Exactly the second option. if there is a non-land military visible unit ( like a worker , a GP ( except a GSpy ), a missionary , a corp exec, a visible sub, planes, missiles and ships other than submarines ) the city is not takeable. Otherwise, the city is takeable ( even if it has 400000 undetected submarines ). The real fun in this is the submarines: if you pass a airship in recon , you can't take the city ( airship makes the submarines visible ), if you don't use the airship you can take the city. Completely unintuitive.
Completely nuts. The change is penalizing you for employing a basic tactic; Recon.