The NSIA is aimed at safeguarding national security and only applies to certain transactions occurring within certain sectors where national security might be threatened. There are 17 sectors in total, including energy, transport, and communications.
Depending on the transaction, the NSIA may require a purchaser to notify the Secretary of State of an acquisition to obtain clearance – this is mandatory if the transaction falls under the scope of the NSIA. In some cases, notification can be voluntary, and in certain circumstances, the Secretary of State can “call-in” a transaction for scrutiny.
One of the areas where the regime can be problematic for restructuring professionals, is obtaining clearance when dealing with a distressed business due to the time pressure that such transactions are under.
The latest Market Guidance does address distressed transactions, explaining what parties should do where an acquisition involves a party facing material financial distress. However, (somewhat unfortunately) it says that it is only in exceptional circumstances that the timetable for assessing a clearance application under the NSIA will be fast tracked. This is not ideal where speed of turnaround in a distressed scenario is key to preserving value in a business or even the business itself.
The NSIA provides the UK Government with a period of 30 working days to elect whether to call in a transaction for additional scrutiny, or to confirm that no action will be taken. In cases where notification is mandatory, completion cannot take place before clearance is obtained, otherwise the transaction is void. In our experience, turnaround times for non-distressed notifications have typically been around 25 – 27 working days.
In cases involving distressed business that have been notified under the NSIA that we have dealt with, clearance is and has been provided relatively quickly (on average circa 20 working days), but there is no assured way of fast-tracking an application. Now, as the new Guidance says, it is only in exceptional circumstances where there is material financial distress that an application may be fast tracked.
In a distressed M&A situation, where transactions are typically turned around in perhaps 10-15 days in total, waiting to receive clearance can have a materially adverse effect on the distressed business.
It is likely that in most cases where there is financial distress a party will be able to say that it is material, but to try and fast track an application the Government will now expect evidence that the financial distress is material. This evidence may include:
Confirmation from an insolvency practitioner that they have been engaged, along with their analysis and advice to the company that an insolvency event is imminent;
A 13-week cash flow statement, showing a deficit and breach of facilities;
Current balance sheet and profit and loss account, including projections;
Evidence of non-support from lenders, shareholders and creditors.
The list in the Guidance is non-exhaustive and will be judged on a case-by case basis.
What does this mean in practice?
When involved in an acquisition where clearance is required, plan for the worst i.e. a 30 working day turnaround time to review the application.
Consider whether you can evidence material financial distress but be mindful that fast tracking is not guaranteed and may only be authorised in exceptional cases.
If you can evidence material financial distress, factor in the additional time and cost of providing that.
Consider whether the proposed transaction can be structured to deal with the time taken for the UK Government to review the application i.e. a split exchange and completion. Although this is likely to require funding support from a third party (possibly the buyer) and may result in diminished value and return to stakeholders.
In our recent experience, the additional “holding costs” required to support the company, and additional professional fees incurred to structure the deal in a manner that protected the company, the transaction and the buyer whilst clearance was sought, meant that value of the transaction available to stakeholders was reduced by about one third. In this case, shareholders who may have received a return (had clearance been obtained sooner), received virtually nothing following completion.
Although Guidance is always welcome, it does not (at least in the last case we dealt with) address the commercial and practical issues that we have seen when trying to restructure a distressed business that operates within one of the sectors caught under the NSIA.