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In this mini-series, Fieldfisher's tier 1 ranked Public law team outline a few hot topics for claimants in commercial judicial review cases.
In this edition, Partner Martin Smith, Director Zach Judge Raza and Senior Associate Asfand Gulzar provide an overview of the issues that businesses should be aware of when considering a challenge to the decisions of the UK Government (UKG) relating to national security.
National Security and Investment
The UK's National Security and Investment Act 2021 (NSIA) allows the UKG to scrutinise and intervene in certain corporate transactions (including acquisitions and investments) made by anyone, including businesses and investors, that the UK assesses could harm the UK's national security.
The UKG has the ability under the NSIA to impose remedies with potentially drastic commercial consequences.
Key features of the NSIA regime
Mandatory notification:
- anyone seeking to acquire shares or voting rights in companies engaged in certain activities in the UK in one or more of 17 key sectors must notify and obtain clearance from the UKG before completing the acquisition. If the acquisition is completed without approval, it will be considered void and of no legal effect;
Call-in powers:
- 'call-in' powers enable the UKG to call in for review any in-scope transaction (whether or not notified) where there is a reasonable suspicion that it could give rise to a risk to national security. This can occur while the transaction is in progress or contemplation, or within a specified period following its completion;
Information gathering powers:
- powers for the UKG to request information relevant to their functions under the NSIA. When assessing an acquisition, the UKG may request information from the parties involved, or from third parties. This can be done by serving information notices on relevant parties, including the acquirer, seller, target, or any other party considered to have relevant information for the assessment of an acquisition;
Remedies:
- the UKG has wide powers to impose remedies: it can prohibit a transaction, unwind all or part of a transaction and/or impose conditions; and
Sanctions:
- sanctions for non-compliance with the NSIA, including fines of up to 5% of worldwide turnover or £10 million (whichever is the greater) and imprisonment of up to five years.
The NSIA does not define national security for the purposes of its transaction review and notification regime, nor does it set out the factors to be taken into account in assessing national security risks. Instead, the factors that the UKG will consider in deciding whether to exercise its call-in powers are set out in a statutory statement made under section 3 of the NSIA.
By not providing a specific definition of national security, the UKG aims to avoid constraining its ability to safeguard UK businesses from unforeseen security risks. However, the lack of a clear definition has been widely criticised for creating uncertainty around the understanding of national security within the NSIA and allowing for subjective interpretations of the term in relation to specific investments, potentially influenced by political or economic considerations.
There are also concerns about the lack of transparency in decision-making under the NSIA, making it difficult to predict how it will apply to a specific transaction. The UKG's approach to reviewing transactions and imposing remedies has been likened to a "black box," with limited consultation or detailed explanations for final orders. The UKG has again justified this lack of transparency as necessary to protect national security interests, but there are indications that they are considering making the regime more open and transparent.
Sectors implicated
Unsurprisingly it has primarily been transactions involving the military, defence, and dual-use (items which can be used for both civil and military purposes) sectors that have been implicated by the NSIA. However, one sector that is increasingly featuring in the UKG's decision-making is artificial intelligence (AI). It is inevitable that increasing numbers of transactions in the AI sector are very likely to come under scrutiny under the regime.
Nationality-blind
The NSIA is intended to be 'nationality-blind' in contrast to similar legislation in the US which concerns 'foreign powers' acquiring control of US businesses. This means that both overseas and UK businesses may be subject to UKG orders under the NSIA.
Why judicial review?
The UKG is adopting a far more interventionist approach than in the past. The range of interventions has proven to be more diverse than many expected, and their number is well ahead of the UKG's own expectations for the legislation.
Whilst the Courts have made it clear that whether an action is in the interests of national security is a 'matter of judgement and policy' for the government, this does not mean the decisions of UKG are immune from challenge. Indeed, businesses should be aware of the arguments that they may wish to rely on in the event that a transaction is blocked or otherwise hindered. If a business wished to challenge a decision made under the NSIA they would need to apply for judicial review on the grounds of illegality, procedural unfairness, unreasonableness/irrationality, or for a breach of a right protected by the European Convention of Human Rights.
The decision must be proportionate; not be arbitrary; be based on verifiably accurate information; be based on relevant information; and be made following consideration of representations made by the parties.
Businesses should be aware that the UKG will be able to apply for a Closed Material Procedure whereby the UKG can disclose information sensitive to national security to the Court alone. The Court will appoint a Special Advocate to represent the other party's interests, without having to disclose the material to the other party. This process allows the Court to consider all of the relevant information and come to a decision based on all of the facts.
In 2022 the UKG ordered a subsidiary of a Chinese-owned company to sell its controlling stake of one of the UK's largest semiconductor factories, Newport Wafer Fab. This was the outcome of a review under the NSIA which found that, on balance, the transaction posed a risk to national security and so should be unwound. A judicial review of that decision is ongoing in the High Court of England and Wales.
Conclusion
Recent developments, such as the UKG's decision relating to Huawei involvement in the UK's 5G networks, as well as the 2023 US Executive Order on outbound investment in sensitive technologies, have brought into sharp focus the potential national security risks associated with global transactions and investments. The importance of companies assessing whether transactions fall within the NSIA and what can be done to challenge decisions made under it cannot be overstated. Whilst the UKG has recently issued helpful updated guidance on the use of the powers, navigating this regulatory framework remains complex.
A webinar that we recently hosted on this topic with representatives from the UKG is available here.
If you would like to discuss any of the issues raised in this blog, please get in touch with our team.
The content of this blog does not constitute legal advice and is provided for general information purposes only. Specific legal advice should be sought before taking any actions based on the content of this blog.