1. It maybe necessary if ms doesn't allow it. You'd have to call them to activate since it's a major hardware change and it won't let you automatically. Per the license, they shouldn't activate with a pc upgrade like this which is pretty much a whole new pc but they seem to be more lenient these days and probably will activate it for you anyways.
This has nothing to do with the upgrade still being free especially when he's already using 10. This would be an issue with the license and being able to transfer depending on the license type.
2. No, you only need to format the os drive. You should keep it unplugged during the windows install just so you know the system partition doesn't go on there. Then plug it in and it should show up with everything intact.