The High Court recently upheld a final order issued under the National Security and Investment Act 2021 (NSIA) requiring the Chinese state-backed company FTDI Holding Limited (FTDIHL) to divest its interest in Future Technology Devices International Limited (FTDI). As well as highlighting the difficulty of overturning NSIA final orders, the ruling offers helpful clarification on the NSIA’s procedural requirements – in particular as to what constitutes “awareness” of a transaction, and who must be “aware”, in order for time to begin to run in connection with the six-month period during which the Secretary of State (SoS) can call in a transaction for review.

Background

FTDI develops semiconductor devices and related cables and software devices, all of which focus on USB connectivity.

FTDIHL, a special purpose vehicle established by a number of (state-backed) Chinese investment funds, acquired an 80.2% shareholding in FTDI in December 2021 (the Transaction). Although the NSIA was not in force at the time, the Transaction fell within its scope as the NSIA applies retrospectively to certain deals completed on or after 12 November 2020¹.

National security concerns regarding FTDI first surfaced in around July 2022, in relation to a separate proposed acquisition by the Chinese company Electric Connector Technology Co Ltd (ECT). These resulted in the UK Government’s Investment Security Unit (ISU) – which oversees the implementation of the NSIA – making certain enquiries of FTDI. Those enquiries were closed in around December 2022, after the ISU was informed that ECT’s proposed acquisition had been abandoned. 

Whilst looking into ECT’s potential acquisition during 2022, officials in both the ISU and the Department of Culture, Media and Sport’s Economic Security Unit encountered evidence of the Transaction having taken place in 2021. However, it was not until May 2023, when the head of the ISU became aware of the Transaction and its status as a possible “trigger event”², that its potential implications under the NSIA were appreciated. 

The ISU examined the Transaction and recommended that the SoS serve a call-in notice, which was issued on 22 November 2023.  This was followed by a final order directing FTDIHL to divest its entire shareholding in FTDI (the Order). The Order cited risks to the integrity of the UK’s critical national infrastructure due to FTDIHL’s Chinese state backing.

The present proceedings 

On 3 December 2024, FTDIHL initiated judicial review proceedings challenging the Order. Although the High Court upheld one of FTDIHL’s grounds of judicial review regarding the failure to provide adequate reasons, the Court determined that this alone was insufficient to overturn the final order. The Court’s reasoning on the various grounds is explored below.

Was the call-in notice served in time?

One of the key issues was whether the call-in notice was out of time, as FTDIHL argued that the call-in notice had not been served on the acquirer within six months of the SoS becoming aware of the trigger event, as required by the NSIA. In particular, FTDIHL submitted that the November 2023 call-in notice was issued more than six months after government officials first became of the Transaction, in late 2022, and that their awareness should be attributed to the SoS, rendering the notice unlawful. 

The Court ultimately dismissed this argument, whilst providing some useful guidance on from when the six-month call-in period will be deemed to run. 

Who must have the relevant knowledge to establish “awareness” and start the clock?

The Court held that “awareness” under s2 NSIA is not limited to matters within the personal knowledge of the acting SoS, or the senior ISU official that makes the decision on whether to call in a transaction. Instead, the knowledge of officials within the ISU more widely is relevant. However, the Court also held that knowledge held by officials in other Government departments is not imputed to the ISU, and is therefore not relevant for starting the six-month time period. 

Relying solely on the SoS or the formal decision-maker becoming aware would be impractical, as in many cases, no call-in is recommended, such that the SoS or decision-maker may not be informed of the transaction. Therefore, if personal knowledge were required, the six-month period might never begin. Moreover, the NSIA specifies that it is the SoS who issues information notices^3. Interpreting the SoS’s "awareness" as being limited by their personal knowledge would therefore also imply that the SoS must personally issue information notices – an unrealistic reading of the legislation. 

What level of awareness is required?

Whilst the Court agreed with FTDIHL that matters within ISU officials’ knowledge could be imputed to the SoS, it also concluded that mere knowledge of a trigger event was not enough to constitute “awareness” under s2 NSIA. There must also be an appreciation that the transaction may be relevant to the exercise of powers under the NSIA. This ensures that the Government is not time-barred from acting before recognising the potential national security implications of a transaction. 

In this case, the ISU officials looking into FTDI in 2022 were focused only on its potential acquisition by ECT, and did not appreciate that the Transaction was one potentially relevant to the exercise of powers under the NSIA. Therefore, there was no “awareness” of the trigger event until ISU officials began examining the Transaction on 23 May 2023. The Court reached this conclusion whilst nonetheless noting that one of the officials in question had seen “material which would have indicated, to anyone who thought about it, that there had been an acquisition of significant control of FTDI by FTDIHL”.  In practice, this sets a very high bar for establishing there was awareness to start the time running on a call-in.  It is not enough to establish that, from the facts available, the ISU “ought to have known” of the potential for a trigger event to have occurred – acquirers must also show the ISU actually appreciated the NSIA implications arising from those facts. 

On whom did the call-in notice need to be served?

The call-in notice was emailed only to FTDI (as the ISU did not have contact details for FTDIHL) on the final day of the six-month call-in period – with instructions to forward it to the acquirer, FTDIHL. However, it was not forwarded to FTDIHL until the next day, after the six-month period had passed. FTDIHL submitted that the notice was therefore not served on FTDIHL within the required time. The Court rejected this argument, holding that the SoS could reasonably conclude that sending the notice to FTDI was sufficient to bring it promptly to FTDIHL’s attention. 

Other grounds 

Failure to provide adequate reasons 

FTDIHL also submitted that the SoS had failed to comply with the requirement under the NSIA to provide adequate reasons for their decision in the final Order. The Court agreed, finding that the reasoning set out therein lacked sufficient detail, as it merely referenced the identified national security risks at a very high level⁴. 

Nevertheless, the Court held that this failure did not invalidate the Order. The ISU’s internal correspondence demonstrated that the SoS actually had sufficient reasons for their decision, even if they were not articulated in the Order. Further, based on its reading of s28(4) NSIA, the Court concluded that Parliament could not have intended for such an omission automatically to invalidate a final order. 

Rights of the acquirer

Alongside the above procedural arguments, FTDIHL argued that the process followed by the ISU and SoS failed to meet the common law and Article 6 ECHR requirements of procedural fairness, and that the Order was unlawful, disproportionate, constituted a deprivation of property in breach of Article 1, Protocol 1 ECHR, and was irrational or unreasonable.

All these arguments were dismissed by the Court. It held that procedural fairness must be balanced against the protection of national security, and that FTDIHL had been provided with adequate disclosure and afforded sufficient opportunity to make representations. It also ruled that the Order was both proportionate and lawful, striking a fair balance between FTDIHL’s property rights and the public interest in safeguarding national security. The Court emphasised that the SoS’s judgment that only divestment would mitigate the national security risks presented was entitled to a high degree of deference.

Implications for future transactions 

Prior to this ruling, the Court had already demonstrated a strong reluctance to interfere with the Government’s exercise of its discretion when taking national security-related decisions under the NSIA⁵. This judgment, however, goes a step further by giving the Government significant leeway in respect of the NSIA’s procedural requirements.

In particular, the Court’s position on when the six-month period for issuing a call-in notice begins significantly alleviates the time pressure imposed on the ISU in this regard. By having the clock start only once the ISU actually appreciates that a transaction carries implications under the NSIA, the ISU effectively is guaranteed a six-month window – starting from when it consciously begins its investigation – to carry out its initial enquiries and decide whether to issue a call-in notice. This can be contrasted with the approach under UK merger control, where the CMA’s four-month window to refer a completed transaction to a Phase 2 investigation begins once “material facts”⁶ of the transaction are made public, regardless of the CMA’s actual level of awareness. 

Further, despite having found that the reasoning included by the SoS in his final order to FTDIHL was insufficient, the Court not only upheld the Order’s validity, but also indicated that, in future, the SoS can, in the interest of national security, validly redact most details from the order actually sent to an addressee, provided the full reasoning is included in an internal confidential version. Addressees of future NSIA orders should not, therefore, expect greater transparency as a result of this ruling.

The facts of this case – with the ISU investigating one potential acquisition, before appreciating the significance of and becoming interested in an earlier one – are likely to remain fairly unique. But by repudiating a number of procedural lines of argument, the ruling reinforces the notion that reversing an NSIA decision is exceptionally difficult. This is likely to further deter future challenges. It may also make voluntary notification under the NSIA a more attractive option, to avoid a prolonged period of uncertainty⁷ as to whether a transaction will be called in – further increasing the administrative burden for acquirers of UK businesses, at a time when the Government has expressed an intention to reduce such burdens⁸. 

1 See s2(4) of the NSIA
2 i.e. a reviewable transaction under the NSIA
3 See s19(1) of the NSIA
4 That of “UK-developed semiconductor technology and associated Intellectual Property being transferred to China, and deployed in ways that are contrary to UK national security” and “the ownership of FTDI being ... used to disrupt critical national infrastructure which use FTDI Products”
5 See in particular the judgment in L1T FM Holdings UK Limited and another -v- Chancellor of the Duchy Lancaster in the Cabinet Office
6 This need not include all (or indeed any) material facts regarding the transaction, but should include facts which provide a reasonable basis for considering that a merger may have occurred for the purposes of the Enterprise Act 2002 – see Lebedev Holdings Limited and Another v Secretary of State for Digital, Culture, Media and Sport
7 Which period can last up to five years: under s2 NSIA, the long-stop date to call in a trigger event occurring after the NSIA’s entry into force is the end of the five-year period beginning on the day the trigger event occurred.
8 See National security powers to be updated to reduce the burden on businesses - GOV.UK

Trainee Callum Gill contributed to this article