The National Security and Investment Act – further guidance on notifications

Posted: 18/05/2023

The National Security and Investment Act 2021 (the NSI Regime) has been in force since January 2022. Following publication of the first set of market guidance notes in July 2022, the government has now published, on 27 April 2023, a new edition of notes, which are incorporated into the main NSI guidance.

The latest update provides more information and practical guidance for submitting a notification, based on analysis of notifications made so far and feedback gathered from stakeholders. This article summarises what businesses need to know about the most recent guidance.  
 
Key points

• It is possible to accelerate the assessment process where parties can evidence that there is material financial distress giving rise to genuine urgency. 
• Parties can now contact the Investment Security Unit (ISU) for guidance on whether an acquisition is notifiable.
• Notifications can be made when heads of terms have been signed, but the parties must be careful not to file too early.
• No final order will be published if a party withdraws from an acquisition.

Acquisitions involving parties in material financial distress

The initial review period for a notification submitted under the NSI Regime is 30 days – which can be extended if a detailed review is required. Any proposed transaction cannot complete prior to clearance, which can present issues for parties that are facing financial distress and need a quicker decision.  
 
The updated guidance has advised notifying the ISU of such situations as soon as possible, as it may be possible to expedite a decision in ‘exceptional’ circumstances where ‘evidence of material financial distress gives rise to genuine urgency’. What counts as material will be decided on a case-by-case basis, but parties will need to provide supporting evidence. 
 
Where material financial distress is claimed, the government has provided details of the types of ‘appropriate and supporting evidence’ it may accept, which generally include:

• analysis by external legal, restructuring and insolvency advisers and external auditors relating to the position of the company;
• evidence from the company’s debt or equity providers eg banks (which provide financial facilities) and existing shareholders;
• if the relevant entity is part of a larger corporate group, information about the parent company’s ability to provide continued financial support; and/or  
• if relevant, evidence that funding options other than a sale or merger are not feasible.  

Relevant evidence of urgent financial distress is likely to include, but is not limited to: 

• confirmation of engagement of the restructuring and insolvency advisor together with their analysis and advice to the company supporting the claim that an insolvency event is imminent;
• 13-week cash flow statement, clearly showing a deficit and breach of facilities;
• 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 (and therefore non-support).

Uncertainty of requirement to submit a notification  

The updated guidance has also clarified that, where there is significant uncertainty about whether an acquisition is notifiable, parties may contact the government to seek a view. However, any subsequent response does not constitute legal advice, nor will the government always be able to give a substantive response (eg it is unlikely to comment on hypothetical scenarios).  
 
Parties are advised to include as much detail as possible about the qualifying acquisition in their query, including the names of the parties and their activities. They must also provide a clear explanation of why there is uncertainty in applying the NSI Regime to the acquisition and any timing considerations to be aware of.  

Timing of notification  

The government has advised that notifications should be made when ‘the terms of the acquisition are sufficiently stable to enable the government to properly assess whether the NSI Act is applicable and whether it could lead to national security risks’. It will generally be appropriate to notify when there is ‘a good faith intention to proceed’ which can be evidenced by: 

• agreed heads of terms; 
• financing arrangements;  
• the transaction has been considered at board level, or publicly announced; or  
• any other good reason for notifying.

Whilst a deal does not have to be signed for a notification to be submitted and parties have some flexibility, it is important to consider carefully the timing of the notification and to factor this into the transaction timeline. A premature notification could have adverse outcomes.  For example:  

• if notifications are made too early, and the transaction subsequently changes after it has been reviewed, this may count as a separate trigger event and require a new notification (although, the parties can contact the government regarding non-material changes to a transaction to ask if a new notification is required. In such cases, they should state the progress of negotiations or commercial dealings);
• early notifications may result in additional scrutiny which could cause delays and costs (from additional information requests being made by the government);  
• there is also a risk that early notifications may be rejected for being incomplete (so the government is unable to determine whether to provide a call-in notice).  

Stages of the NSI Regime assessment process  

There is further guidance on the various stages of the assessment process, including what the government can ask parties to do during the assessment period, including:  

• interim orders – temporary controls to prevent parties taking action;  
• information notices – requiring further information (including from third parties); and  
• attendance notices – requiring parties (including third parties) to attend a meeting in person or virtually. 

Parties should be aware any of these can pause the statutory review period, which could result in delays to the acquisition timeline. The review period will only restart when sufficient information is provided.  
 
This part of the guidance also includes additional details on the review period. During this phase, the ISU will undertake substantial due diligence and, where appropriate, 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 updated guidance also confirms that the parties can withdraw from an acquisition. If the parties choose to withdraw before the review is complete, they should inform the government in writing and provide evidence. If withdrawn, no final order will be made but a final notification may be issued by the government. After withdrawal has occurred, any new or revised terms of the deal must be considered as a potential new trigger event, that may require a new notification.  
 
Interestingly, the guidance also confirms that parties do not need to wait for the government to suggest remedies (to mitigate national security risk); the parties can make representations on possible remedies at any point in the process. However, whilst the government will consider such representations, it is not bound to accept any remedies suggested.

Guidance on completing the notification form  

More detailed guidance has also been provided on completing the notification form and what information might be required, based on common inconsistencies in the forms received to date. In particular, parties should be careful of using the right form depending on the type of notification ie mandatory vs voluntary.  
 
The government has also highlighted the information it has found particularly helpful in notifications it has received to date:

• why the parties believe the acquisition does or does not raise any national security concerns;  
• the rationale for the acquisition (why the acquisition is being undertaken and what the intended business effect of the acquisition is eg consolidation of functions);  
• any relevant financial or economic information of the target (eg value of the deal, the turnover 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; and
• any existing relationships between the target and acquirer (eg supply chain, competition etc).  

The overall takeaway is that parties should include as much information as possible about the acquisition, and they can optionally send additional supporting information and documents.  

Conclusion  

Whilst parties can continue to progress an acquisition during the review and assessment period up to the point of completion (unless any interim orders have been given), they cannot complete without clearance. This is important to factor into a transaction timeline and how this may affect a deal.  
 
The updated guidance has provided more clarity on the notification and review process, as well as more detail on the 17 mandatory sectors. The guidance will continue to be updated and stakeholders can suggest topics for future updates.  

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