Clifford Chance

A China-linked acquirer has lost a court appeal against a UK Government national security divestment order. The case gives guidance on timings under the National Security and Investment Act (NSIA) process and on the reasoning needed in decision-making.

Background

FTDI Holding Ltd (Acquirer), a UK firm ultimately owned by Chinese state-backed funds, acquired an 80.2% stake in Future Technology Devices International Ltd (Target) in December 2021. This acquisition constituted a "trigger event" under the NSIA, under which the UK Government is notified of acquisitions of UK businesses (or shareholdings in UK businesses) in certain sensitive sectors and assesses them on national security grounds, with the right to prohibit them.

The acquisition of the 80.2% stake in the Target predated the NSIA coming into force and therefore was not notified. UK Government officials raised concerns in July 2022 about the Target being acquired. However, the focus at that stage was not on the Acquirer, but instead on what was understood to be an acquisition or planned acquisition by a different Chinese company, called Electric Connector Technology Co Ltd (ECT). As a result of these concerns, the Investment Security Unit (ISU), which administers the NSIA, opened a "Market Monitoring" case, used for acquisitions that have not been notified by the parties, but which are identified as being of interest. Through correspondence with the Target, on 23 May 2023, the Director of the ISU became aware that the Acquirer – and not ECT – had already acquired majority control of the Target.

On 22 November 2023, the Secretary of State (i.e. Government Minister) responsible for the NSIA issued a Call-In Notice to assess the acquisition's risk to national security, followed by a Final Order in November 2024 requiring divestment.

The Acquirer challenged the Government's Final Order by way of judicial review. The High Court upheld the Final Order in favour of the Government, though it did find for the Acquirer on one of the grounds of appeal.

The High Court's judgment

Ground 1A: The Notice to call-in was served within time

The Acquirer argued that the Notice was not served on it within the statutory six-month time limit as it had been served on the Target, rather than on the Acquirer itself. Rejecting this, the High Court found that the Secretary of State reasonably believed that, by sending the Notice to the Target, the Notice would come to the attention of the Acquirer, and therefore the service requirement was met.

Ground 1B: The Order was lawful as the Government was "aware" of the acquisition within six months of issuance of the Notice and the Order

The Government has the power to call in transactions that are not notified either (i) within five years of completion of the transaction concerned or (ii) if earlier, within six months of the Secretary of State becoming "aware" of the transaction. When considering what counts as "awareness", the High Court found that such awareness is acquired when it is known that: (i) there has been a "trigger event" (i.e. the acquisition); and (ii) the acquisition may require investigation and the exercise of powers under the NSIA (i.e. because it raises potential national security risks). However, it is not just awareness on the part of the Secretary of State that counts – the test could also be met by awareness of ISU officials with sufficient experience and seniority to assess whether a trigger event had occurred.

The Acquirer contended that the Secretary of State was “aware” of the relevant trigger event in 2022, and in any event before 23 May 2023 (when the Director of the ISU became aware of it). Accordingly, awareness had been acquired more than six months before serving the Notice on 22 November 2023, which would have meant that the Final Order would be considered to have been made too late. However, the High Court found that, although the ISU was aware of the trigger event (i.e. that the Acquirer had made the acquisition), it was not aware that the acquisition raised potential national security concerns until 23 May 2023, when the Director of the ISU became aware that the Acquirer may have acquired the Target, which initiated the ISU's due diligence process to determine whether the transaction had taken place. The six-month period therefore only began then, and the Notice was served in time.

Ground 2: The review process was procedurally fair

The Acquirer contended that the call-in review process was unfair and breached Article 6 of the European Convention on Human Rights and common law standards, citing an insufficient explanation of the perceived national security risks. In particular, although the ISU had told the Acquirer that its concerns related to the fact that the target's products were used in certain critical national infrastructure, it did not disclose which infrastructure was affected, or how. The High Court held that "fairness" in the context of national security may not necessitate full disclosure to the investigated party in order for the Secretary of State to discharge his duty to act fairly. The Acquirer had been given sufficient information about the case against them to give effective instructions to the special advocate representing their interests, and to respond effectively through representations orally and in writing.

Ground 3: Insufficient reasoning for the decision-making did not invalidate the Order

The High Court accepted that the Final Order lacked adequate reasons (as required by the NSIA) to enable the Acquirer to understand why the matter was decided as it was (which the Secretary of State contended was necessary to protect national security interests). Failure to set out sufficient reasons did not invalidate the Final Order, however, as the Secretary of State did in fact have sufficient reasons (which were set out in separate evidence that the High Court viewed in closed session).

Ground 4: Ordering divestment was not disproportionate to the national security risk

The Acquirer argued that the Final Order was a disproportionate interference with its right to peaceful enjoyment of possessions under Article 1 Protocol 1 (A1P1) of the European Convention on Human Rights. Rejecting this argument, the High Court found that the Final Order was rationally connected to the objective of preventing or mitigating the national security risks which the Secretary of State considered to exist and was a proportionate way to address those risks: "it is the Secretary of State which has the institutional qualification and expertise, especially in relation to matters of evaluation of a risk, not the courts. Further, Parliament has given the primary responsibility for assessing both the nature of the risks to national security and for making an assessment of what is a proportionate response to such risks to the Secretary of State".

The end result was that all grounds were dismissed except for the technical breach on reasons (Ground 3), which did not result in the Final Order being quashed. The Final Order requiring divestment stands. The Acquirer’s only remaining recourse would be to seek permission to appeal to the Court of Appeal.

Key takeaways

• This is only the second High Court appeal under the NSIA since the law took effect in January 2022 (the first being LetterOne's failed challenge – see here for our briefing on that case).
• The High Court continues to set a very high bar for overturning national security decisions if statutory processes are broadly followed and fair opportunities to respond are provided.
• Technical errors, like inadequate reasons, are unlikely to invalidate a Final Order unless they materially impact fairness or substance, which is unlikely to be the case where parties are able to make representations pertaining to national security risk. This notwithstanding, given the High Court's finding that the Secretary of State's reasons were insufficient, the Secretary of State may consider that, as a matter of good administration, he needs to provide more detailed reasons in future Final Orders.
• The Government’s “awareness” for NSIA purposes is a high bar. The ISU's awareness of the transaction itself is not sufficient. The ISU needs to know of the facts or matters that would lead it to know whether a national security review is warranted. Given that the NSIA refers only to awareness of the trigger event, this is a much higher bar than a plain reading of the NSIA suggests. Allied to this issue, the High Court did not set out what facts or matters would start the clock. Given this, if transacting parties decide not to notify their transaction, they should not assume that it will become immune from review after six months from the date of its announcement.