What is the NSIA?
The NSIA established a new, stand-alone statutory regime for Government scrutiny of, and intervention in, acquisitions and investments, for the purposes of protecting national security. The NSIA grants the Secretary of State a range of powers including to: “call-in” a transaction for further review; require parties to provide information concerning the transaction; and approve (either unconditionally or subject to conditions), block or unwind a transaction. Further detail on the regime can be found in our earlier pieces National Security and Investment Act: Time to act now and National Security and Investment Act: first Annual Report published.
How to challenge decisions made under the NSIA?
If a person wishes to challenge certain decisions of the Secretary of State, for instance to approve, block or unwind a transaction then that person can apply for judicial review of the decision.
Judicial review is the mechanism by which the Courts review the lawfulness of a decision taken by a public body. Judicial review is not primarily concerned with the merits of a decision, but rather whether it was lawfully made. An application for judicial review can be brought 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 "ECHR").
Ordinarily, an application for judicial review must be made “promptly and in any event within three months” of the decision under challenge. However, the NSIA modifies this such that an application must be made within 28 days of any decision (extendable in exceptional circumstances).
What happened in the Nexperia / Newport Wafer Fab case?
In November 2022, the Secretary of State for what was then the Department for Business, Energy and Industrial Strategy (the "SoS for BEIS")1, ordered that Nexperia (a Dutch-incorporated, but ultimately Chinese-owned company) had to divest an 86% stake in one of Britain's largest semiconductor factories, Newport Wafer Fab.
Nexperia initially acquired a 14% stake in Newport Wafer Fab in March 2021 and in July 2021 it acquired the remainder of the shares (the "Transaction"). Throughout 2021 and 2022, concerns were raised about the Transaction given Nexperia's purported links to the Chinese Communist Party. After significant political pressure, the Transaction was called-in under the NSIA in May 2022 (while Kwasi Kwarteng MP was SoS for BEIS), and a final order made in November 2022 (while Grant Shapps MP was SoS for BEIS) stating that the Transaction must be unwound.
The accompanying notice to the final order indicated that the central concerns were that the Transaction could be a risk to national security relating to technology and know-how that could result from a potential reintroduction of compound semiconductor activities. The Government considered that there was a potential for those activities to undermine UK capabilities and also that the Transaction could prevent businesses and R&D operations in South Wales from being engaged in future UK national security projects.
In making the final order, the SoS for BEIS confirmed that he was satisfied that: (a) on the balance of probabilities, a risk to national security had arisen by virtue of the Transaction; and (b) unwinding the transaction was a necessary and proportionate response to mitigate that risk.
What are the key issues the High Court needs to consider in an application for judicial review?
The first key issue that the High Court needs to determine is how wide a margin of appreciation the Court should afford the Government in determining that there is a risk to national security. In respect of this issue, we would make three observations:
- The term "national security" is not defined by the NSIA (or indeed in other legislation or by Government more broadly). As made clear in the Government's statement made under s.3 of the NSIA (the "Statement"), which requires the Government to publish an indication of how it intends to use its powers under the NSIA, "this is a longstanding policy to ensure that national security powers are sufficiently flexible to protect the nation". While the Statement is clear that it “intentionally does not set out the exhaustive circumstances in which national security is, or may be, considered at risk”, it nevertheless suggests that the Government will consider three risk factors:
- Target Risk – The risk of what the target does, or could be used for.
- Acquirer Risk – The risk posed by the acquirer given the sector of activity, capabilities and links to threatening entities.
- Control Risk – The amount of control that the acquirer gains over the target.
- The Courts have made clear in the past that whether an action is in the interests of national security is a "matter of judgement and policy" that is to be entrusted to Government, rather than the Courts. The Courts therefore apply a very considerable margin of appreciation to the Government's judgement. This is primarily for reasons of institutional competence and democratic accountability.
- Because national security considerations are engaged, the fact that the Government's decisions may interfere with fundamental rights protected by the ECHR – for instance in the Nexperia case, the Government has directly interfered in Nexperia's property rights – is unlikely to significantly alter the margin of appreciation afforded by the Court to the Government.
Notwithstanding the wide margin of discretion that may be afforded to the Government, their decisions are by no means immune from challenge, even where national security considerations are in play.2
In light of this, the second key issue, is what grounds of judicial review are likely to prove the most fertile areas for challenge. We consider that businesses should be alert to the following particular circumstances:
- Where there are compelling arguments that concerns raised by the Government could be addressed by less intrusive measures such that the action the Government has taken (or is proposing to take) is disproportionate. By way of example, businesses could argue that instead of completely blocking or unwinding a transaction, undertakings could be given by the parties to avoid the risk to national security arising.3
- Where the Government has treated companies in similar positions or in similar fields differently such that the action taken could be argued to be arbitrary.
- Where the evidence presented to the decision-maker (now the Chancellor of the Duchy of Lancaster) contains verifiably incorrect information which informs the potential risk to national security. For instance, if the ministerial submission misrepresents any association of the acquirer with a foreign entity of concern.
- Where the Government has failed to take reasonable steps to inform itself of the relevant information to take a decision under the NSIA.
- Where the Government has clearly failed to consider representations made by the parties or to provide parties with the opportunity to make representations. This is particularly so, given that section 26(4) NSIA states that before making a final order, the SoS must consider any representations made to the SoS.4
A challenge is more likely to succeed if these circumstances have arisen. In contrast, if a party is simply challenging the Government's assessment as to whether a transaction poses a risk to national security, the Courts are likely to afford such a wide margin of appreciation to the Government's decision that that deference "is likely to amount simply to acceptance"5.
Closed material procedure
A further procedural element that any business who is considering challenging decisions made under the NSIA should be aware of is that the Government will be able to apply for a closed material procedure. This procedure allows the Government to disclose any information sensitive to national security solely to the judge and a special advocate who is appointed to represent the claimant's interests. This may mean that in specific cases, an application for judicial review may be refused on the basis of material that is not disclosed to the challenger.
Key takeaway for businesses
Given the potentially significant commercial consequences of decisions made under the NSIA, it is crucial for businesses to be equipped to deploy public law arguments in the context of the NSIA. Further, where a transaction may ostensibly engage national security considerations and be expected to attract scrutiny, businesses must be prepared to engage proactively and co-operatively with the ISU with a clear an focused narrative.
How we can help
Our advice to clients is to factor in the NSIA regime at the outset of due diligence when considering how it will impact a contemplated acquisition and investment.
Please get in touch with us to discuss the impact that the NSIA regime could have on your business. Hogan Lovells practises law at the intersection between business and Government and is particularly well placed to help – having a deep understanding of the regulatory landscape and the detail of the NSIA regime. We also have extensive experience of working inside Government, and advising businesses on the machinery of Government and its policy priorities. Let us help you navigate the new regime and, if necessary, engage with Government and relevant stakeholders.
In particular, if you would like to discuss how best to engage with or indeed potentially challenge Government concerning decisions made under the NSIA, then do get in touch.