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The Court of Appeal in London has dismissed an attempt by investment firm LetterOne (L1), which had been seeking compensation after the previous Government used the new National Security and Investment Act 2021 (NSIA) to force them into selling Upp’s full fibre broadband network to rival operator nexfibre at a loss (retail customers went to Virgin Media).
Upp was originally established as a £1bn project that aimed to deploy a new Fibre-to-the-Premises (FTTP) based broadband network and retail ISP across 1 million premises in the East of England (here). But their efforts were dealt a significant blow in December 2022, after the UK Government ordered LetterOne – an investment firm that previously received significant backing from several prominent and now sanctioned Russians (Mikhail Fridman and Petr Aven) – to sell its entire stake in Upp in order to “prevent, remedy, or mitigate the risk to national security” (here).
At the time, LetterOne said they “believe that L1 ownership of Upp is not a threat to national security in any way” and pointed out that “L1 is not sanctioned and has taken fast, decisive action to put in place strong measures to distance L1 from its sanctioned shareholders. They have no role in L1, no access to premises, infrastructure, people and funds or benefits of any description.” The investment company froze the shareholdings of those individuals (who jointly owned less than 50% of the company) and its oligarch founders resigned from the group’s board.
However, despite LetterOne launching a legal challenge against the government’s decision (here), the investor claimed they ended up selling Upp at a loss (i.e. “less than the £143.7m that (LetterOne) had by then invested“) to rival operator nexfibre in September 2023 (here). At that point, Upp’s network had only covered 175,000 premises, although it’s worth considering that assessing market value for altnets is a tricky thing these days, with some banks and investors predicting they may take a loss (here).
The High Court in London last year dismissed LetterOne’s appeal against the forced sale (here). But the investment company then lodged a new appeal based around the question of whether Article 1 of Protocol 1 (A1P1) to the European Convention on Human Rights (ECHR) would require compensation to be paid following a forced sale made pursuant to a final order under the NSIA. Yesterday the Court of Appeal dismissed that challenge.
It is also important to keep in mind that what is in issue is the risk posed to national security by the Ultimate Beneficial Owners of a company, which may be at several steps removed from the entity concerned. In the present case those UBOs were individuals who had been the subject of Russian sanctions, including in the UK. There is no question, as Mr Hickman urged upon the Court, of impugning the character of the Appellants as such but it is important to keep in mind that the ultimate risk to the security of this country comes from the UBOs.
In this context Sir James Eadie emphasised before this Court what had been said by the Judge at para 206, in a part of her judgment which is not under appeal to this Court:
“Nor am I persuaded that a remedy founded on changes to corporate structure and other restrictions to which the Claimants showed willingness to submit would have the benign effects for which the Claimants contend. On the contrary, I accept Mr Phillips’ and Ms Wolfe’s submissions that the Claimants consistently accepted or implied that the Group and its UBOs had – and should retain – influence and control over Upp. In the first set of representations, the First Claimant accepted that the Group had some control over Upp, albeit denying that the Group exerted a high level of control.
The first set of representations demonstrated that Mr Kosogov had not been placed under the same measures of structural and legal separation from the Group as the sanctioned UBOs (Mr Fridman and Mr Aven). In the meeting with the ISU on 22 November 2022, the Group indicated that it did not accept the ISU’s proposal that investor consent (in practical terms, their own consent) should no longer be required for all high value contracts, describing the elimination of investor consent as ‘extremely difficult.’ Dr Easton made clear that the Group wanted to retain the ability to influence the Upp Board through the Investor Directors.”
Mr Hickman emphasised before us that there is no suggestion that the Appellant companies have done anything wrong or that they themselves pose a risk to national security. He is entitled to emphasise that the law recognises a distinction between the corporate entities and the ultimate beneficial owners. Nevertheless, in this context it is clearly the risk posed to national security from those ultimate beneficial owners which has prompted the Respondent to make the order. In this context, particularly having regard to the importance of national security, courts must be alive to the realities of the situation irrespective of the legal position that a corporate entity is distinct from its shareholders or others.
Furthermore, the presence in the statutory scheme of section 30 of the NSIA is important to the overall assessment of proportionality. That is a provision which would allow mitigation measures to be taken, for example by way of financial assistance (if hardship was shown or something of that sort).
One also needs to keep in mind that the process for assessing the “fair market value” of a company, as distinct from what it can actually be sold for albeit in circumstances of a forced sale, is likely to be a complicated and lengthy process. This is evident from the disposal plan which we were shown in the present case. This would have the potential to impede the process by which the Respondent is able to achieve the important public interest purposes which lie behind the scheme of the NSIA.
Finally, it is important to note that there is no Strasbourg authority directly on point. Sir James Eadie submits that none “comes close” to requiring that a State must compensate against any diminution in value flowing from a forced sale, or for past investment and/or possible future profits. This is important, because it is well-established that the courts of this country should follow the clear and constant jurisprudence of the European Court of Human Rights, neither more nor less. As Lord Reed PSC explained in R (Elan-Cane) v Secretary of State for the Home Department [2021] UKSC 56; [2023] AC 559, at para 63, although it is open to domestic courts to develop the law in relation to Convention rights beyond the limits of Strasbourg case law, on the basis of the principles established in that law, they should not go further than they can be confident that the European Court would do.
For the reasons I have given, I would dismiss this appeal.
This was somewhat of a test case, the first case in relation to the NSIA to come before the Court of Appeal, and thus the decision against LetterOne is likely to set a precedent for other potentially similar challenges in the future. Several challenges based on procedural unfairness and irrelevant considerations were also dismissed.
