In July last year the Government published the first edition of its market guidance notes on the National Security and Investment Act, as part of its commitment to offer practical support to businesses navigating the regime (see our August 2022 briefing here). On 28 April 2023, building on insights from key stakeholders, the Government published the second edition. The second edition provides guidance on how the Government uses certain powers, how businesses can interact with the Investment Security Unit most effectively and the time at which a notification should be made. In this briefing, we take a look at the new aspects of the guidance notes through the lens of our experience of advising on the NSI Act regime over the last few months.
Uncertainty as to whether an acquisition is notifiable
In our experience, since the NSI Act came into force, one of the challenges faced by transaction parties has been making an assessment as to whether the acquisition is notifiable under the mandatory notification regime. An acquisition of a target entity operating in one of 17 high risk sectors of the economy triggers a mandatory notification. Interpreting the detailed definitions of the 17 sectors and applying them to a target's business can be tricky and sometimes buyers and sellers will come to different conclusions as to whether a notification is required.
The new edition of the market guidance helpfully confirms that if there is significant uncertainty about whether an acquisition is notifiable, the Government may be contacted by email to seek a view. Although any response is not legal advice, for some transactions it should be useful to have a steer as to whether the interpretation of the relevant sector definitions by the parties and their advisers aligns with the views of the Investment Security Unit.
Timing of notifications
The market guidance notes now contain advice on the stages during a transaction at which it is likely to be appropriate to make a notification. The Government generally considers it appropriate to notify "when there is a good faith intention to proceed". This could be evidenced by the existence of heads of terms, financial arrangements being in place or board level consideration of the acquisition. Given the potential for the notification process to delay completion of transactions, transaction parties will usually want to notify as soon as possible, although the guidance does also warn of the potential negative consequences of premature notification. These include for example, the fact that notifying prematurely may necessitate further information requests, which can cause delay, and the fact that the notification may be rejected if it does not contain sufficient information to allow the Government to decide whether to call in the transaction for review.
Financial distress transactions
The updated guidance notes acknowledge that in some circumstances, an acquisition may require a mandatory notification or be subject to a call-in or review under the NSI Act, at a time when the parties face financial distress that means they would like a faster decision from the Government. In exceptional circumstances, "where evidence of material financial distress gives rise to genuine urgency", the guidance states that it may be possible to expedite the assessment process. Where material financial distress is claimed, the Government is likely to request analysis provided to the company by external legal, restructuring and insolvency advisers, as well as external auditors, in relation to the position of the company. The guidance also sets out what relevant evidence of urgent financial distress is likely to include: for example, a 13-week cash flow statement, clearly showing a deficit and breach of facilities, a current balance sheet and profit and loss account and correspondence with suppliers or creditors evidencing debt demands.
Completing the notification forms
"Top tips" have been added for notifiers to consider when filling in notification forms. They include, for example, ensuring that the correct economic areas under the NSI Act have been selected and ensuring that each response box in the form can be read as a standalone response (with limited cross-referencing where possible). While most of these tips are common sense considerations for completing the forms, they could act as a helpful checklist to run through before submitting a notification.
Guidance on the stages of the process
The guidance provides further clarity on the stages of the assessment process, including when and how interim orders can be used and what is required in response to a Government information notice. There is also guidance on the process of extending the assessment period and how the Government will communicate decisions to the transaction parties. When the Government makes a decision, call-in notices will be issued to the relevant parties, copied to the legal representatives by email. The guidance highlights that "this includes instances (as required by the NSI Act) where the qualifying entity is unaware of the proposed acquisition."
This part of the guidance provides much-needed transparency of the options available to both the Government and the transaction parties during the assessment process. There is comfort to be taken from those parts of the guidance which encourage dialogue with the Government, particularly in relation to final orders and also the decision to withdraw from the acquisition. We are also pleased to see the Government address how it will handle confidential and sensitive information.
Financial assistance required as a result of a final order
The guidance notes that the NSI Act gives the Government the power to provide financial assistance to businesses and other parties affected by a final order and that this could include, for example, loans, guarantees or indemnities. Requests for assistance should be accompanied by documentary evidence, and the Government expects to provide assistance "very rarely, and only when no appropriate alternative is available."
The Government's introduction to the second edition of the market guidance notes says that it provides businesses with further predictability and transparency around the regime. Since the NSI Act came into force, increased transparency of the review process and the way the Investment Security Unit operates has been called for by both businesses and advisers, and so the expanded guidance on the ISU's process is to be welcomed.
We await with interest the Government's second annual report on the operation of the NSI Act. The first annual report covered only the three month period between the Act's commencement and 31 March 2022 (see our 2022 briefing). We expect the second annual report, covering the full year to the end of 31 March 2023, to be published imminently.