On 11 November 2024, the High Court issued the first ever judgment concerning a challenge to an unwinding order imposed by the UK Government under the National Security and Investment Act 2021 (the ‘NSI Act’), in L1T FM Holdings and another v. Chancellor of the Duchy of Lancaster. In a clear victory for the Government, the judgment by the Honourable Mrs Justice Farbey confirmed the broad discretion of the Secretary of State to determine the appropriate remedy for resolving national security concerns arising from a problematic transaction, up to and including forced divestment of the acquirer’s shareholding in a qualifying entity, as well confirming that the overall process followed by the Government in such cases is fair and proportionate.
As well as providing this important validation for the regime as currently operated, the judgment is notable for the insights that it provides into the process followed by Government officials and ministers for in-depth reviews under the NSI Act, with the level of detail going well beyond what has been disclosed in the Government’s own guidance to date.
Background
Since it entered into force on 4 January 2022, the NSI Act has enabled the UK Government to review a wide range of transactions for their potential impact on national security. Acquisitions of shareholdings above a certain size in entities engaged in specified sensitive sectors must be notified and cleared before they can proceed. The Government, acting through a designated Secretary of State (at the time of the decision the Business Secretary and currently the Chancellor of the Duchy of Lancaster in the Cabinet Office), has the power to impose remedies to remove the national security risk posed by investigated transactions. As an anti-avoidance measure, the NSI Act included a provision enabling the Government to investigate transactions that closed between 12 November 2020 (when the bill that became the NSI Act was introduced to Parliament) and the date when the NSI Act came into force.
This case arose from the acquisition by L1T FM Holdings Ltd (‘L1T’), on 21 January 2021, of the entire issued share capital of a company (at the time called FibreMe, subsequently renamed Upp) that planned to roll out a full fibre broadband network to underserved rural communities in the UK. By January 2022, Upp operated networks in eight towns in East Anglia.
L1T is part of the LetterOne Group, a Luxembourg investment fund formed for the purpose of making long-term investments in the energy, technology, health and retail sectors. Crucially, LetterOne was founded by a group of Russian nationals, who were the ultimate beneficial owners of L1T at the time of the acquisition and involved in the fund’s management. Certain of these individuals were identified as being oligarchs close to the Kremlin and were subject to EU and UK sanctions following the Russian invasion of Ukraine. The court noted that one of the investors, Mr Aven, attended the meeting of Russian oligarchs with President Putin on the day of the invasion.
Although LetterOne’s intention to invest in FibreMe was initially received positively by Government officials in the run-up to its acquisition, the judgment reveals that the transaction’s potential impact on national security was being considered at a high level within Government within days of the NSI Act coming into force. On the basis of this consideration, the transaction was called in for an in-depth review on 5 May 2022, using the Government’s power retrospectively to review transactions that were closed before the Act came into force.
Following an in-depth review, and extensive consultation across Whitehall, on 19 December 2022 the Secretary of State issued a final order requiring L1T to divest its entire shareholding in Upp, on the grounds that this was “necessary and proportionate to prevent, remedy, or mitigate the risk to national security”. According to the judgment, the risk arose from concerns that the company’s ultimate beneficial owners were vulnerable to leverage by the Russian State and would have the ability to use Upp’s control over fibre networks in the UK to access data, disrupt broadband operations and conduct espionage. The divestment was completed on 5 September 2023, when Upp was sold to Virgin Media O2 for an undisclosed amount (reported to be less than £100 million, i.e. materially less than the £143.7 million that had by then been invested in the company by its shareholders).
The Judicial Review Challenge
L1T and LetterOne brought judicial review proceedings on 16 January 2023. Interestingly, the claimants did not dispute that the transaction created a risk to UK national security or challenge the Government’s ability to call in the transaction retrospectively. Rather, their entire case was based on the contention that the Secretary of State should have imposed a less draconian package of remedies to reduce LetterOne’s influence over Upp, including measures to limit representatives’ access to the company’s information, personnel, premises and assets; and to reduce the situations where investor consent was required for company actions. (Crucially, the alternative remedy package still envisaged LetterOne retaining the ability to appoint three ‘investor directors’ to Upp’s seven member board. According to L1T’s submissions to the court, such directors regularly engaged with Upp and its staff to ensure that they were adequately informed on the company’s affairs.)
Specifically, the claimants argued that: (i) the Government order requiring complete divestment of the investors’ shareholding in Upp infringed their human rights, as it amounted to a disproportionate interference in their property rights and a form of expropriation without compensation; (ii) the decision to impose the order infringed public law principles, as it was based on an investigation that breached the duty of inquiry by taking account of irrelevant considerations and failing to take account of relevant considerations and was irrational; and (iii) that the procedure was unfair, due to lack of disclosure and a failure to provide sufficient opportunity to address concerns.
Human Rights
Addressing the arguments in turn (and in reverse order to that adopted in the judgment), the court confirmed that the investors’ European Convention right to the protection of property was engaged, and that the forced divestment was close to de facto expropriation. Notwithstanding this, the court noted that the key question for it to decide was whether the divestment remedy was proportionate, both in itself and in light of the alternative remedies package that was available. In this respect, the court deferred to the Secretary of State’s finding that “nothing less than divestment was necessary and proportionate to quell the risk of Russian State influence through the influence of the [ultimate beneficial owners] on the Claimants and (further down the chain) on Upp”. On this basis, the remedy was manifestly proportionate. Indeed, a proportionality assessment is hard-wired into the statutory process. As the judge pithily concluded, “the length at which [this ground of challenge] was argued does not make it arguable” and permission to apply for judicial review on this ground was therefore refused.
As far as the claim that the investors should have received fair compensation from the Government for their loss was concerned, while the court accepted the application for judicial review on this ground, it ultimately dismissed it on the grounds that the interests of national security had to prevail over the claimants’ financial interests. In a key passage, the court noted that “large-scale investors [should not] be surprised that they may lose money on investments that threaten national security: the risk of such losses is ultimately part of the economic landscape for those operating in the alt-net sector or other parts of national infrastructure.” In a possible nod to the experience of the company’s oligarch investors of Russia’s unique brand of capitalism, the court also noted “That geopolitical crises may affect the viability of investments in a way that cannot be recouped should not come as a surprise to sophisticated economic actors, such as the Claimants.” The court also upheld the argument of the Government, in support of its rejection of L1T’s application for financial aid (which can be granted under the NSI Act, with no upper limit), that “the Secretary of State should be afforded a wide margin of discretion in relation to whether a party operating an entity in a way that is contrary to the interests of national security ought to be reimbursed for financial losses upon divestment under the Act”.
Public Law
As far as the public law challenge was concerned, the court dismissed the claimants’ submissions that the Government should have used other legal means of addressing its concerns, including those offered by telecoms regulations, as “not arguable”. It also found that the submissions that the decision was unreasonable was “not even arguably met”. As a result, the application for judicial review on public law principles was dismissed.
Procedural Fairness
Finally, addressing the procedural fairness claim, the court granted the judicial review and upheld that claimants’ arguments that common law principles of fairness applied and were not supplanted by the specific statutory provisions of the NSI Act. Nevertheless, the court stressed that it was not enough for the claimant to show that a decision-making process could have been better. As long as that process is fair (in the eyes of the court, as the “arbiter of fairness” between individual and state) and sufficiently clear, it is ultimately for the Secretary of State to decide on the procedure to follow.
In this case, the court considered that the claimants had adequate opportunity to comment on the case against them. In response to their argument that it had been insufficient, the court ruled that it was unrealistic to expect an extended dialogue “in the context of a statute concerned with national security”. As a result, the court was satisfied that the decision to make the order in this case was based on a fair process, in terms of both the claimants’ right to know the case against them and their right to respond to that case. (It is nevertheless interesting to note that, in a judgment of February 2024 on a preliminary issue, the High Court (Swift J) criticised the way in which the Government had presented summaries of confidential or ‘closed’ documents in ‘gist’ form as original documents.)
Commentary
Ultimately, it is unsurprising that the court upheld the approach taken by the Government in this case and deferred to the Secretary of State’s conclusion that full divestment of the claimants’ stake in Upp was required. The NSI Act was drafted to give the Government broad discretion in the assessment of national security risks and the determination of appropriate remedies to address them.
As the court noted in its judgment, it will “treat it as axiomatic that Parliament has entrusted the assessment of risk to national security to the executive and not to the judiciary”. Once a risk has been identified, the NSI Act gives the Secretary of State the power to take all measures that he or she considers “reasonably necessary” to “prevent, remedy or mitigate” that risk. Deciding on such measures inevitably involves “matters of judgment and policy which the court is not equipped to decide”. Given the potentially serious consequences of error, in the court’s view legitimacy can be conferred only by entrusting such decisions to persons accountable through the democratic process. In this case, where the decision was made personally by a Secretary of State, following assessments made personally by three other Secretaries of State, democratic accountability was high and it was not for the courts, which had low accountability, to second-guess those assessments.
It is nevertheless interesting to note that the court expressed its agreement with the Government’s assessment, when weighing up the divestment remedy against the alternative package of mitigating measures and ultimately deciding on the former, that (unlike in a standard competition review) it was not appropriate in the context of a national security review to rely on the effectiveness of measures that assume compliance with law or regulations. What the Government was dealing with here was a situation where there was a risk that “malign actors”, who were hostile to the UK’s interests and had no intention to abide by UK laws, could exploit the connection between the ultimate beneficial owners and Upp in a wide range of harmful ways. In such a context, it was legitimate to pursue a solution that removed any possibility of such influence, especially where the alternative remedy package still envisaged a degree of influence being maintained through Upp’s investor directors. Given the threat faced by Russia, and the methods used by the regime to get its way, it would have been naïve for the Government to rely on conduct measures that protected Upp on paper.
The judgment is probably most useful for parties and their advisers as a result of the light it sheds on the process followed by Government and, in particular, the extent of consultation across Whitehall that precedes a final order under the NSI Act. Specifically, the in-depth review in this case was kicked off following consideration of the transaction by the “ISU Board”, which according to the judgment is chaired by the Deputy National Security Adviser for Intelligence, Defence and Security and is attended by senior representatives of the Cabinet Office, the Department for Business, Enterprise and Industrial Strategy or ‘BEIS’ (now the Department of Business and Trade), the Department of Culture, Media and Sport (‘DCMS’, the department responsible at the time for fibre broadband roll-out), the Ministry of Defence, the Foreign, Commonwealth and Development Office (‘FCDO’), the Home Office, the Department for International Trade and the National Cyber Security Centre (‘NCSC’). It was the NCSC that provided the crucial evidence on the ability of a company controlling a fibre network to access personal data of users, disrupt and sabotage network operations and conduct espionage. The involvement of the NCSC, and the importance of its factual analysis, demonstrates the key role of expert agencies in the NSI Act assessment process.
Although officials at the Investment Security Unit (‘ISU’) ran the process from start to finish, and hosted key meetings with the parties, the final decision by the Secretary of State for BEIS (the then-responsible minister) to unwind the transaction was taken only following further extensive consultation across Government, based on four core documents: the Investment Security Risk Assessment (the ‘ISRA’), which set out the ISU’s assessment of the national security risk and included separate diplomatic and economic assessments for context; the NCSC’s risk assessment referred to above; the Remedies Assessment, which set out the potential measures for preventing or mitigating the identified risks and analysed the effectiveness of each; and the Representations Assessment, which summarised the representations received by those affected by a final order. All four of these documents were annexed to a ministerial submission to the Secretary of State, prepared by ISU officials, setting out their recommendation, together with a DCMS economic assessment and a legal assessment from the ISU. The Secretary of State also received letters from the Foreign Secretary, Home Secretary and Secretary of State for DCMS, based on briefings by (inter alia) the Deputy Directors of the National Security Directorate at the FCDO and the State Threats Policy Unit. According to the court, the Home Secretary and the Secretary of State for DCMS supported divestment as the only remedy capable of addressing the identified national security risks. While it is notable that the Prime Minister’s office was not directly involved, the close involvement of four Cabinet ministers demonstrates that such cases involve political input at the highest level of Government.
The judgment also provides interesting insight into the way in which the court system balances the interest of parties in a fair hearing with the need to protect sensitive information relating to national security in such cases. Although the court confirmed that the demands of litigation could require more extensive disclosure than is provided during an ISU review, even at this stage disclosure can justifiably be limited to conveying the ‘gist’ of sensitive documents to the parties, rather than the documents themselves (as long as the Government does not try to pass off a gist summary as the original document). It is also interesting to note that the judge was able to consider sensitive information relied on by the Secretary of State, but not disclosed to the parties or their lawyers (referred to as “closed” material), by means of a closed session, where the interests of the claimants were represented by two Special Advocates, rather than by their barristers. This illustrates the particular lengths taken in national security cases, compared with competition reviews.
Ultimately, the court’s confirmation of the high degree of discretion accorded to the Secretary of State under the NSI Act will enable the ISU to maintain its current process, which is characterised by limited engagement with the parties, with confidence. While a successful judicial review against a Government order made under the NSI Act remains possible, for example if there have been particularly egregious procedural flaws, the judgment makes it abundantly clear that the courts will not impinge on issues of ministerial discretion, including the choice of remedy. This will be a disappointment to parties and their advisers, given the frustrations that arise with what in practice often feels like a ‘black box’ process. The judgment nevertheless provides a degree of comfort that any decision to prohibit will be based on extensive and painstaking consultation across Government and careful consideration of the available evidence by the Secretary of State.