Business declares war on DoD stock buyback ban moving in Senate

Business is declaring war on a provision tucked into a must-pass defense bill that would restrict Pentagon contractors from executing stock buybacks and paying dividends unless they have the Defense Department’s approval, and asking Congress to kill the provision before it reaches the president’s desk.

The U.S. Chamber of Commerce, along with 40 other business groups, sent a letter Tuesday to Senate leaders urging them to strip the measure from the bill — an annual defense policy package called the National Defense Authorization Act. The Senate is due to begin considering the measure this week.

The provision, known as Section 815, would amount to an unprecedented incursion from the government into tens of thousands of companies that do business with the Pentagon, the groups wrote. It would also apply broadly, making no explicit distinction between a prime defense contractor manufacturing missiles and a food vendor.

“By prohibiting dividends, share repurchases, and other capital distributions absent a government waiver, Section 815 would shift responsibility for ordinary capital allocation decisions from corporate leadership to Washington,” the letter reads. “[W]e urge the Senate to strike Section 815 and oppose future efforts to use federal procurement policy to control otherwise lawful corporate governance and capital.”

The push from the Chamber and the other groups, all representing Pentagon contractors, exemplifies the threat the provision poses to business. Section 815’s inclusion in the bill, which has already been approved by the Senate Armed Services Committee, also greatly increases its chance of becoming law and severely reduces the likelihood it will be stripped before a Senate vote.

The provision was pushed by Sen. Elizabeth Warren, D-Mass., and was included in the NDAA on a bipartisan basis, according to members of the committee who spoke to CNBC after their closed-door vote. Warren had led a similar bill with Sens. Josh Hawley, R-Mo., and Mike Lee, R-Utah.

Proponents say it is meant to crack down on underperforming contractors and codify President Donald Trump’s January executive order to bar buybacks and dividends for contractors who underperform DOD expectations. Warren, in an interview last month, described the policy as intended to “bring a small amount of discipline to these defense contractors who have been running wild for years.”

Warren, in a statement, said it is “time to stop these contractors from putting Wall Street over our national security.”

“Giant military contractors are cheating our government out of billions in taxpayer dollars and lining their executives’ and shareholders’ pockets instead of investing in our national defense,” she said.

Trump, in issuing the executive order the month before he began a war against Iran, said he wanted to spur defense production and encourage companies to reinvest proceeds.

Lawmakers have griped for decades that defense contractors have bilked the federal government on lucrative projects that run over budget and over schedule. They argue contractors are paying themselves and their shareholders via stock buybacks and dividends before they deliver for the military.

Industry groups largely view the legislative push as more restrictive than the executive order, however. While the executive order was largely perceived as a flexible behavioral intervention, Section 815 would be a stricter prohibition contingent on waivers that reaches far beyond prime military contractors.

“Section 815 would give the federal government an unprecedented role in companies’ routine financial decisions,” said Will Anderson, vice president of corporate governance at Business Roundtable, which signed onto the letter. “The proposal is far-reaching and would create new uncertainty for companies across a wide range of industries at exactly the moment Congress should be removing barriers to participation in the defense industrial base — not creating new ones.”

Under the bill, the Pentagon would be prohibited from entering into contracts with contractors unless the contractor agrees in writing not to “purchase an equity security of such entity, or any parent entity of such entity, that is listed on a national securities exchange” or “pay dividends or make any other capital distribution with respect to the equity securities of the entity.”

The provision would take effect June 15, 2027. The defense secretary could agree to waive the limitation if the contractor provides a “qualifying defense investment plan.”

That the provision made it into the base text of the committee-approved bill, with little if any dissent, shows how far Republicans have been pushed out of their traditional free-market orthodoxy under the Trump presidency. The Senate Armed Services Committee’s report on the bill shows the panel did not vote on Section 815 during the meeting where it was approved by an 18-9 vote, implying there was little disagreement.

The report includes a brief note on the provision, saying the committee “recommends a provision that would, beginning on June 15, 2027, prohibit the Secretary of Defense from entering into a contract for goods or services, unless the contractor agrees to not purchase equity security, pay dividends, or make any other capital distribution with respect to equity securities unless the contractor has a waiver from the Secretary of Defense based on a qualifying defense investment plan.”

But the lobbying push against the provision appears to be winning over some members of the Senate Armed Services Committee.

Sen. Mike Rounds, R-S.D., told CNBC on Monday that the provision goes “farther” than he is comfortable with.

“I don’t like it when politicians are telling business people how to build their businesses necessarily,” Rounds, a member of the Armed Services Committee, said. “Anytime you get into the middle of trying to tell businesses how to do business, I think you’re going farther than you should.”

Rounds noted that the provision restricting capital management could cause the U.S. to miss out on “a benefit that they see for creating an opportunity for more investment that we can use to continue to rebuild the industrial complex that we need.”

The groups that wrote the letter agree, arguing that “[r]estricting capital distributions therefore does not create additional investment; it simply prevents capital from being allocated to its highest-value use.”

Getting the provision removed at this point from the Senate bill would require that an amendment to remove it be approved on the floor. That’s highly unlikely, given that members of both parties support the effort and an amendment would be subject to a 60-vote threshold.

But the differences between the Senate NDAA version will still need to be reconciled with the House version. The House is mired in gridlock over the bill. Its version does not include the buyback and dividend provision, meaning it will be subject to debate between the two chambers.

“That means there’s a good possibility that it’s either modified or changed,” Rounds said.