Executive Order Puts Defense Contractor Buybacks, Dividends, and Executive Compensation Under Scrutiny

President Donald Trump issued an executive order on January 7, 2026 that imposes obligations on US defense industrial base government contractors, including immediately prohibiting any “major defense contractor” from conducting future stock buybacks or issuing dividends at the “expense of accelerated procurement and increased production capacity.” Within 60 days of the order, the secretary of defense must ensure that future contracts with any new or existing defense contractor (including renewals) stipulate that executive incentive compensation be linked to certain performance metrics, such as “on-time delivery” and “increased production,” among others.

The executive order, Prioritizing the Warfighter in Defense Contracting (Executive Order), also orders a historical review of defense contractor performance. By February 6, 2026 (and on a continuing basis thereafter), the US Department of Defense (DoD) must identify any defense contractors for critical weapons, supplies, and equipment that are (1) underperforming on their contracts, (2) not investing their own capital into necessary production capacity, (3) not sufficiently prioritizing US government contracts, or (4) whose production speed is insufficient as determined by the secretary of defense (the Secretary).

For any defense contractor that meets at least one of these categories, DoD must then identify whether that contractor engaged in any stock buyback or corporate distribution during the period of underperformance or insufficient prioritization, investment, or production speed, and provide notice detailing the nature of the underperformance or insufficient prioritization, investment, or production speed. Essentially, such defense contractors are likely to receive a cure notice from the DoD, as the Executive Order provides for a 15-day period during which the defense contractor may undertake corrective action approved by its own board of directors for review by DoD. The Executive Order notes that some defense contractors have already received this notice.

The consequences for inadequate remediation may be significant. If DoD determines that the remediation plan is “insufficient,” or if the defense contractor and DoD are unable to resolve the underperformance dispute within the 15-day negotiation period, then DoD may take immediate action to expedite production, prioritize the US military, and return the contractor to sufficient performance, investment, prioritization, and production. Three listed solutions include the below:

• A voluntary agreement with the defense contractor
• Enforcement under the Defense Production Act (50 USC 4501 et seq.)
• Any available contract enforcement mechanisms within the Federal Acquisition Regulation

When selecting a potential solution, the Executive Order directs DoD to consider 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 US government coupled with capital investments by the contractor.

The Executive Order further provides that the Secretary shall develop and implement additional contractual provisions related to the following:

• Prohibiting both stock buybacks and corporate distributions during a period of underperformance, noncompliance, or insufficient prioritization, investment, or production speed
• Prohibiting tying executive compensation to short-term financial metrics like “free cash flow or earnings per share”
• Authorizing the government to cap executive base salaries to allow the Secretary to “scrutinize the incentive portion of executive compensation” to the identified metrics.

In addition to the above notice-remediation process, the Executive Order also instructs the secretaries of state and commerce to consider and cease advocacy for any identified contractors’ participation in Foreign Military or Direct Commercial Sales.

Finally, for any publicly listed company that is so identified by DoD, the Executive Order instructs the chairman of the Securities and Exchange Commission to consider whether to amend Rule 10b-18 to prohibit use of the relevant safe harbor by such identified companies.

GOVERNMENT CONTRACTOR IMPLICATIONS

The Executive Order leaves much of the implementation to future development, including the introduction of new contract clauses governing or prohibiting the exercise of dividend payments and stock buybacks. Such restrictions, if implemented, may have a detrimental effect on a contractor’s ability to attract and retain key executive talent.

However, the immediate impact is significant. The Executive Order directs DoD to issue new cure-type notices to underperforming contractors. In response to those notices, if a defense contractor does not implement satisfactory remedial action, then the Executive Order directs DoD to return the contractor to satisfactory performance.

This directive is noteworthy because instead of terminating underperforming contractors, the Executive Order appears to direct DoD to take a more active role in the affairs of the contractor—including through Defense Production Act authority. Recognizing that the US administration is willing to use or cite to the Defense Production Act in a variety of situations—including during the COVID-19 pandemic—the use of this authority in this context is likely to raise significant questions (and perhaps legal challenges) regarding the scope of DoD’s authority under the Defense Production Act and the need to protect the intellectual property and other assets held by defense contractors.

Despite the immediate anticipated and forthcoming impacts, the Executive Order also leaves open significant questions regarding its scope and effect that may be the subject of further guidance or rulemaking:

• Are non-defense government contractors within the scope of the Executive Order? The text focuses on those defense contractors that support the warfighter. It is not clear whether the changes prompted by the Executive Order will address government contractors that support both military and commercial functions, which could include many different types of companies throughout the supply chain.
• What is the scope of the executive order’s reference to “major defense contractors”? The Executive Order references “major defense contractors.” Although it also references “any defense contractors” without the “major” qualifier, it remains unclear whether the Executive Order is intended to apply to all contractors that conduct business with DoD or only those that are “major.” If the latter, it is unclear what defense contractors the government might consider “major” for purposes of the Executive Order. It is also unclear how broadly DoD will interpret the Executive Order’s reference to “critical weapons, supplies and equipment” that are covered by this action.
• What criteria will be used to assess when a defense contractor’s remediation plan is insufficient? Government contractors are well aware of responses to show cause and cure notices, and the process for implementing acceptable corrective action plans. However, the Executive Order introduces a new level of uncertainty in assessing what type of remediation may be acceptable to DoD. For instance, it remains unclear whether addressing the underlying performance issues will be sufficient or if remediation will require that a contractor provide DoD with a more direct role in addressing the underlying purported issues.
• Does the Executive Order direct DoD to adjust production speeds under existing contracts? The Executive Order instructs DoD to consider whether “production speed is insufficient as determined by the Secretary,” but does not account for when production speed may still be in line with contract requirements. In such instances, it is not clear whether the Executive Order expects DoD to modify performance metrics under existing contracts to align with DoD’s current production expectations as opposed to those that exist under current contracts.
• What is the result of any finding that executive compensation is too high or tied to inappropriate metrics? The Executive Order instructs DoD to develop contract clauses that tie executive compensation to identified defense contract performance metrics rather than short-term financial metrics, and it allows DoD to effectively freeze executive base compensation during the pendency of a review of those metrics. However, the Executive Order does not clarify what actions DoD may take upon a finding that compensation is not sufficiently tied to such metrics or is otherwise misaligned with the government’s goals.

PUBLIC COMPANY AND FEDERAL SECURITIES LAW IMPLICATIONS

The Executive Order carries with it implications for US public companies that are considered “major defense contractors,” including future contractual limitations on dividends and repurchases and potential changes to the availability of the safe harbor provided by Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the Exchange Act).

Explicit Contractual Restrictions on the Issuance of Dividends or Ability to Repurchase Shares

The Executive Order directs the Department of Defense to ensure that future defense contracts include provisions prohibiting stock buybacks and corporate distributions during periods of underperformance or noncompliance as defined by the Secretary. This means that contract terms could explicitly include restrictions on buybacks or dividends for certain defense contractors when they are underperforming or not sufficiently prioritizing production and delivery.

Potential Modifications to Exchange Act Rule 10b-18 Safe Harbor

The Executive Order directs the chair of the US Securities and Exchange Commission (SEC) to consider amending Rule 10b-18, which is a non-exclusive safe harbor under the federal securities laws for issuer repurchases, as it relates to share repurchases conducted by defense contractors.

Under Rule 10b-18, an issuer and its affiliated purchasers are protected from liability for market manipulation under Sections 9(a)(2) and 10(b) and Rule 10b-5 of the Exchange Act provided that the applicable repurchases on any given day meet the conditions set forth in the rule, which generally require that a single broker be used and that the repurchases be conducted pursuant to the applicable timing, price and volume limitations. Any amendments that restrict or remove the safe harbor protection for share repurchases by defense contractors would serve to increase the legal uncertainty or liability risk for repurchases that fall outside any such newly defined parameters.

While Rule 10b-18 is not a prerequisite to conducting share repurchases and public companies may seek to otherwise structure repurchases in a legally compliant manner, companies may find it difficult to do so with 100% certainty given the broad nature of the applicable market manipulation provisions. Moreover, brokers, which are often key facilitators of issuers’ share repurchase programs, may be reluctant to participate in a buyback without the comfort of the safe harbor.

Executive Compensation Considerations

The Executive Order also provides that contracts must stipulate that executive compensation will not be tied to “short-term financial metrics” but instead to “on-time delivery, increased production, and all necessary facilitation of investments and operating improvements required to rapidly expand [US] stockpiles and capabilities.” The Executive Order provides free cash flow and “earnings per share driven by stock buybacks” as non-exhaustive examples of prohibited financial metrics.

Further, the Executive Order provides that all new contracts impose a cap on the base salaries of executive officers of defense contractors (with increases for inflation permitted) if the Secretary finds that a contractor has engaged in underperformance, noncompliance with the contract, insufficient prioritization of the contract, insufficient investment, or insufficient production speed. The Executive Order appears to intend that the Secretary have broad discretion in determining compliance with these limitations on executive compensation for defense contractors. [1]

NEXT STEPS

Affected companies should note that the Executive Order does not explicitly prohibit future share repurchases or dividend issuances, but it does impose additional burdens that include analyzing contractual performance before approving and effecting repurchases and dividends.

In this regard, defense contractors will need to assess provisions in applicable agreements and develop a process for determining how to evaluate and determine whether and when there is underperformance, “insufficient prioritization,” or lack of adequate “production speed.”

Defense contractors, particularly those that are publicly traded in the US, should consider the following:

• Whether additional risk factor disclosure is needed in upcoming periodic reports, such as annual reports on Form 10-K or quarterly reports on Form 10-Q and whether the potential impacts of the Executive Order warrants discussion in cautionary, forward-looking statement language
• Developing talking points with shareholders and the investment community, keeping parameters such as Regulation FD in mind
• Working with the Compensation Committee and/or Board of Directors to determine whether changes to executive compensation philosophy or metrics are needed in light of potential restrictions tied to performance metrics and capital allocation
• Updating applicable Board governance documents, including the Compensation Committee charter, to address the impacts of the Executive Order
• Updating policies and procedures relating to share repurchases and dividends

Notwithstanding the open questions of the Executive Order and potential headwinds affecting its implementation, employers should anticipate additional reviews, requests for information, and increased scrutiny of employment agreements by DoD. While current employment agreements seem protected (for now), employers should consider impacts to terms and conditions of any future employment agreements, including any agreements currently in negotiation, in order to retain eligibility for defense contracts.

Of course, the talent pool for skilled executives is already quite limited. Time will tell whether, in light of this Executive Order, defense industry employers will face an even shallower pool of qualified candidates. Such employers should consider a fresh look at their restrictive covenant agreements and other retention mechanisms. They might also revisit well-worn metrics to evaluate executive performance and possible advancement to align with the Executive Order’s priorities.