Attempted challenges to NSIA prohibition decisions: a very high hurdle

November 29, 2024

In the first case of its type, LetterOne has lost its challenge to the Government's decision to prohibit (and require unwinding of) its completed acquisition of a UK broadband provider under the UK's stringent national security investment screening laws. What does the judgment tell us about the prospects for success of such challenges, and about UK national security reviews more generally?

Background

The NSIA and judicial review

The UK's National Security and Investment Act (the NSIA) took effect on 4 January 2022. It sets up broad powers for the Government to review and ultimately prohibit or impose conditions on certain inbound and outbound investments with a UK nexus, on national security grounds. The NSIA can apply to a wide range of transactions, including not just traditional M&A or majority stakes, but also, for example, internal reorganisations and transactions or collaborations concerning access assets such as land or intellectual property - and, as in this case, can extend to non-notified completed transactions. There is no provision for appeal "on the merits" of decisions under the NSIA. Challenges can only be brought via judicial review, a limited standard which focuses on whether the decision was lawfully reached, rather than offering any substantive reassessment.

Final Order: prohibition and divestment

The case concerned a "Final Order" by the Secretary of State under the NSIA, which required investment firm LetterOne to sells its 100% stake in a fibre broadband company, Upp. LetterOne's five founders were Russian; four of them were subject to UK sanctions for their alleged support for the Russian government, although two of those four have since stepped away from LetterOne. Upp had stated plans to expand its modest initial fibre broadband network across rural UK communities.

The reasons for the prohibition and divestment order

The reasons given by the Secretary of State in the Final Order for requiring the full divestment of Upp by LetterOne were "…the Ultimate Beneficial Owners' vulnerability to leverage by the Russian State, and Upp's full fibre broadband network rolling out in the East of England."

Government documentation disclosed "in open" in the proceedings refers to concerns over access to customer data which could be used to conduct espionage and undermine national security, the ability to disrupt and sabotage operations on the broadband network and the ability to influence strategic decisions of the company in such a way as to undermine national security. Concerns were also raised over long-term impacts arising from the expected longevity of the infrastructure in question and the possibility that Upp would form part of a larger network in the future. The national security risks were expected by the Government to grow each year, as Upp expanded its network.

The grounds for appeal

The Government's assessment that the acquisition of 100% of Upp's shares resulted in a risk to national security was not disputed. Rather, the judicial review application focused on the contention that the Final Order for full divestment was unnecessary and that remedies would have sufficed to address the risk. The legal grounds for appeal are summarised in the judgment as:

• Human rights: The Final Order was disproportionate and breached LetterOne's fundamental right to the protection of property;
• Public law: The Final Order was based on irrelevant considerations, or the Secretary of State failed to have regard to all relevant considerations, and was made in breach of the duty of inquiry (Tameside), as well as being irrational (Wednesbury); and
• Procedural fairness: The Final Order was procedurally unfair, as the national security risks were not sufficiently disclosed to LetterOne before the Order was made and LetterOne was not given a fair opportunity to address the Government's concerns over the suitability of remedies falling short of divestment.

The outcome

In a robust judgment, the court placed considerable weight on the Government's discretion in matters of national security. For example, the judgment states that:

"… the court will treat as axiomatic that Parliament has entrusted the assessment of risk to national security to the executive and not to the judiciary.… the Secretary of State is entitled to take measures that he or she reasonably considers will prevent, remedy or mitigate the risk to national security. That question involved matters of judgment and policy which the court is not equipped to decide."

"The Secretary of State exercises powers under the Act in the interests of the safety of the people of the United Kingdom … the Secretary of State … took the decision personally following assessments made by three other Secretaries of State personally. The degree of democratic accountability was high. The scope for the intervention of unelected judges is limited."

"… the vital importance of the community's interest in national security must be given considerable weight … the assessment of risk to national security … requir[es] the court not only to consider the facts as presented by the parties but also to undertake a predictive exercise about future risk. The court's lack of institutional ability to make its own predictions about the future warrants a high degree of judicial restraint."

In this context, each of LetterOne's grounds for judicial review was dismissed or refused. The court found that the process had been fair. On irrationality or "Wednesbury unreasonableness", the court found that "the high threshold of unreasonableness is not even arguably met". On proportionality, the court found that the use of the Final Order for full prohibition was justified as a proportionate response to the national security risks identified. The judgment notes that the applicants did not "advance any realistic case about how the Government should deal with malign actors - hostile to the United Kingdom's interests, with no intention to abide by UK law and no interest in [LetterOne]' or Upp's commitment to UK law."

Implications for challenges to NSIA decisions

The LetterOne judgment, the first on a judicial review application made to challenge decision-taking under the NSIA, confirms the long-established principle that the bar for challenge to government decisions taken on the basis of national security is extremely high. As above, the court repeatedly refers to the high margin of discretion for government in such matters, the crucial nature of the national security interests at stake and the impropriety of a court substituting its decision for that of government on such matters.

Secondly, the judgment exemplifies what are likely to be the practical as well as the legal difficulties of such challenges. Much of the evidence on which NSIA decisions are based will be secret from the parties. Even the judgment is available only in a limited "open" version, whilst a "closed" version (which is not publicly available) addresses the national security-related evidence.

Any judicial review of a prohibition under the NSIA must be brought within 28 days, a very short deadline. The limitation of NSIA challenges to the judicial review standard, combined with the limited window for appeals, indicates that (unsurprisingly) the Government does not wish to encourage judicial reviews of decisions taken under the NSIA.

LetterOne also failed to obtain compensation for its losses in the forced sale of Upp in compliance with the Final Order. Though the NSIA provides that compensation may be paid, the court found that "the interests of national security must prevail over the Claimants' financial interests", and added that "nor can large-scale investors be surprised that they may lose money on investments that threaten national security." Potential applicants for judicial review may pause for careful consideration of the likely costs involved, particularly given the very high bar for success and the apparent unlikelihood of receipt of any compensation for distressed divestments for NSIA compliance.

Inside the "black box" - the Government's review

Although the application failed, the judgment sheds valuable light on the otherwise "black box" of the NSIA review process and, in particular, the procedure for how the ultimate decision to clear the transaction, impose remedies or require a full divestment is arrived at, and some of those who have input into it.

The judgment explains that before a Final Order is made, three formal assessment papers are compiled, and decisions given by all relevant Secretaries of State, before the Chancellor of the Duchy of Lancaster makes the final decision on the basis of the assessment papers received (along with their appendices and the input received from the other relevant departments). These include:

• an Investment Security Risk Assessment (ISRA), which sets out the ISU's assessment of the national security risks arising, and the reasons for that assessment. It contains a Diplomatic Assessment by the Foreign, Commonwealth and Development Office and an Economic Assessment from the government department concerned in the relevant economic sector. The ISRA is cleared by a member of the ISU who is a member of the Senior Civil Service. Any disagreements between officials about the recommendation is noted in the ISRA;
• a Remedies Assessment, which sets out potential remedies and analyses their effectiveness and efficiency, including in terms of their cost and burden on the authorities as well as on the parties. Again, any disagreements between officials are noted;
• a Representations Assessment, which includes all representations received on behalf of those affected by a Final Order; and
• a Ministerial Submission, which contains the ISU's recommendation.

The ultimate decision is taken personally by the Chancellor of the Duchy of Lancaster (who heads the Cabinet Office). At the point when his decision is taken, multiple Secretaries of State - including the Home Secretary and the Foreign Secretary - will have been personally consulted and have given their views.

As is clear from the above, the potential for remedies falling short of divestment to address national security risks identified forms an integral part of the process. The ISU plays a key role in shaping decision-making, but the judgment emphasises that the ultimate decision is taken by the Chancellor of the Duchy of Lancaster, albeit based on the extensive materials set before him.