High Court rules on challenge to final order under National Security and Investment Act 2021
December 2024The High Court’s judgment in LetterOne v Secretary of State for Business, Energy and Industrial Strategy ([2024] EWHC 2963 (Admin)) is the first to challenge a final order under the National Security and Investment Act 2021 (NSIA).
This decision provides useful guidance on the NSIA’s application to safeguard UK national security following acquisitions associated with sanctioned individuals and sensitive national industries. Below, we outline the court decision and its implications for those involved with mergers and acquisitions and compliance.
Background
LetterOne, a multinational investment group with holdings in energy, technology, and retail, acquired Upp Corporation Limited in January 2021, a fibre broadband start-up aiming to expand high-speed internet in underserved UK rural areas. Whilst Upp’s operations were localised to East Anglia, its strategic potential as critical infrastructure drew government scrutiny. The issue arose from LetterOne’s ownership structure, linking the group to Russian nationals sanctioned by the UK and EU following Russia’s invasion of Ukraine.
The designation imposed pursuant to the Sanctions and Money Laundering Act 2019 described the founders, including Mikhail Fridman and Petr Aven, as “pro-Kremlin” or associated with the Russian government. These links raised concerns over potential misuse of sensitive data, disruption of broadband services, and undue influence on strategic decision-making, particularly if sanctions were lifted in the future. On these grounds, the Secretary of State issued a final order under the NSIA, requiring LetterOne to divest its entire shareholding in Upp.
This divestment order became the first case to test the NSIA’s framework, setting a critical precedent for balancing commercial interests against national security risks.
Key Issues
Proportionality of the divestment order. Was the full divestment necessary and proportionate to mitigate the identified risks?
LetterOne proposed less intrusive alternatives, including restrictions on governance, access controls, and independent audits. The government argued that only divestment could eliminate the long-term risks posed by ownership links to sanctioned individuals.
Human rights compliance. Did the order infringe on LetterOne’s rights under Article 1 of Protocol 1 of the European Convention on Human Rights, protecting property rights?
LetterOne claimed the forced sale caused significant financial losses, particularly as the sale price reflected a distressed transaction rather than the true market value.
Procedural fairness. Did the Secretary of State comply with procedural requirements, including adequately considering representations and providing LetterOne an opportunity to address concerns?
The claimants contended they were not given a fair chance to negotiate remedies short of divestment.
National security risk assessment. How did the Secretary of State weigh national security risks against LetterOne’s proposed mitigations?
The judgment focused on the enduring risks linked to sanctioned individuals, particularly given Upp’s role in telecommunications infrastructure and the potential for lifted sanctions to restore influence.
Outcome
The High Court upheld the divestment order, affirming it was lawful and proportionate under the NSIA. The court deferred to the Secretary of State’s judgment on national security, emphasising the need for decisive measures to eliminate risks. LetterOne’s proposed mitigations, such as restricting access to sensitive data and governance oversight, were found insufficient for addressing long-term concerns, particularly if sanctions were lifted in the future.
Judgment Highlights
National security concerns
The court upheld the Secretary of State’s assessment that Upp’s fibre broadband network, a growing component of UK critical infrastructure, posed risks of exploitation, disruption, and espionage.
Proportionality of remedies
LetterOne had proposed a remedies package with a wide range of safeguards designed to address the Government’s concerns. These included governance restrictions and data audits, but were deemed insufficient to mitigate risks. The court highlighted the unique longevity of telecommunications infrastructure and the irreversible nature of security breaches.
Human rights
The court ruled that while the order interfered with LetterOne’s property rights within the meaning of Article 1 of Protocol 1 to the European Convention of Human Rights, the interference was justified by the overriding need to protect national security. Compensation for financial losses is not guaranteed under the NSIA framework.
Implications
Heightened scrutiny
Communications are designated as one of seventeen sensitive sectors under the NSIA. There is a mandatory duty to notify these before completing any acquisition. The Government will wish to conduct a rigorous assessment, particularly when ownership links to sanctioned individuals exist. Businesses must anticipate scrutiny even for pre-existing transactions, as the NSIA allows retrospective reviews within defined periods.
Proactive mitigation
Companies must embed national security risk assessments in their M&A processes. Comprehensive due diligence on ownership structures, robust mitigation plans, and early engagement with authorities can reduce exposure to severe remedies. However, as LetterOne demonstrates, even extensive mitigations may not preclude divestment if risks are deemed persistent.
Alleged procedural failures
Despite criticisms from the claimants, the Court found nothing unfair in the process that had led to the decision. In terms of disclosure of evidence, fairness required the Government to disclose the gist of its case before making its decision. However, it was not compelled to disclose large volumes of the evidence on which it relied. The Court found enough had been done to put the claimants on notice of the decision before it was finally made.
Judicial deference to governmental decisions
The judgment highlights the limited scope for challenging NSIA decisions. Courts are unlikely to overturn executive orders on national security grounds unless clear procedural failings or irrationality are demonstrated. Businesses must prepare for the reality that such decisions carry significant legal and financial weight.
Sanctions
The High Court’s decision highlights the critical role of sanctions in national security assessments under the NSIA. LetterOne’s ownership links to sanctioned Russian nationals were central to the decision, with the court emphasising the risks of influence, particularly if sanctions were lifted. This case demonstrates the amplified scrutiny of transactions involving sanctioned parties, even when steps are taken to distance operations from those individuals.
The recent amendment to Regulation 15 of the Russia (Sanctions) (EU Exit) Regulations 2019 broadens the obligations to ensure compliance with sanctions restrictions. These changes reinforce the need for thorough due diligence in M&A transactions, particularly in identifying direct and indirect connections to designated persons or entities. Together, these developments serve as a reminder for businesses to embed robust sanctions checks into their transaction planning, especially in sensitive or high-risk sectors.
Conclusion
The LetterOne judgment highlights the NSIA’s framework for safeguarding national security, prioritising long-term risk mitigation over financial considerations. The Court made clear it will not lightly interfere with the Government’s discretion to review transactions and concerns around national security considerations. This sets a high threshold for challenging NSIA final orders and confirms that financial losses alone will not outweigh national security imperatives.
For those involved in M&A and compliance, the decision underlines the importance of aligning transaction strategies with the NSIA’s stringent requirements and highlights the need for sanctions due diligence to mitigate risks in sensitive sectors.
Failing to notify a transaction when required by the NSIA can attract fines of up to 5% of turnover (or up to £10 million if greater) or lead to individuals being prosecuted, potentially facing a custodial sentence of up to five years. Even where a filing is made, the transaction should be structured carefully so that the purchaser is required to pay only once clearance has been given. This is to avoid the nightmare scenario of being forced to sell the target on a distressed basis if the acquisition is not cleared.
Whilst not the focus of the case, the judgment also highlights the importance of conducting sanctions checks when carrying out an acquisition or disposal. Where a person has been listed as designated, they are subject to an asset freeze. It is then prohibited either to make funds or economic resources available to a designated person or otherwise for their benefit.
For further assistance or tailored advice on the NSIA, please contact James Hutchinson or Paul Henty.
The full judgement can be read here: L1T FM Holdings UK Ltd & Anor v Chancellor of the Duchy of Lancaster in the Cabinet Office [2024] EWHC 2963 (Admin) (20 November 2024)
For more on the NSIA 2021, please see our other articles here: https://beale-law.com/article/?s=NSIA&expertise_search=&author_search=&service_search=
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