First UK National Security and Investment Act judicial review sets high bar to challenge

The UK Government used its powers under the National Security & Investment Act 2021 (the NSIA) to force LetterOne, an investment company ultimately owned by a number of sanctioned Russian nationals, to sell a small UK fibre broadband provider it had acquired. Following the first judicial review under the Act, the decision was fully upheld. The judgment offers insights into the NSIA regime.

Key takeaways

• The courts will afford wide discretion to the Government's decision making as national security is a matter for elected officials.
• The judgment sheds light on the internal processes of the Investment Security Unit (ISU) and relevant Government departments.
• Although much of the information relied on by the Government will be too sensitive to be shared, claimants may be able to obtain disclosure of significant detail on the decision-making process through a judicial review claim.

Background

The NSIA came into force on 4 January 2022. It significantly strengthened the UK Government's powers to investigate and potentially prohibit transactions on national security grounds by requiring mandatory notification for transactions in 17 sectors thought most likely to raise national security concerns. The Act also empowers the government to issue a call-in notice in relation to transactions that may give rise to a risk to national security. This power applied retrospectively to trigger events which took place on or after 12 November 2020, provided the notice was issued within six months of commencement of the Act. For further background, see our Quickguide.

At the time of writing, the Chancellor of the Duchy of Lancaster is responsible for decisions under the Act. The final order in the LetterOne transaction was issued by the previous decision maker, the Secretary of State for Business, Energy and Industrial Strategy (BEIS).

The called-in transaction

In January 2021, LetterOne acquired the entire share capital of UK broadband provider FibreMe Limited, subsequently renamed Upp Corporation Ltd (Upp). By January 2022, Upp's network extended across eight towns in East Anglia. 

LetterOne brought its proposed acquisition of Upp to the attention the Secretary of State through engagement with other BEIS officials in December 2020; the transaction was not subject to mandatory notification.

The ultimate beneficial owners of LetterOne, and, therefore, of Upp, were five Russian nationals (the Claimants), of whom four were sanctioned by the UK following Russia's invasion of Ukraine in February 2022. 

On 18 January 2022, the ISU Board (which is an advisory group of civil servants from relevant government departments) met to discuss the LetterOne case. The meeting was attended by representatives from the Cabinet Office, the Home Office, the National Cyber Security Centre, and various other government departments. 

On 5 May 2022, judging the transaction a risk to national security, the then Deputy Director of the ISU issued a call-in notice. The areas of concern to national security included:

• access to data including personal information about customers which could be used to undermine national security;
• the ability to disrupt and sabotage broadband network operations; and
• the ability to conduct espionage operations.

Following a period of assessment, on 19 December 2022, the Secretary of State decided that a risk to national security had arisen and LetterOne should divest its entire shareholding in Upp (the Order). LetterOne launched its claim for judicial review of the Order on 16 January 2023.

The Claimants' grounds for review

The Claimants did not dispute that the transaction gave rise to a national security risk. Instead, their contention was that the Secretary of State's decision to order full divestment (instead of less intrusive measures) without compensation for loss was "draconian" and unlawful. 

The court granted permission for judicial review on the grounds of procedural fairness and alleged breach of human rights, but ultimately dismissed the claim on 20 November 2024. There were three broad grounds of appeal: 

Ground 1 claimed that the Order breached the Claimants' human rights because (i) divestment was disproportionate and (ii) the failure to award compensation for their financial loss infringed the Claimants' right to the protection of property. The court found that:

• The Secretary of State struck a fair balance between the community interest in national security and the rights of the Claimants.
• Less intrusive alternatives were not sufficient to mitigate the risk that Russian State influence could still be asserted over Upp, therefore full divestment was proportionate.
• Although the court had granted permission to apply for judicial review in relation to compensation, it found it was not disproportionate for the financial burden of divestment to fall on the Claimants: the risk of losses due to geopolitical crises is simply part of the economic landscape for investors.

Ground 2 contended that the Order breached public law principles because (i) the Secretary of State had failed to consider relevant factors, considered irrelevant factors and breached the duty to acquaint himself with relevant information, and (ii) the decision was unreasonable. The court declined to criticise the Secretary of State's selection of the Act over other statutory powers, such as telecommunications regulation: none of the other powers cited by the Claimants were designed to prevent the same national security risks. The court concluded that the  high threshold of unreasonableness was "not even arguably met". 

Ground 3 was that the Order was procedurally unfair because the national security risks were not sufficiently disclosed and the Claimants were not given a fair opportunity to discuss alternative remedies. The court granted permission to apply for judicial review but found that the decision-making procedure was fair: 

• The Claimants were informed of the gist of the case against them and were able to put forward representations and propose mitigation measures.
• The use of general procedures (as explained below) is proper: a bespoke procedure is not required.
• Parties should not expect to be in constant dialogue with the Government following a call-in notice.

The ISU's general procedure 

The judgment gives an indication of how the courts will approach a judicial review of a final order, but it also offers insight into the processes of the ISU.

Once a call-in notice has been issued, the ISU will prepare three assessment papers:

• an Investment Security Risk Assessment (ISRA) outlining the ISU's assessment of the national security risks arising from the transaction;
• a Remedies Assessment that sets out the remedies and mitigations that may prevent, or effectively meet, the risks described in the ISRA; and
• a Representation Assessment summarising the written representations made on behalf of those who will be affected by a final order.

The three assessments will then be annexed to a Ministerial Submission drafted by ISU officials that contains the ISU's formal recommendation for how best to mitigate the risk to national security posed by the transaction. 

Ministers from relevant departments are then briefed. In the Upp case, in addition to BEIS, ministers at the Foreign Office, the Home Office, and the Department for Culture, Media and Sport were briefed. Department ministers then write letters stating their preferred final order (Ministerial Letters). 

Finally, the Ministerial Submission (with the three assessments annexed), an ISU legal assessment, and the Ministerial Letters will be presented to the Chancellor who will review before making their decision. In the Upp case, the Secretary of State reviewed the papers and made his decision on the same day. 

Comment

Unsurprisingly, the LetterOne judgment confirms that the bar to challenging a final order under the Act is very high.

The Chancellor is entitled to rely on sensitive information, which will not be shared with the parties for reasons of national security. The court will therefore follow a "closed material procedure", whereby certain information will be disclosed only to "special advocates" who will act on behalf of the claimants and their lawyers in closed court sessions. However, the Claimants in Upp managed to obtain disclosure of the gist of key documents, such as the three assessment papers.

The scope for intervention by unelected judges in the assessment of national security risk, including predictions as to the future, is limited. Final order decisions are taken by the Chancellor personally, following assessments by other Secretaries of State meaning the degree of democratic accountability is high. 

The courts may be more willing to intervene on issues of procedural fairness, where there may be scope to supplement the statutory process with implied common law duties; and in relation to the protection of human rights. In particular, the Court noted there is provision for financial assistance to be granted under section 30 of the NSIA, which could be requested by the addressees of future orders. However, the Chancellor will also be afforded a wide discretion in relation to any such financial awards. 

With thanks to Jamie Walker.