The speed read
The third Annual Report and the first judicial review case on the UK’s National Security and Investment Act provides us with valuable insights into the processes of the ISU in its administration of the regime.
Here are some of the key takeaways and trends that we have found useful for investors transacting in the UK:
- although the number of notifications increased in the Reporting Period, the number of call-ins and final orders issued fell significantly;
- the ISU is processing most transactions within the expected timelines, with only a small minority being called-in for further scrutiny and investigation;
- investors should be mindful of submitting notifications on the correct track (mandatory or voluntary) as this was the most common reason of rejecting a notification;
- all should remember that ISU notification is required for all transactions requiring mandatory notification, even if there is no overseas element;
- the parties involved in a transaction subject to NSIA should be cautious and prepare for extensive scrutiny, including the possibility of divestment;
- early and detailed engagement with the ISU is critical to avoid escalation;
- although proportionality is a key consideration, the threshold for challenging national security justifications is a high bar; and
- transactions involving sanctioned individuals or entities must beware of heightened scrutiny.
Read on below for further detail.
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The National Security and Investment Act 2021 (“NSIA“), which came into force on 4 January 2022, strengthened the UK Government’s powers to scrutinise and intervene in business transactions on the grounds of national security. Particular focus has been on the 17 sectors requiring mandatory notification, but other transactions can be, and are, reviewed. The Investment Security Unit within the Cabinet Office (“ISU“) is responsible for administering the regime on behalf of the Secretary of State.
On 10 September 2024, the Government published the third NSIA Annual Report covering the reporting period from 1 April 2023 to 31 March 2024 (“Reporting Period“) along with its accompanying spreadsheet which contains all the data published since the commencement of NSIA.
Notifications:
There was a small increase in notifications submitted from 865 to 906 (c.5% increase). Of these, 753 were mandatory notifications, 120 were voluntary notifications and 33 were retrospective validation applications. Almost all notifications received approval, with only c.3% being rejected. Approval by the Secretary of State may be rejected for a number of reasons, the most common being that the acquisition should have been notified under a different notification type i.e. mandatory filing submitted as a voluntary filing and vice versa (42%). Only 2 notifications were rejected due to insufficient information having been provided.
On average, it took the ISU six working days to accept a mandatory notification and eight working days to accept a voluntary notification. Transactions can be notified in relation to multiple sectors and the highest number of notifications related to the defence sector (48%), followed by critical suppliers to government (19%). Acquirers from the UK made up 61% of the notifications, followed by the USA at 26%.
Call-ins:
Of the notifications reviewed in the Reporting Period, only 41 acquisitions were called in (c. 5%) which is down from 65 in the previous reporting period (c.37% decrease). The highest number of notifications related to the defence sector (34%) followed by military and dual-use (29%). Acquirers from China made up 41% of the call-in notices, followed by the UK at 39%. On average, it took the ISU 29 working days to issue call-in notices for both mandatory and voluntary notifications.
Final orders:
Only five final orders were issued in the Reporting Period, which, compared to the 15 final orders issued in the previous reporting period represents a c. 67% decrease from the previous reporting period. No acquisitions were blocked or subject to an order to unwind (down from 5 in the previous reporting period). The highest number of final orders issued related to the defence sector (4), followed by communications and military and dual-use (each recording 2). None of the final orders related to acquirers from China (down from 8 in the previous reporting period).
Judicial review on final orders:
The High Court of Justice handed down its judgment on the first NSIA judicial review case on 20 November 2024 regarding the acquisition of UPP Corporation Ltd (“UPP“) by L1T FM Holdings UK Ltd (“L1T“).
On 21 January 2021, L1T acquired the entire share capital in UPP, a fibre broadband company, which constituted a trigger event under section 8(2)(c) NSIA.
The Secretary of State considered the following areas of concern in respect of national security:
- the ultimate beneficial owners of L1T included sanctioned Russian nationals; and
- the risks of UPP’s expanding full fibre broadband network being the access to data, the ability to disrupt and sabotage broadband network operations and the ability to conduct espionage operations.
On 19 December 2022, the Secretary of State issued a final order and decided that L1T shall divest its 100% shareholding in UPP and considered that the final order and its provisions are necessary and proportionate to prevent, remedy and mitigate the risk to national security.
Subsequently, L1T commenced a judicial review claim challenging the final order on the following three grounds:
Ground 1: Alleged Human Rights Act violations
It was argued that the final order was disproportionate and that less intrusive measures could have been implemented, and that failure to provide compensation compounded the breach.
The Court found that the final order was not disproportionate and stated that the interests of national security must prevail over the claimants’ financial interests and that geopolitical crises may affect the viability of investments in a way that cannot be recouped and this should not come as a surprise to sophisticated economic actors.
Ground 2: Public law principles
It was argued that the final order was unreasonable, irrational, based on irrelevant considerations and in breach of the duty of enquiry.
The Court found that “the high threshold of unreasonableness is not even arguably met”.
Ground 3: Procedural fairness
It was argued that there was no sufficient disclosure or opportunity to address concerns about national security risks before the final order was issued.
The Court found that the claimants were in fact informed of the gist of the case and made representations and proposed mitigation measures, and that the ISU were not doing anything other than considering the appropriate remedy in light of the risk to national security.
Ultimately, the Court upheld the Secretary of State’s decision and emphasised the broad discretion afforded to the executive under NSIA, the serious nature of national security risks and the inadequacy of the proposed less intrusive measures.
Insights into the processes of the ISU
The judgment provides greater clarity in how the courts could approach judicial review of a final order and it also sheds light on the processes of the ISU and assessments completed before a final order is made:
- The Investment Security Risk Assessment (ISRA) sets out the assessment of national security risks arising from the transaction.
- The Remedies Assessment sets out proposed measures to mitigate risks, analysing effectiveness, enforceability and proportionality.
- Representations by affected parties are reviewed in the Representations Assessment.
Key takeaways for investors:
- although the number of notifications increased in the Reporting Period, the number of call-ins and final orders issued fell significantly;
- the ISU is processing most transactions within the expected timelines, with only a small minority being called-in for further scrutiny and investigation;
- investors should be mindful of submitting notifications on the correct track (mandatory or voluntary) as this was the most common reason of rejecting a notification;
- all should remember that ISU notification is required for all transactions requiring mandatory notification, even if there is no overseas element;
- the parties involved in a transaction subject to NSIA should be cautious and prepare for extensive scrutiny, including the possibility of divestment;
- early and detailed engagement with the ISU is critical to avoid escalation;
- although proportionality is a key consideration, the threshold for challenging national security justifications is a high bar; and
- transactions involving sanctioned individuals or entities must beware of heightened scrutiny.