’s stated policy objective is to accelerate defense procurement and revitalize the defense industrial base by realigning the priorities and incentives of defense contractors away from investor profits and toward production efficiency. It criticizes defense contractors for being “incentivized to prioritize investor returns over the Nation’s warfighters,” which has negatively affected the timeliness and quality of their performance of government contracts. The Order is designed to increase defense contractors’ focus on production capacity, innovation, and on-time delivery rather than investor returns, dividends, and stock buybacks. The Order’s policy objective is in line with President Trump’s recent statements about seeking to increase federal military spending.
Section 3 of the Order directs the Secretary to begin a review process to identify “critical weapons, supplies, and equipment” contractors that are engaged in stock buybacks or distributing dividends and that are currently in “a period of underperformance or insufficient prioritization, investment, or production speed.” The Order does not define these terms and does not provide the criteria that the Secretary will use for this review. The review process will begin within 30 days of the date of the Order and on a continuing basis thereafter.
The Secretary will provide notice to all contractors designated as “underperforming” and describe the nature of their deficient performance. Within 15 days of notification, the Secretary will engage with underperforming contractors “as needed” to request a remediation plan approved by the contractor’s board of directors for review by the Secretary. The Order does not provide details regarding the factors the Secretary will use to assess whether a contractor is “underperforming,” nor the contents of the remediation plan the Secretary will require.
Under Section 4(a), if the Secretary deems a contractor’s remediation plan insufficient and the underperformance is not otherwise resolved within the 15-day post-notice period, the Secretary may initiate “immediate actions,” including through use of any agreement between the contractor and the government, available enforcement actions under the Defense Production Act (50 U.S.C. 4501 et seq.), and any available contract enforcement mechanisms within the Federal Acquisition Regulation (FAR) and Defense Federal Acquisition Regulation Supplement (DFARS). When considering an enforcement action, the Secretary will weigh the financial condition of the contractor, the economic viability of relevant programs, and “the potential mutual benefits offered by robust and sustained growth opportunities from the United States Government coupled with capital investments by the contractor.”
Section 4(b) of the Order directs the Secretary to take steps within 60 days of the Order’s issuance to ensure that all future contracts, including renewals of existing contracts, contain a provision prohibiting stock buybacks and corporate distributions by the contractor “during a period of underperformance, non-compliance with the contractor’s contract, insufficient prioritization of the contract, insufficient investment, or insufficient production speed as determined by the Secretary.” Future contracts will also include provisions that cap executive base salaries during periods of underperformance and link compensation with performance-based metrics, including “on-time delivery” and “increased production” under these contracts.In a social media post from January 7, 2026, President Trump specified that he believes executive salaries should be capped at $5 million. However, this figure does not appear in the Order.
Section 4(c) of the Order states that the Secretary of War may decide to cease ongoing advocacy efforts or deny new advocacy cases for underperforming contractors competing for international Foreign Military Sales (FMS) or direct commercial sales.
Finally, Section 4(d) of the Order directs the Chairman of the Securities and Exchange Commission to consider whether to adopt amended regulations governing stock buybacks under Rule 10b-18 that would prohibit use of the relevant safe harbor for underperforming contractors.
The Order prescribes a process and consequences that are not in the FAR or DFARS, nor have they been part of the Department of War’s policy toward defense contractors. As a result, we expect that in the near term, the Order’s practical effect and function will likely be to provide the administration with even greater leverage over contractors, rather than as a self‑executing legal mechanism unto itself. There are no current standard contract provisions or regulations that authorize the Department of War to impose bans on dividends or buybacks or to cap executive pay based solely on a unilateral “underperformance” designation. The Order’s suggestion that such actions are immediately “not permitted” will likely be difficult to enforce on contractors absent new provisions. There is also no clear authority that creates the mandatory 15‑day negotiation period referenced in Section 3.
However, many other tools referenced in the Order already exist, including the government’s ability to withhold payments, its leverage over invoicing and approvals, and the standard requirement that contractors continue performance during disputes. The Order contains an unusual reference to the Defense Production Act (DPA). Title I of the DPA (50 U.S.C. 4511 et seq.), implemented via the Defense Priorities & Allocations System (DPAS), authorizes “priorities and allocations” through rated orders. Major defense contracts already carry DPAS ratings, so invoking the DPA may add little to what already applies to priority programs.
One seldom‑invoked aspect of DPA Title I is its criminal provision, 50 U.S.C. 4513:
“Any person who willfully performs any act prohibited, or willfully fails to perform any act required, by the provisions of this subchapter or any rule, regulation, or order thereunder, shall, upon conviction, be fined not more than $10,000 or imprisoned for not more than one year, or both.”
While not explicitly referenced in the Order, if the administration sought to maximize its enforcement posture, it could attempt to rely on this criminal enforcement provision, although there is little precedent for criminal prosecutions under the DPA or DPAS.
In the longer term, the Order outlines a well-trodden path for authorizing the government to impose consequences on contractors: placing the requirement in contract terms. Although the FAR and DFARS do not currently address dividend or buyback restrictions or executive salary caps tied to performance, the government can issue new standard terms in the coming months, and the Order provides the Department of War 60 days to implement new DFARS clauses that do just that. It is usually very difficult for contractors to refuse government‑mandated clauses — in part because the government sets the rules for procurements and will only negotiate terms under rare and demanding circumstances. Moreover, since the government generally has a broad termination-for-convenience right in all procurement contracts, it can threaten to terminate or wind down contracts with contractors that refuse to incorporate new clauses into existing contracts. In this manner, the government could conceivably add the requirements to existing contracts through bilateral modification.
Going forward, the Department of War could implement these new requirements by adding the new clause to each new solicitation and the resulting contracts. Because a prospective contractor may be found non-responsive if objecting to a contract requirement in response to a solicitation, most contractors will likely be faced with a Hobson’s choice to accept the new terms, or risk loss of any contract opportunity. However, timing is a constraint: 60 days is an aggressive schedule to develop and promulgate FAR or DFARS language, and there is typically lag between issuance of new provisions and their consistent incorporation into solicitations and awards.
In contrast to implementing these contract requirements, Section 4(c) of the Order would be relatively straightforward for the government to execute. In FMS procurements, contractors sell goods or services to the US government, which in turn sells to a foreign purchaser; the government is a party and enjoys wide discretion in selecting its contractors in this context. In direct commercial sales, the US government provides advocacy and facilitation rather than acting as purchaser. Curtailing advocacy for “underperforming” contractors in either channel is a step the government could likely take quickly and with limited contractual or judicial recourse.
Section 4(d) of the Order directs the Chair of the US Securities and Exchange Commission (SEC) to consider whether to amend existing SEC regulations that public companies often use in conducting stock buybacks. Currently, stock buybacks that satisfy the conditions of SEC Rule 10b-18 benefit from a safe harbor against market manipulation claims under specific provisions of the Securities Exchange Act of 1934. But even if the SEC eliminated the Rule’s safe harbor for defense contractors designated by the Secretary under Section 3, those companies’ stock buybacks would not automatically become illegal. Companies could continue to perform stock buybacks in a legally compliant manner even without the benefit of the SEC safe harbor.
For example, companies excluded from the safe harbor could still structure their stock buybacks to align with the Rule’s parameters governing the manner, time, volume, and price of stock buybacks for purposes of establishing a reasoned defense by analogy to the safe harbor. The Rule expressly states that failure to meet its conditions does not give rise to a presumption of manipulation. While exclusion from the safe harbor could affect some brokers’ willingness to participate as necessary facilitators of stock buyback programs, brokers have in other contexts been willing to facilitate stock buybacks by operating in a manner consistent with the safe harbor’s parameters without fully satisfying its conditions.
In light of risks posed by the Order, defense contractors should consider the extent to which they can take action now to reduce designation risk and position themselves for negotiations with the Secretary of War, particularly if they have ongoing contracts which may be behind schedule or over budget. Contractors may voluntarily submit corrective action plans if identified by the Secretary of War to avoid further targeting and to preserve eligibility for new awards.
We advise considering the following steps to prepare for this Order to go into effect: