In this alert we give you the key highlights from the market guidance notes and tell you what this means for NSIA filings in practice.
Takeaways
- Parties can now contact the ISU for guidance on whether an acquisition is notifiable.
- It is possible to expedite the assessment process where parties are suffering from material financial distress, although the significant amounts of evidence required may make this unworkable in practice.
- Notifications can be made when heads of terms have been signed although parties should be careful not to file too early.
- No final order will be published if a party withdraws from an acquisition.
ISU willing to give views on whether an acquisition is notifiable
A core criticism of the NSIA regime so far has been that it is not always possible to determine whether an acquisition is subject to mandatory notification. In particular, navigating the description of the 17 sensitive sectors can be tricky.
It is therefore good news that the government has clarified that parties may contact the Investment Security Unit (ISU) by email for its views on a particular acquisition. Any response will not amount to legal advice but the government says it will endeavour to be as helpful as possible.
While this is a welcome step, parties will incur delays if they choose to seek a view from the ISU. This may be preferable, however, to the risk that a notification may be rejected for using the wrong form.
Expedited reviews for parties suffering from financial distress
The government has confirmed that in exceptional situations of material financial distress it may be possible to expedite the assessment process.
The updated guidance provides additional details on the types of “appropriate and supporting evidence” parties will need to provide to the government to benefit from the expedited process. These include:
- confirmation of the engagement of insolvency advisors, alongside their analysis and advice
- 13-week cash flow statement that shows a deficit and breach of facilities
- current balance sheet and profit and loss account, including projections
- evidence that no support is available from lenders, shareholders, suppliers or creditors
This amounts to an extremely extensive list of information. It may well be unworkable in practice, given that any party in distressed circumstances will be under a huge number of competing pressures. It remains to be seen whether parties in financial distress will be able to meet these high evidentiary burdens and therefore make use of a more expedited review.
Unfortunately there is no further guidance on when a notification might be required when appointing a receiver or liquidator (as opposed to an administrator). This was touched on in the earlier guidance but there is still a great deal of uncertainty around this point (and an inconsistency between the NSIA in this regard and other legislation that carves out the appointment of an insolvency officeholder). The Insolvency Lawyers Association is continuing to liaise with the ISU on this issue.
Timing of notifications clarified but beware of filing too soon
The government has clarified that notifications can be made when “there is a good faith intention to proceed”. This can be evidenced, for example, by the existence of heads of terms, the existence of financing arrangements or a public announcement of a firm intention to make an offer or the announcement of a possible offer.
A signed document is therefore not required and parties might decide to notify early in order to minimise the period between signing and closing a transaction.
However, the guidance highlights the consequences of notifying too early. If the terms relating to the acquisition change, the revised terms might count as a separate trigger event and require re-notification. A premature notification may also lead to additional information requests, which could cause delay, and rejection of the notification for being incomplete.
To mitigate these risks, it is possible for parties to contact the ISU to update them of any changes and ask if a new notification is required. The government may require confirmation that the seller “has been engaged and agrees that the acquisition is in contemplation”. This also applies in scenarios where more than one notification has been received in relation to the same target.
In subsequent editions of the market guidance notes, it would be helpful for the government to provide further clarity on the types of changes that would / would not count as a separate trigger event. A lack of certainty in this area is particularly problematic given the criminal implications of failing to make a mandatory filing and the fact that the transaction could be void.
Important guidance on stages of NSIA assessment
In the period after submitting a notification form:
- the government generally aims to accept, reject or return a notification form within five working days
- if a notification is returned, the parties should answer any questions as quickly as possible to assist the government in its review of the acquisition
- it is possible at this stage for parties to address any questions they have to the general ISU email address
This part of the market guidance notes also include additional details on the review period. During this period the ISU will conduct significant due diligence and share the details of the acquisition with other relevant government departments. The government will only make its final decision once the relevant departments have provided their assessments.
The guidance also covers other aspects of the process, including interim orders, the process for requesting an extension to the review period (for instance, to further develop any remedies needed to mitigate national security risk), and the approach the government will take to informing the parties when it reaches a final decision.
Of particular interest is the confirmation that parties do not need to wait for the government to suggest remedies – parties can make representations on possible remedies at any point in the process.
Withdrawing from an acquisition means no final order
It is possible for parties to withdraw from an acquisition before the review process is complete. The parties must inform the government in writing and produce evidence that the transaction has been abandoned.
Importantly, the guidance confirms that if the government is satisfied that the parties have withdrawn from an acquisition, it will not issue a final order. This is positive news: it avoids there being a published final order which could make the notifying party less attractive to sellers of other UK businesses and assets in the future.
Tips for completing the notification form
The guidance includes a number of ‘top tips’ for completing a notification form. Such tips include ensuring that the correct economic areas under the NSIA 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). Parties should ensure they include as much detail about the acquisition as possible.
The government sets out the information it has found helpful in the notifications received so far:
- why the parties believe the acquisition does or does not raise any national security concerns
- the rationale for the acquisition
- any relevant financial or economic information of the target, and the market value of the parties involved
- whether any associated parties are in financial distress
- details of any related acquisitions that have not been notified to the government
- any existing relationships between the target and acquirer
While the government is not requiring the provision of information on each of these points, notifying parties should consider including it, as far as is possible, in any future notifications.
Grants of financial assistance will be rare
The guidance makes clear that any requests for financial assistance as a result of a final order will be considered on a case-by-case basis and will need to be accompanied by documentary evidence. The government expects to provide financial assistance rarely, and will only do so when no appropriate alternative is available.
Future editions of the market guidance
We will continue to engage with the government to encourage it to further improve the predictability and transparency of the NSIA regime. In the meantime, we await the government's second annual report on the operation of the NSIA – including key statistics on filings and outcomes under the regime – which is due to be published shortly.
Please get in touch with your usual Allen & Overy contact if you would like to discuss the implications of the updated market guidance notes and the wider regime for your business.
