Nippon Steel’s Bid for U.S. Steel Blocked under National Security Law

Summary

On January 3, President Biden blocked the acquisition of U.S. Steel by Nippon Steel, a Japanese company, on national security grounds. In doing so, he fulfilled a declaration that he made almost one year ago, just as the 2024 presidential campaign was picking up, that Pennsylvania-headquartered U.S. Steel should remain in U.S. hands. He has not, however, offered compelling evidence that the transaction would have a negative impact on the U.S. steel industry, much less an impact so substantial as to threaten national security. Instead, his decision appears to be premised, at best, on flawed national security arguments and, at worst, on political motivations. 

The transaction has important implications for foreign investors into the United States:

1. The Committee on Foreign Investment in the United States (“CFIUS”) will likely remain focused on traditional national security concerns for most transactions.
2. Foreign ownership may, in itself, be viewed as objectionable with respect to some high-profile targets, even in the absence of any clear national security risk.
3. Companies should consider not just direct ties of the target to national security considerations, but also its broader role in industrial competitiveness.
4. Parties need to consider a broader set of stakeholders in the CFIUS process, given that concerns may arise from agencies not traditionally viewed as having a national security mandate.
5. Robust government relations and public affairs planning is crucial for high-profile transactions.
6. Parties may need to proactively demonstrate lack of risk and offer incentives for CFIUS approval.
7. Parties should carefully consider efforts clauses and break fees, given the unpredictability of the CFIUS process.

What was the basis for the President’s decision?

The President issued an order prohibiting the transaction pursuant to section 721 of the Defense Production Act of 1950, the law that also establishes CFIUS.  The President acted after a six-month CFIUS review process and a split recommendation from the CFIUS agencies.  The President’s prohibition order, his statement explaining the order, and the process leading to the order all depart from historical practice and, based on reported details, the requirements of law.

The law authorizes the President to prohibit transactions that threaten to impair U.S. national security, but the President’s statement does not establish how the transaction could impact national security, other than a general assertion that a “strong domestically owned and operated steel industry” is necessary given the importance of steel to infrastructure, the auto industry, and the defense industrial base. 

Moreover, beyond a non-company specific reference to foreign companies dumping steel on global markets at artificially low prices, the President’s statement does not offer any explanation for why Nippon Steel’s ownership of U.S. Steel would weaken the U.S. steel industry, much less to a degree that could result in the impairment of national security.  Even if one accepted the relevance of the transaction to national security, the President’s statement does not explain why the extensive, legally binding and enforceable commitments that Nippon Steel was prepared to make would not fully resolve such concerns. Indeed, those commitments arguably would better protect the U.S. steel industry than any other alternative, as they would create guarantees that do not exist today and would not exist if U.S. Steel were purchased by a U.S. investor. 

From a security perspective, it is notable that U.S. Steel reportedly does not have any military supply contracts. Furthermore, Japan is a strategic partner, critical in U.S. efforts to counter China’s economic and military aggression. Additionally, any hypothetical actions that Nippon Steel could take that could weaken U.S. Steel (such as closure of plants, interference in decision making on whether to bring antidumping claims, or availability of U.S. Steel capacity to meet wartime needs presumably) could be addressed through a mitigation agreement or exercise of other available authorities. In view of these factors, the President’s decision appears to ultimately come down to a view that foreign ownership, in and of itself, is not acceptable for this company.

How is this outcome notable?

This is an unprecedented decision in many ways: A U.S. president has never formally blocked a non-Chinese investment, and CFIUS has never sought even informally to prevent a Japanese transaction, except where leakage of technology with military applications to China was a concern. Furthermore, all presidential and CFIUS actions to block transactions in the past have been at the behest of member agencies with national security expertise; here, reportedly, not only was the U.S. Trade Representative leading the push for the block, but the Department of Defense did not support such action.

At best, the decision appears to reflect a deeply flawed presumption that Nippon Steel, because it is a foreign entity, would be less motivated to ensure the commercial competitiveness and success of U.S. Steel than U.S. owners, notwithstanding spending more than $14 billion to acquire the company. At worst, the decision is an award to the head of the steel union, a political ally, in disregard of applicable law and evidence, as the parties argue. Either way, the decision risks long term harm to U.S. national security interests by rupturing a strong relationship with Japan, a country that is one of the most significant strategic partners and investors in the U.S. economy; risking relinquishment of U.S. leadership internationally on best practices in foreign investment review; and weakening public trust in the integrity of the CFIUS process, which is critical to its effective functioning.

The decision reflects one more example of a previously non-political, technical U.S. government decision making process engaging in politically driven outcomes. CFIUS had already become more politicized in the Biden Administration than in previous Democratic or Republican administrations. The Nippon Steel transaction took that politicization to an entirely new level, establishing an unfortunate precedent for future administrations of either party to use CFIUS to achieve a politically advantageous outcome.

What’s next for the transaction?

The parties previously stated they would file a lawsuit if the deal were blocked. By law, the President’s decision is insulated from judicial review on the merits, so the parties will argue that they were not accorded Due Process and potentially that the process was so flawed that it is incapable of being remedied. However, especially with a new president about to be sworn in, the argument that the process was irretrievably flawed is not likely to succeed, and any Due Process claim can likely be remedied by rerunning the process, even if doing so is not likely to change the outcome. 

The parties may argue that the decision was not based on national security considerations and was outside the President’s authority. However, while they would likely be right that the connection to any historical notion of national security is highly attenuated, the courts may be unwilling to second-guess the President’s determination of where the line is between economic interest and national security.

The parties could seek to convince the Trump Administration to rescind the prohibition order or, if the courts require CFIUS to re-do the process, to reach a different conclusion. However, President-elect Trump already indicated last month that he would block the transaction. And while those political calculations may change as the implications of the block settle in, the parties would have to be prepared for continued significant uncertainty as to the results of any such effort.

What are the implications for other transactions?

• CFIUS will most likely remain a process driven by staff-level analysis, focused on more traditional notions of national security, with all but the most risky transactions resolvable through mitigation (though any direct Chinese investment or investment by companies with significant China exposure could still be at some risk of prohibition). And we expect that most CFIUS staff are highly dissatisfied with how the process played out in this case. This means that most future transactions will not be affected by the considerations below. Rather, these considerations will be most relevant when there is a particularly high-profile or politically charged target.
• The outcome of the Nippon Steel transaction also sets a worrying precedent in so far as it endorses a view that mere foreign ownership can be a basis for national security objection. It is particularly worrying in that the precedent concerns a target that does not have clear defense, intelligence, or homeland security importance; where the acquirer could be trusted to comply with mitigation measures; and where mitigation could even be structured to not rely on trustworthiness of the acquirer. 
• Given the blurring of the lines between economic interest and national security, which is likely to persist into the Trump Administration, it will be important for companies to think not just about how their transaction has direct national security implications, but whether it touches on an industry that feeds broadly into industrial competitiveness.
• Most cases are likely to present a path for the government to argue a more recognizable national security argument (technologies with potential defense applications, critical infrastructure, data, etc.). But parties will need to be aware that such arguments may provide convenient pretext for concerns or interests that are more protectionist in nature, necessitating careful analysis of non-national security considerations in deal planning.
• Given that CFIUS has become increasingly politicized, parties should conduct robust government relations and public affairs analysis and planning for any transactions likely to have a high profile, accounting for labor, competitors, and Members of Congress.
• The practice of economic agencies holding security agencies to the letter and spirit of the law now not only is non-existent, but economic agencies may be more of a risk factor than security agencies. This means that parties need to think about CFIUS stakeholder outreach differently than they have in the past.
• As a general matter, CFIUS has moved beyond just looking at risk arising from the particular transaction before it, strict notions of national security, and the government necessarily assuming the burden of showing that a risk exists. Parties now need to be thinking about how to show that a transaction does not pose a risk and potentially how to create incentives for CFIUS to approve transactions, which in some cases may include offering commitments to address vulnerabilities of the target company that may preexist the proposed transaction. 
• Parties should carefully consider efforts clauses and break fees, anticipating the unpredictability of the CFIUS process and lack of effective remedies for decisions that may be inconsistent with the facts or law. Here, Nippon Steel is potentially on the hook for a $500 million break fee.