5 May 2023 Erasmia Petousi - Mark Daniel - Jennifer Willis ForeignInvestmentLinks

New Market Guidance issued on the NSIA – what are the key changes?

The UK Government published changes to the Market Guidance Notes (MGNs) that were originally published in July 2022, with new or amended guidance on certain topics surrounding the application of the National Security and Investment Act 2021 (NSIA) based on its analysis of submitted notifications and feedback from stakeholders. 

The NSIA regime came into force more than a year ago and over 800 cases have been reviewed to date, with five outright prohibitions. As noted in our post on the first MGNs issued last year, the first year of its practical application has highlighted certain issues, including the broad scope of the NSIA and the continued lack of transparency in the review process (a concern also highlighted by the Tony Blair Institute for Global Change). While the MGNs provide welcome guidance for practitioners on certain procedural issues, they do not seek to address these more substantive issues. 

When to notify?

On the timing of notifications, the updated MGNs indicate these can be made when there is a “good faith intention” to proceed (e.g. heads of terms, financing arrangements, board level consideration of the acquisition, or a public announcement of a firm intention to make an offer or of a possible offer). This is an equivalent test to the one used for the UK merger control regime. However, the Government may accept a notification at an earlier stage where there are “good reasons” for doing so. 

The amended MGNs note the risks associated with premature notifications - from further information requests to the rejection of the notification. For cases involving notifications from competing bidders, the Government “will not typically” provide information on the other bidders, but it will inform the target - and is legally required to do so - if the acquisition is called in for scrutiny. In addition, they note that if a transaction subsequently changes after it has been reviewed, the updated transaction might count as a separate trigger event. Therefore, the MGNs invite the parties to contact the Government if there are non-material changes to the planned arrangements, to ask if a new notification is needed.

Guidance on whether to notify

A common criticism of the NSIA regime has been the lack of transparency as to whether the ISU will provide its view where there is uncertainty as to whether a transaction is notifiable. The MGNs now clarify that parties can contact the ISU if there is “significant uncertainty” about whether an acquisition is notifiable, and that they should provide as much detail as possible on the transaction and the parties, explaining the reasons for the uncertainty and any timing considerations. That said, the Government notes that there will be circumstances in which it may not be possible or appropriate to give a substantive response, in particular where queries relate to hypothetical scenarios, or provide insufficient information. In addition, there is no indication about how long the ISU has to respond to such queries. In practical terms, it remains to be seen whether the new guidance will be sufficiently timely to be of practical use in time-pressured transactional situations.

Dealing with financial distress

The updated MGNs also seek to respond to one of the key matters that has been raised throughout the application of the regime, namely the timing of the ISU’s review of transactions involving parties suffering material financial distress. The revised MGNs invite parties to bring the issue to the Government’s attention as soon as possible and indicate that “in exceptional situations”, where the material financial distress gives rise to “genuine urgency”, it may be possible to expedite the assessment process (a welcome flexibility which we have also seen in practice). 

In addition, the revised MGNs provide guidance on the evidence that might be considered where the parties make a material financial distress claim. This will typically include analysis by external advisers and auditors and could extend to evidence from the company’s debt or equity providers, its parent company’s ability to provide continued financial support, or the existence of funding options other than from a sale or merger. The Government will consider what evidence is appropriate on a case-by-case basis and relevant evidence of urgent financial distress is likely to include:

  • confirmation of restructuring and insolvency adviser engagement, along with their analysis and advice showing that an insolvency event is imminent;
  • a 13-week cash flow statement, clearly showing a deficit and breach of facilities;
  • the current balance sheet and profit and loss account, including projections;
  • evidence of non-support from lenders and shareholders, including evidence of breaching banking facilities; and/or 
  • correspondence with suppliers/creditors of the company evidencing debt demands.
Other key themes 

The updated MGNs also provide guidance on a number of procedural issues, including: 

  • the NSIA assessment stages, including interim orders and information notices. While this is a helpful step, the relevant parts of the guidance are rather factual and do not provide detailed information on how the ISU will determine, in practice, whether a particular step is required; 
  • the Government’s power to provide financial assistance to businesses and other parties affected by a final order (intended to be provided only very rarely);
  • top tips when completing a notification form, including the information to be provided in relation to the acquirer and qualifying entity, where these are located outside of the UK;
  • submitting information that is classified above “OFFICIAL” under the Government’s Security Classification system; and
  • how the Government may gather open-source information and use third-party service providers to obtain information.