Labour ditches nationalisation but investors should still (legally) hedge their bets

Amid sharp swings in the direction of business policy in recent years, the opposition Labour Party's shifting stance on nationalisation has unsurprisingly drawn much attention in corporate circles. During the 2017 and 2019 campaigns Labour proposed large nationalisation programmes. Ultimately, this included Royal Mail, energy transmission, distribution and supply, water and the broadband-relevant parts of BT along with the hybrid proposal to require businesses with over 250 staff to transfer 10% of their value into employee ownership funds.

Most controversially, Labour campaign material at the time of their plans implied that, via "deductions for compensation" for a range of factors, there may be below fair market value compensation.

Since Keir Starmer became leader in 2020, Labour's policy programme has become markedly more reassuring to private business and investors amid a sustained pivot to the traditional centre ground of UK policy. One key shift has been to drop all nationalisation plans which involved transfer of ownership from the private to public sector. The only remaining proposal is to bring passenger rail franchises back to the public sector upon contract expiry, without the requirement for eventual contract relet.

So, while nationalisation is not current Labour policy, this briefing is to assist investors seeking to protect themselves against future changes.

Investors have several possible routes to protect themselves against below market value compensation

Article 1 of Protocol 1 of the European Convention on Human Rights would provide investors with substantive protections. See section 1 below.

In addition, those potentially impacted by nationalisation might be able to seek redress under a relevant bilateral or multilateral investment treaty (see section 2 below). Those who do not currently benefit from such protections, and potential new investors, may wish to review their structures and reorganise where appropriate so as to potentially benefit from protection under the particular bilateral or multilateral investment treaty if their investments were eventually nationalised and a dispute concerning that nationalisation were to arise. Factors for investors to weigh will include the nationality requirements for qualifying for such protection, the relative benefits of any increased protection and the additional costs and other disadvantages of such a structure.

Public law principles and human rights law protections in the UK domestic courts

Decisions to nationalise businesses can be challenged in the UK domestic courts, with public law principles and human rights law providing protection for investors. Where measures are implemented through secondary legislation (or non-legislative means) there are a range of potential grounds of challenge. In contrast, where primary legislation is used to implement nationalisation, the options for challenges are more limited. However, regardless of the route used, Article 1 of Protocol 1 (A1P1) of the European Convention on Human Rights provides investors with substantive protections (although the remedies the court can grant are different where primary legislation is concerned).

What does A1P1 protect?

A1P1 protects the right to peaceful enjoyment of property. It has long been interpreted as requiring fair compensation to be made available by the state for deprivations of property, while in the case of a "control on use" of property, compensation is less likely to be payable. The first step is establishing an interference with a person's possessions (including those of a company). The court then considers whether that interference is justified. This includes consideration of:

• a fair balance being struck between the public interest and private rights;
• more generally, that the measure adopted is proportionate; and
• the government being afforded a margin of appreciation.

How is A1P1 used in practice?

From individuals to corporates, A1P1 claims have been brought in a wide range of contexts across a variety of sectors over the years. Plain packaging legislation, food regulations designed to tackle childhood obesity, designations under the sanctions regime, and more recently compensation for poultry culled following bird flu outbreaks have all been the subject of A1P1 claims. The former shareholders of Northern Rock also relied on A1P1 in their challenge to the compensation scheme established following the nationalisation of the bank. In a regulatory context, a notable decision was the award of damages to Infinis plc following its successful A1P1 claim against Ofgem. Even for unsuccessful claims, domestic courts are not necessarily the end of the road. There may be scope to pursue a claim in Strasbourg as complaints alleging breach of A1P1 may also be brought to the European Court of Human Rights once domestic remedies have been exhausted.

Investment treaty protections

A bilateral investment treaty is an agreement between two countries containing reciprocal undertakings for the promotion and protection of private investments made by nationals of the signatories in each other's territories. Such agreements are entered into to provide confidence to private investors in respect of the treatment their investment can expect from the host state (including in relation to compensation in the event of expropriation, non-discriminatory treatment and fair and equitable treatment). The UK has such treaties with many jurisdictions, including China, Hong Kong, India and Singapore.

Similar protections can also be found in certain multilateral investment treaties to which the UK is currently party (including the Energy Charter Treaty which, even though the UK has announced its intention to withdraw, will continue to protect pre-existing investments in the energy sector).

Such safeguards will remain welcome. However reassuringly centrist Labour policy has moved in recent years, the UK's recent history of jarring shifts from both its main political parties will leave many investors wanting to err on the side of caution for years to come.

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