Key takeaways

1) Restriction on buybacks and dividends

• The EO targets “underperforming” contractors with a prohibition on dividends and stock buybacks. It states that “Many large contractors — while underperforming on existing contracts — pursue newer, more lucrative contracts, stock buy-backs, and excessive dividends to shareholders at the cost of production capacity, innovation, and on-time delivery.”
• The EO then mandates, in the next sentence, the following: “Effective immediately, they are not permitted in any way, shape, or form to pay dividends or buy back stock, until such time as they are able to produce a superior product, on time and on budget.” “They” appears to be a reference to the “large contractors” that are “underperforming on existing contracts;” however, as discussed below, it is unclear whether the prohibition is limited to contractors above any size threshold.
• The EO grants the Secretary of War (the Secretary) 60 days from the date of the EO to “take steps to ensure that any future contract … contains a provision prohibiting both any stock buy‑back and corporate distributions … [and] stipulate that executive incentive compensation … will not be tied to short‑term financial metrics, such as free cash flow or earnings per share driven by stock buy‑backs, and instead will be linked to on‑time delivery [and] increased production … ”
• The EO states that such measure will hold defense contractors to the “highest standards intended to ensure the advancement of core national interests, including with respect to the timeliness and quality of the defense items that they deliver.”
• According to the White House Fact Sheet, the Secretary is directed to include clauses in future contracts that “prohibit stock buybacks and corporate distributions during periods of underperformance, non-compliance, insufficient prioritization or investment, or insufficient production speed.”

2) Applicability to contractors

• The White House Fact Sheet and the EO refer to “defense contractors” and “major defense contractors,” and Section 1 contains a reference to “large contractors,” as discussed above. It is not clear, however, whether the EO only applies to contractors above a particular size threshold, contractors on “major defense programs” under 10 U.S.C. § 4201, or some other limitation. The term “major contractor” has been used in different contexts – with different dollar thresholds – in the FAR and proposed FAR rules over the years, but it is unclear whether the EO will be limited in such a manner.
• Neither the EO nor the Fact Sheet make distinctions based on organizational form, ownership or governance structure,  or public or private status.
• According to the EO, buybacks and dividends are “not permitted in any way, shape, or form” for underperforming contractors, indicating that the restriction applies regardless of whether buybacks and dividends might otherwise be permitted under existing corporate policies or prior board authorizations.
• The EO does not distinguish between prime contractors and subcontractors, nor does it exempt subsidiaries or joint ventures.
• Unless additional guidance is provided, contractors should operate under the presumption that privately held companies, subsidiaries, joint ventures, and other non-public entities performing defense work are subject to the same restrictions as publicly traded firms.
• The Fact Sheet directs the Secretary of War to include clauses in future contracts prohibiting buybacks and other forms of corporate distributions “during any period of underperformance, non-compliance, insufficient investment, or inadequate production speed,” and subcontractors should prepare in the event that these clauses are flowed down in subcontracts.

3) Applicability to private and publicly traded companies

• The EO affirms its reach “across our economy,” noting that “Every firm … has a right to profit,” but underscoring that “the American defense industrial base also has the responsibility to ensure that America’s warfighters have the best possible equipment and weapons.”
• While stock buybacks are typically associated with public companies, the EO’s language extends to any form of “corporate distributions.” The term “corporate distributions” remains undefined but appears to extend beyond traditional dividends to include owner payments and other forms of payments to shareholders. The implications for limited liability company member draws, partnership distributions, and employee stock ownership plan‑related payments are unclear and may turn on future guidance from the Department of War.

4) Executive incentive compensation will be tied to delivery and production

• The EO mandates that executive incentive compensation for defense contractors must not be “tied to short-term financial metrics, such as free cash flow or earnings per share driven by stock buy-backs,” but instead must be “linked to on-time delivery, increased production, and all necessary facilitation of investments and operating improvements required to rapidly expand our United States stockpiles and capabilities.”
• In addition to limitations on performance-based incentives, the EO contemplates capping executive base salaries at their “current levels, with increases allowed for inflation.”
• The president’s Truth Social posts following release of the EO state that no executive should receive total compensation exceeding $5 million until their company has constructed new and modern production plants. As noted above, the EO itself does not specify a specific dollar ceiling and instead freezes compensation at “current levels,” leaving some ambiguity regarding enforcement and the interplay between the EO’s contractual requirements and the President’s public statements.
• Contractors should anticipate that future government contracts may include explicit provisions linking executive compensation to delivery and production outcomes and may also incorporate salary caps or other limits consistent with the administration’s stated priorities. Companies are advised to review current compensation structures and prepare to adjust incentive plans to align with these new requirements.

5) SEC safe harbor protections

• The EO directs the Chairman of the Securities and Exchange Commission (SEC) to consider whether to adopt amended regulations governing stock buybacks under 10b-18 that would prohibit use of the safe-harbor protections for underperforming defense contractors.
• If the SEC amends Rule 10b-18 as contemplated by the EO, underperforming defense contractors could lose the “safe harbor” that currently protects them from certain market manipulation liability when conducting stock buybacks. This would expose such contractors to increased risk of SEC enforcement actions or private litigation related to the timing, volume, or manner of their repurchases.
• These regulations could affect how defense contractors assess and implement stock repurchase plans in light of potential liability concerns and considerations. Contractors should consider updating compliance policies and enhancing documentation of the rationale for any repurchases to mitigate potential liability.

6) Enforcement of underperformance

• The EO authorizes the Secretary of War to identify defense contractors who are “underperforming.” The White House Fact Sheet characterizes “underperforming” contractors as those that “fail to invest their own capital in production capacity, insufficiently prioritize U.S. government contracts, or maintain inadequate production speed while spending money that could be spent on those critical needs on stock buybacks or corporate distributions.”
• The EO directs the Secretary to take into account the following “[w]hen considering whether to initiate any available enforcement action:”
  • “The financial condition of the defense 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.”
• When a contractor is identified as underperforming, the EO directs the Secretary to issue a written notice “describing the nature of the underperformance or insufficient prioritization, investment, or production speed.” The contractor must then submit a board-approved remediation plan within 15 days of receiving the notice, detailing corrective actions and a timeline for improvement.
• If the Secretary determines that the remediation plan is inadequate, or if the contractor and the Secretary cannot resolve the dispute within the 15-day negotiation period, the EO empowers the Secretary to pursue remedies “to the maximum extent permitted by law, including through use of any voluntary agreement of the contractor, 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 Regulations and Defense Federal Acquisition Regulations Supplement.”
• In addition, the EO empowers the Secretary, “in consultation with the Secretaries of State and Commerce,” to consider “whether it is appropriate to cease ongoing advocacy efforts or deny new advocacy cases for underperforming contractors competing for international Foreign Military or Direct Commercial Sales.”
• The EO specifies that these restrictions will remain in place until the contractor demonstrates “superior product, on time and on budget,” though it does not define these performance standards in detail. Contractors should anticipate further guidance on the metrics and evidence required to lift these restrictions.

What defense contractors should do now

1) Map potential exposure

• Inventory buybacks and dividends over the past 24 months.
• Review commitments under current board authorizations and planned actions in 2026 –  2027.
• Assess any ongoing or planned buyback programs and be prepared to suspend such activities in compliance with the new mandate.
• Review existing government contracts and evaluate those where EO‑driven clauses are likely.
• Review past and current performance metrics, with a focus on production levels and on-time delivery rates.

2) Evaluate existing guidance, disclosures and board authorizations

• Boards and management should assess whether the prohibition on stock repurchases affects previously issued earnings per share (EPS) guidance. Many companies’ EPS projections assume ongoing buybacks, which reduce the number of shares outstanding and can impact reported EPS. Management, the disclosure committee, and the board should evaluate whether current guidance remains accurate or if updates are needed.
• Companies should review their stated dividend policies, as disclosed in periodic reports, to determine if changes are warranted in light of the EO’s restrictions.
• Boards should consider whether it is prudent or necessary to formally cancel any existing authorizations for stock repurchase programs, given the new prohibitions under the EO and related commentary relating to the availability of Rule 10b-18 safe harbor.

3) Prepare a performance narrative

• Prepare to demonstrate performance using program‑specific metrics.
• Distinguish government‑driven changes or delays from contractor‑controlled factors and document approved baseline changes.
• If possible, prepare a narrative that shows month‑over‑month improvements to performance metrics.
• If distributions occurred, explain the board’s capital allocation rationale and any simultaneous investments that increase capacity and performance.

Why this matters: The EO creates a rebuttable posture; the Secretary may presume that distributions during performance shortfalls are misaligned. Contractors must be ready to prove that performance is being met or is improving and that capital allocation supports warfighter needs.