High Court rules on first challenge to a forced divestment under the UK’s NSIA regime

United Kingdom

The High Court’s recent judgment in LetterOne’s appeal against a Final Order requiring it to divest its completed purchase of Upp is the first time the UK’s National Security & Investment Act 2021 (NSIA) regime has been considered by the courts.  There has been much speculation as to how judicial oversight of the regime would operate, and this judgment confirms the deference of the courts to the Government’s decision-making on sensitive national security concerns.  The judgment also provides an interesting window into the assessment process undertaken by the Investment Security Unit (ISU), and to the process by which the Secretary of State’s decisions are to be reviewed by the High Court when dealing with sensitive issues concerning national security. 

The NSIA regime

The NSIA gives the UK Government broad powers to intervene in certain transactions which it considers may present a risk to national security. The UK Government has wide powers to prohibit, impose conditions on and review transactions, even retrospectively once they have been completed. The NSIA provides for a significant extension of the Government’s powers and increases the scope of transactions falling within its remit. Challenges to a decision under the NSIA can only be brought on a judicial review standard, therefore imposing a high standard for the overturning of any Final Order made by the ISU.

The Final Order requiring divestment

Made on 19 December 2022, the ISU Final Order required LetterOne to sell its entire shareholding in Upp, a UK fibre broadband provider, which LetterOne had acquired in January 2021 (a year prior to the NSIA coming into force).

The Ultimate Beneficial Owners (UBOs) of LetterOne and the LetterOne Group (the Group) were Russian nationals, two of whom were sanctioned by the UK Government following the invasion of Ukraine.  Following an extended assessment period, the Secretary of State was satisfied on the balance of probabilities that a trigger event had taken place and that a risk to national security had arisen, describing this risk as the UBOs vulnerability to influence from “malign actors”, namely the Russian State.

LetterOne accepted there was a risk to national security but argued that the risk was remote and could be resolved by less-intrusive remedies in the form of corporate ringfencing provisions and operating restrictions around the Upp business. That alternative remedy had been discussed during the remedies assessment, referred to as “Remedy B”. The various elements of Remedy B were summarised as:

  • A Security and Resilience Committee (SRC) would be established by Upp to monitor compliance with the Final Order;
  • Upp would create lists of “permissible information” to which the Group representatives would have access to in order for them to make funding decisions about Upp. All other information would be considered “prohibited” and as such, the other companies in the Group would be unable to access it;
  • The Group would maintain its existing right to appoint three “Investor Directors” to the Upp Board but would have no role in appointing the remaining four directors. The Group and Upp would need Government approval of any Board appointments;
  • Upp would not require investor consent to appoint directors to its Board or to enter into any contracts below £2,000,000;
  • Subject to defined exceptions, the Group’s representatives would not have access to Upp’s sensitive sites, data and personnel. They would only be able to visit the Upp headquarters when accompanied by a member of the SRC;
  • Upp would be required to appoint and pay for an independent, third-party auditor approved by the Government to conduct a bi-annual audit of Upp’s compliance with the Final Order and of the work of the SRC. The auditor would be accountable to the Government;
  • Upp would be required to conduct a one-off audit of its network security, undertaken by an auditor approved by the Secretary of State;
  • All “critical physical network assets” would remain in the United Kingdom;
  • A whistleblowing mechanism would be set up and then managed by an independent third-party approved by the Government; and
  • The Group would alter the provisions of their investment agreement with Upp to ensure that the terms of the Final Order could be complied with.

Proceedings and grounds of claim

Proceedings were issued on 16 January 2023.  LetterOne challenged the Secretary of State’s decision on the three following grounds:

  1. Human rights: arguing that the order breached section 6(1) of the Human Rights Act 1998, as the divestiture of LetterOne’s property was contrary to their right to the protection of property under Article 1 of the First Protocol to the European Convention on Human Rights (A1P1). This was argued in two parts: firstly, that the Final Order was disproportionate because the Secretary of State could and should have imposed less intrusive measures than divestment (Ground 1A); and secondly, that the Secretary of State’s failure to ensure full compensation for the financial loss incurred by divestment (Ground 1B);
  2. Public law principles: arguing that the decision breached public law principles.  This was also argued in two parts: firstly, on the grounds that the Final Order was based on irrelevant considerations or a failure to have regard to all of those which were relevant and that it was made in breach of the Tameside duty (Ground 2A); and secondly, that it was irrational in the Wednesbury sense (Ground 2B); and
  3. Procedural fairness: arguing that the decision was unfair as the risks to national security were not sufficiently disclosed prior to the Final Order being made and they were not given a fair opportunity to address those concerns (Ground 3).

Judgment

In its judgment of 20 November 2024 (click here to read the full judgement), the Court began by framing the consideration of national security risk, concluding that the Secretary of State 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”.  In relying on less intrusive measures proposed as part of Remedy B, the Court considered that those submissions missed the point. LetterOne was not able to advance any realistic ways the Government should deal with these actors which are “hostile to the United Kingdom’s interests, with no intention to abide by UK law and no interest in the Group’s or Upp’s commitment to UK law”. 

Against that background, the Court considered the three grounds of claim.  Taking them in reverse order, the Court first dismissed Ground 3 (procedural fairness) concluding that within the context of the NSIA and the nature of national security risks, the decision had been procedurally fair.  Ground 2A was held not to be arguable, and Ground 2B was refused because the high threshold of unreasonableness was not even arguably met. 

On Ground 1A (proportionality), the Court concluded that the decision to require divestment (Remedy A) was proportionate.  The Secretary of State justified his conclusion that nothing less than divestment was necessary and proportionate to address the risk of Russian State influence through the influence of the UBOs on LetterOne and (further down the chain) on Upp. Whilst Remedy B would (if implemented perfectly) theoretically heavily restrict the relationship between the two parties, there was still a possibility that influence could be asserted. 

Finally, on Ground 1B (compensation), the Court considered the key principles for compensation under A1P1, noting that while the taking of property without payment of an amount reasonably related to its value would normally constitute a disproportionate interference which could not be considered justifiable, that rule does not guarantee a right to full compensation in all circumstances. The Court considered it is implausible to suppose that the loss of Upp destroyed the livelihood of anyone in the Group, and emphasised that “large-scale investors [cannot] 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”. 

The Court also considered Ground 1B in the context of the provision in section 30 of the NSIA for financial assistance to be granted to any entity as a consequence of the making of a Final Order. No authority was advanced as to when the discretion to provide financial assistance could be overridden by a right to compensation under A1P1. 

Comment

While the deference afforded to the decision-making by the Secretary of State and consideration of national security risk is unsurprising, the judgment provides an interesting window into the assessment process undertaken by the ISU when applying NSIA regime. There are a number of interesting aspects of the decision-making process and the basis on which any judicial review challenge needs to be advanced. For example, it is interesting that LetterOne managed to obtain a considerable amount of disclosure. That provided them with more detailed reasoning than they were given during the NSI review process. This included "open gists" of key documents including a technical comment paper produced by the National Cyber Security Centre and three assessments prepared for the Secretary of State regarding potential national security risks, the effectiveness of different remedy packages, and representations received.  The bar for any successful future challenge has been set high though, the starting point being best summarised with the opening statement 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”.