In November 2024, the UK’s High Court (the “Court”) issued its judgment on the first appeal of a Final Order (“Order”) imposed by the UK government (acting through the Secretary of State) under the UK’s National Security and Investment Act 2021 (the “NSIA”).
Under UK public law, decisions such as the Order can only be challenged on a judicial review basis – i.e., on the process and not on the merits. The Court not only confirms this position, but also clearly indicates limits to the scope of UK courts’ powers to opine on the substance of national security risk and reveals a wide margin of discretion for the UK government.
Background
The claimants were companies in the LetterOne Group (“Claimants”), which had acquired a shareholding in a UK fibre broadband network service provider called FibreMe (later renamed Upp) in 2021. The Ultimate Beneficial Owners (“UBOs”) of the LetterOne Group were Russian nationals.
The acquisition was not notified since it closed before the NSIA’s mandatory notification regime came into force (in January 2022). The Claimants had foreseen the possibility that the transaction might be retrospectively called in for review (a power which was known to come into effect from January 2022 for transaction closed after November 2020). To mitigate that risk, the Claimants had informally reached out to the UK government’s newly formed screening unit (the “ISU”) to ask whether the ISU was likely to call-in the investment before it closed. The ISU had, at that point in time, expressed no concerns and the acquisition closed in 2021.
However, following the Russian invasion of Ukraine in February 2022, the ISU issued a call-in notice (in May 2022) to retrospectively review the transaction. Once called-in, the NSIA provides the UK government with the ability to prohibit or impose remedies on a transaction where such measures are necessary and proportionate to address the national security risk in question.
In this case, the UK government took the view that the transaction had the potential to give rise to serious national security risks and ordered the full divestment of Upp in December 2022. The Claimants lodged their appeal shortly afterwards.
Takeaway 1 – assessment of national security risks is the prerogative of the executive, not the courts
The Court reflects that the UK parliament, through the NSIA, endowed the UK government with the power to assess risks to national security and to consider the necessity and proportionality of an Order (as per section 26(3)(b) of the NSIA). The Court confirms that the UK government is entitled to take measures that he or she reasonably considers will prevent, remedy, or mitigate the risk to national security. Consistent with previous case law, this is a question that involves “matters of judgment and policy which the court is not equipped to decide,” (LT1, para 101, and e.g., Begum, para 56). The judgment further clarifies that the UK government is democratically accountable for their exercise of this power, recognising “the constitutional boundary between judicial and executive power”.
This is suggested not just as statutory and constitutional boundary, but also a practical one. The Court found that the subject matter at hand required wider government expertise, which the ISU can (and did) draw on to inform its decision. This access to subject matter expertise is “an inherent part of the executive’s institutional capacity which the court lacks” (LT1, para 102).
Takeaway 2 – UBOs under the microscope: national security risks do not have to be immediate or stem from the direct activity of the investors
The Court held that the UK government struck a “fair balance” between individual rights and the wider public interest in its decision. The Court found that the “assessment of risk to national security is multifactorial” and requires a “predictive exercise about future risk”, a fact which “warrants a high degree of judicial restraint” (LT1, para 199). The Court agreed that the UK government does not need to await some “future danger” before taking executive action under the statutory provisions that were most effectively able to deal with the risks posed by the UBOs (LT1, para 153).
The Court further discussed how national security risk should be framed, particularly where concerns relate to UBOs. In this case, national security risks were identified relating to “owner influence” on Upp’s broadband network and to UK telecoms infrastructure generally (LT1, para 50). The Claimants suggested that such risk was “derived from a chain of events – starting with the activities of the Russian Government and working down to Upp’s Board and to its management decisions” that was remote and could be resolved by corporate change and operating restrictions. The Court found this framing to be too narrow. Not only was the UK government not required to identify a particular flaw in the identity or behaviour of LetterOne or the UBOs (such as a breach of law or regulatory rules), but the UK government was “entitled to consider the influence of malign actors exerting influence on the UBOs in any manner of ways, such as deceit, manipulation or other forms of pressure”, or similarly “whether malign actors would exploit the connection between the UBOs and Upp to get hold of personal information” (LT1, paras 112-113).
In that light, the Court makes clear that national security risks do not have to be founded on the behaviour or intent of the UBOs themselves but could stem from the potential action of other malign actors, either at present or in future.
Takeaway 3 – Procedural unfairness remains a high bar: knowing the “gist” of the national security risks is sufficient to enable parties to know and respond during the review process
While the Court confirmed that the UK government does have a duty to be fair in his decision and it must be reached with clearly ascertainable procedural requirements, the UK government does not have to apply a “bespoke” procedure for each case. The UK government was entitled to set general procedures to progress reviews, including through the production of standard assessments (e.g. the Investment Security Risk Assessment, Representations Assessment and Remedies Assessment).
Nor does fairness require full disclosure to the Claimants of the national security risks that the ISU is considering. However, the UK government is required to disclose the “gist of the adverse case” to allow meaningful representations to be made (in line with prior judgments, e.g., Doody). In this case, the Court found that the Claimants had been provided with sufficient knowledge of the case against them as they had been informed, on three occasions, of the “gist” of the adverse case and the national security risks that the UK government had identified.
Takeaway 4 – Procedural safeguards are limited to providing reasonable opportunities for the investor to remedy concerns identified.
“Fairness” also does not require the UK government or ISU officials “to be drawn into a never-ending dialogue” on appropriate remedies. On the contrary, the Court notes that dialogue is an “unrealistic expectation in the context of a statute concerned with national security” (LT1, para 136).
The Court found that the Claimants had been given the opportunity to make representations to the ISU on three occasions, and despite the guidance provided on these occasions, had “consistently accepted or implied that the UBOs would need to retain influence and control over Upp” (LT1, para 206). The Claimants had rejected the ISU’s proposal that “investor consent should no longer be required for all high-value contracts” (LT1, para 207). In hindsight, the Claimants may have preferred an order that required them to give up such consent rights, or to accept other remedies, to one which required to divest their ownership of Upp. However, since the Claimants had already rejected the further measures that the ISU was considering, there was “no obligation on the UK government to give the Claimants another chance to agree to them.”
Takeaway 5 – Risk is part of investment and financial assistance is discretionary, so Caveat Emptor!
The NSIA allows the UK government to give loans, guarantees or indemnities, or any other kind of financial assistance to or in respect of an entity in consequence of issuing a final order. According to the information published by the UK government up to this date, this power has not yet been used. The Claimants argued that the UK government’s failure to ensure full compensation for the monetary loss incurred by the divestment (the “de facto expropriation” of property) contravened the investors’ rights under the ECHR and breached section 6(a) of the Human Rights Act. The Court granted permission to apply for judicial review on this ground and noted that in theory, financial assistance could amount to full compensation, as there is no statutory cap on the amount. However, the Court also noted that the granting of this assistance is “discretionary”. Consequently, the UK government should be granted “a wide margin of discretion” on the matter (LT1, para 228). This discretion extends not just to the value of any award, but also to whether the UK government may consider financial assistance at all.
The Court concluded that the risk of monetary loss is “ultimately part of the economic landscape” and was not disproportionate for losses and the “financial burden” of the divestment to be shouldered by the investors rather than the public purse (LT1, para 225). In the context of investment in national infrastructure: “geopolitical crises may affect the viability of investments in a way that cannot be recouped should not come as a surprise to sophisticated to economic actors”. There was no positive obligation on the UK government to consider a financial award.
In an era of increasing FDI scrutiny and enforcement, investors need to consider the exposure of businesses to geopolitical risk ahead of transactions.
References:
L1T FM Holdings UK Ltd & Anor v Chancellor of the Duchy of Lancaster in the Cabinet Office [2024] WLR(D) 540, [2024] EWHC 2963 (Admin)R (Begum) v Special Immigration Appeals Commission [2021] UKSC 7, [2021] AC 765