“Warfighter First”: Executive Order targets stock buybacks and distributions in defense contracting

Key takeaways

• The EO essentially prohibits the transfer of value to shareholders of defense contractors when the contractor is underperforming on a Department of War (DoW) contract.
• The EO leaves many questions unanswered, including who is covered, how “underperformance” will be measured, what financial actions are restricted, and how the prohibition will be enforced.
• Depending on how the EO is implemented, the EO may discourage some companies from contracting with DoW and require others who depend on DoW for business to prepare for closer links between performance and capital distribution.

What the Executive Order does

On January 7, 2026, the White House issued an Executive Order (EO) titled “Prioritizing the Warfighter in Defense Contracting” reflecting the Administration’s emphasis on speed, scale, and reliability in defense procurement. It directs the Secretary of War (the Secretary), within 60 days, to ensure that any future defense contract or renewal includes a provision prohibiting stock buybacks and “corporate distributions” during periods of contractor underperformance. The EO does not define these key terms or establish metrics, signaling that near-term activity will focus on policy development rather than immediate enforcement.

Section 3 of the EO directs the Secretary to continuously review defense contracts to identify defense contractors supporting “critical weapons, supply, and equipment” activities that are deemed underperforming. While the concept of a defense contractor is generally understood, the EO does not clearly define which businesses qualify for these specific activities—an ambiguity that is particularly significant for companies with mixed commercial and government operations. It also remains unclear whether the term encompasses subcontractors and lower-tier suppliers or is limited to large prime contractors.

The EO grants the Secretary broad discretion in determining underperformance. Once a contractor is designated as underperforming, the Secretary will issue a notice identifying deficiencies and providing the contractor 15 days to negotiate a remediation plan. The EO further provides that prohibitions on stock buybacks and corporate distributions apply immediately upon designation, raising practical questions about how such restrictions will be monitored and enforced.

Section 4 of the EO contemplates a comprehensive remediation plan to be submitted within the 15-day window, with specific, measurable milestones, timelines, and reporting requirements to restore acceptable performance. Remediation may extend to governance and incentive structures, including executive compensation. If deficiencies persist, the EO signals potential avenues for enforcement, including adverse past performance consequences, limitations on new or existing business opportunities, and award-related restrictions. While the EO suggests agencies may condition future contracting actions on compliance with capital return restrictions, the precise scope and mechanics of enforcement remain to be clarified.

Practical implications for the defense industry

Defense contractors are encouraged to identify where underperformance determinations could arise, develop potential remediation plans, prepare governance and treasury playbooks that allow for the rapid suspension of buybacks or dividends if triggered, and model potential impacts on earnings per share and dividend policies. Companies with mixed commercial and government portfolios should assess the risk of enterprise-wide spillover from a localized defense performance issue, consider ring-fencing government-facing units and refining approval and compliance workflows, and tailor investor communications while evaluating buyback structures to ensure they can be suspended or throttled quickly if required. Public companies should monitor for potential SEC guidance or enforcement affecting disclosures, share repurchase programs, dividend communications, and the alignment of incentive compensation during periods of designated underperformance.

Looking ahead

We expect follow-on guidance from the Department of War addressing definitions, performance benchmarks, notice and cure mechanics, and standard clause language. In addition to the possibility of agencies seeking to extend the EO’s reach into renewals, option exercises, or bilateral modifications, they may pursue Federal Acquisition Regulation (FAR) amendments to implement new provisions and supply missing definitions.  Until implementing guidance is issued, the EO remains largely prospective with limited immediate impact. Contractors should nonetheless assess potential exposure now and be prepared to operationalize restrictions on short notice once the rules are defined. 

Additional authors: Lee F. Williams