What happened in the first judicial review of the NSI Act?

Background

The NSI Act, effective from 4 January 2022, allows the UK government to review transactions potentially affecting national security. Certain acquisitions in sensitive sectors require mandatory notification and clearance before proceeding. The government can impose remedies to remove any national security risk posed by relevant transactions. As an anti-avoidance measure, the NSI Act also provided for a retrospective review of transactions completed after 12 November 2020 (two months  before the Act came into force).

The case involved L1T FM Holdings Ltd (“L1T”), part of the LetterOne Group, a Luxembourg investment fund formed for long-term investments in the energy, technology, health, and retail sectors. L1T acquired FibreMe (later renamed “Upp”), a company focused on rolling out fibre broadband to underserved UK communities, in January 2021. LetterOne’s ultimate beneficial owners were Russian nationals, close to the Kremlin, who became a focus of concern following the Russian invasion of Ukraine. Subsequently, sanctions were imposed on these individuals, heightening national security concerns. The transaction was called in for review in May 2022, under the NSI Act’s retrospective powers as the transaction had been completed but not notified.

Judicial Review Challenge

L1T and LetterOne brought judicial review proceedings on 16 January 2023. The claimants did not contest that the transaction created a risk to UK national security, nor did they challenge the government’s ability to call in the transaction retrospectively. However, the claimants argued that the Secretary of State should have imposed a less severe package of remedies to reduce LetterOne’s influence over Upp. This included measures to limit representatives’ access to the company’s information, personnel, premises, and assets, and to reduce situations where investor consent was required for company actions.

Interestingly, the alternative remedy package proposed by the claimants 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 they were adequately informed on the company’s affairs. Specifically, the claimants argued that:

1. 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.
2. 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.
3. The procedure was unfair due to lack of disclosure and a failure to provide sufficient opportunity to address concerns.

Court’s Judgment

Human Rights: The Court acknowledged the significant interference with property rights but upheld the Secretary of State’s decision as proportionate to the national security risks. It emphasized that divestment was the only remedy capable of mitigating risks associated with Russian state influence. The Court dismissed the argument for compensation, noting that sophisticated investors should anticipate potential losses in transactions involving national security risks.

Public Law Principles: The Court found the government’s decision rational and within the scope of the NSI Act. Alternative remedies proposed by the claimants were deemed insufficient to address the identified risks. The Secretary of State’s reliance on the NSI Act, rather than other regulatory measures, was also upheld. 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. Permission to proceed with the judicial review application on public law principles was accordingly dismissed.

Procedural Fairness: The Court granted permission for the judicial review application to be heard on the grounds of the claimants’ arguments that common law principles of fairness applied and were not supplanted by the specific statutory provisions of the NSI Act. 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 was fair and sufficiently clear, it was ultimately for the Secretary of State to decide on the procedure to follow. The Court considered that the claimants had adequate opportunity to comment on the case against them. The Court ruled that it was unrealistic to expect an extended dialogue in the context of a statute concerned with national security. The decision to make the order was based on a fair process, respecting the claimants’ right to know the case against them and their right to respond.

Implications for Business and Regulators

For Businesses:

• Heightened Scrutiny: Companies should anticipate detailed reviews, especially in transactions involving sensitive sectors or foreign ownership.
• Limited Grounds for Challenge: The high bar for judicial review emphasizes the need for thorough pre-transaction risk assessments. Parties should undertake risk assessments well ahead of putting the transaction into effect to avoid retrospective applications.
• Investment Risk: National security concerns can lead to significant financial losses, underscoring the importance of considering geopolitical factors.

For Regulators:

• Broad Discretion Affirmed: The judgment validates the government’s latitude in assessing risks and determining remedies. The Court’s confirmation of the high degree of discretion accorded to the government under the NSI Act will enable the ISU to maintain its current process with confidence.
• Procedural Standards: Ensuring fairness while protecting sensitive information remains a cornerstone of the NSI process. The judgment provides insight into how the court system balances the interest of parties in a fair hearing with the need to protect sensitive information. The Court confirmed that the demands of litigation could require more extensive disclosure than provided during an ISU review, but even at this stage, disclosure can be limited to conveying the ‘gist’ of sensitive documents.

Conclusion

The High Court’s judgment reinforces the robust framework of the NSI Act, granting the government significant discretion to safeguard national security. For businesses, the ruling underscores the critical importance of navigating the NSI regime with caution and diligence. Regulators are bolstered in their ability to manage complex and sensitive cases while maintaining procedural integrity. As national security concerns continue to evolve, this case sets a crucial precedent for balancing economic interests with state security imperatives.

Consultant, Robert Bell, specialises in advising on antitrust, competition and regulatory law including navigating the complex NSI regime. If you need help, please get in touch.

*Note: Robert Bell first published an extended version of this article in the Company Secretary Review in February 2025. This version is a shortened summary. If you would like to see the full article, please see https://www.lexisnexis.co.uk/# or get in touch.