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On January 3, 2025, President Biden issued a long-expected order blocking the acquisition of U.S. Steel by Nippon Steel, following a lengthy review by the Committee on Foreign Investment in the United States (CFIUS), in which CFIUS failed to reach a consensus on whether to clear the transaction. The parties have filed a lawsuit against the government, challenging the decision on constitutional and statutory grounds, having previously asserted that statements objecting to the transaction by President Biden and other members of his administration “corrupted” the CFIUS process and denied the parties their legal rights. In this post, we assess how the transaction reached this point and comment on the expected legal challenge, as well as key takeaways for participants in other transactions subject to CFIUS review.
CFIUS is charged with identifying and – if possible – mitigating risks to US national security that could arise from foreign investments in US businesses, with “risk” defined as a function of “vulnerability” (the nexus between the US business and national security), “threat” (the capability and intent of the foreign investor to exploit the vulnerability), and “consequences” (the impact if the vulnerability were, in fact, exploited).
As detailed in our April 2024 M&A Newsletter (and summarized in our June 2024 blog post), the scope of what CFIUS considers “national security” has expanded over time via legislation, organic growth, and most recently, through President Biden’s September 2022 executive order. Where in the past, CFIUS might have focused on the extent of U.S. Steel’s support for the defense supply chain (which, based on a search of USASpending.gov covering the last several fiscal years, currently appears to be non-existent), CFIUS is now empowered to consider U.S. Steel’s impact on broader US manufacturing supply chains.
When announcing their intent to challenge Biden’s decision, the parties also noted that they had offered a number of conditions to mitigate CFIUS’s concerns in the form of four draft national security agreements. The proposed terms included:
If CFIUS’s concern was on protecting US steel manufacturing capacity, the most relevant proffers were not those relating to governance or oversight of U.S. Steel, but on the commitments to protect jobs and manufacturing capacity.
Generally speaking, the final proffer in this list – giving CFIUS a veto over reductions in U.S. Steel’s manufacturing capacity – is consistent with the approach we suggested in our April 2024 M&A Newsletter and June 2024 blog post, with one key difference: the 10-year time limit. CFIUS is more likely to accept a time-constrained “supply assurance” condition if the US government wants to ensure itself of enough time to contract with alternative suppliers or if the items being supplied have a limited technology shelf life. In the case of U.S. Steel, there are no apparent US government supply arrangements, and the concerns raised by President Biden and CFIUS relate to the long-term survival of the US steel manufacturing industry. Accordingly, the 10-year time limit limited the value of the proffer.
Moreover, the parties have stated that this proffer was submitted on December 30, 2024 – after CFIUS’s report had been sent to the President, and about midway through the 15-day period during which President Biden had to reach a decision. At that point, President Biden may have considered the proffer to be “too little, too late.”
Generally speaking, CFIUS works very hard to reach a consensus on each transaction, since failure to reach a consensus requires CFIUS to refer the matter to the President for decision. In this case, the parties were told that CFIUS failed to reach a consensus. Press reports indicated initially that opposition to the transaction was led by the US Trade Representative, Katherine Tai, though subsequent reports also cited opposition by the Secretary of Energy, Jennifer Granholm, as well as White House advisers who do not directly participate in the CFIUS process, though other agencies, including the Departments of Defense, Justice, State, and the Treasury, reportedly did not have the same objections.
The Biden order blocking the Nippon Steel acquisition and its supporting public statement indicate that the focus of the decision was limited to U.S. Steel’s contributions to US supply chains and the protection of US steel production capacity – the “vulnerability” elements of CFIUS’s risk equation. With respect to the “threat” factor, the order says that Nippon Steel “might take action that threatens to impair” US national security but does not indicate how or why, in light of Nippon Steel’s existing US presence (with manufacturing facilities in Alabama, Indiana, Kentucky, Pennsylvania, Washington, and West Virginia) and Japan’s role as a US ally. There was also no discussion of what the consequences might be – even if Nippon Steel were to move U.S. Steel’s production offshore – given U.S. Steel’s decreased role in the US steel marketplace.
We note that President Biden’s decision was reached nearly two months after the Presidential election, and even longer since he had abandoned his bid for re-election. This partially undercuts some of the criticism that the decision was motivated by electoral politics, but note that other Pennsylvania officials will face future elections and supported Biden’s position, and would not want to be left hanging by the President had he decided to reverse course.
The law governing CFIUS limits the potential scope of court challenges to adverse decisions following CFIUS reviews, but does not limit them entirely. Specifically, 50 U.S.C. § 4565(e) prohibits a court review of (i) a Presidential decision to suspend or block a transaction as well as (ii) the President’s findings that a transaction could impair US national security, and that other legal authorities are insufficient to mitigate the risk. Both of these provisions, enacted as part of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), track language in FIRMMA’s predecessor statute, the Foreign Investment and National Security Act of 2007, and are consistent with the general deference courts give to the Executive Branch with respect to national security issues.
However, FIRRMA adds one other provision: A civil action challenging an action or finding under FIRRMA may be brought (only) in the US Court of Appeals for the District of Columbia Circuit (DC Circuit Court). This third provision recognizes that court challenges following CFIUS reviews cannot be barred completely, acknowledging the DC Circuit Court’s 2014 decision in Ralls Corporation v. CFIUS that parties can assert that the CFIUS process violated the Fifth Amendment to the US Constitution by depriving parties of property without due process of law.
To succeed with their due process claim, Nippon Steel and U.S. Steel will have to convince the DC Circuit Court that (i) they had a constitutionally-protected property interest and (ii) the CFIUS process leading to President Biden’s order did not constitute “due process.”
The parties are also claiming that the CFIUS process itself, as well as the decision, violated both procedural and substantive elements of Section 721 of the Defense Production Act of 1950 (Section 721) – the law governing CFIUS. In particular, they claim that the decision was based on political, rather than national security grounds. Assuming CFIUS did not skip any of its standard procedural steps during its review of the transaction, the procedural claim will likely have to rely on many of the same arguments supporting the due process claim. The substantive claim will be more difficult to prove, given President Biden’s 2022 executive order directing CFIUS to expand its view of “national security,” coupled with the broad language of 50 U.S.C. § 4565(f)(11), which allows CFIUS and the President to consider, as part of their national security analysis, “such other factors as the President or [CFIUS] may determine to be appropriate, generally or in connection with a specific review or investigation.”
The legal challenge may provide the public with greater insight into the CFIUS process, both generally and in the context of this specific transaction. We will be particularly interested to see any details in the public record concerning:
Any litigation concerning President Biden’s decision will not be resolved until after the Trump Administration has taken office. Just as incoming President Trump has indicated that he hopes to negotiate a settlement concerning the US business of TikTok (despite previously ordering its divestment by China's ByteDance during his first term as President), he could use the litigation concerning the acquisition of U.S. Steel as an opportunity to negotiate a settlement with Nippon Steel. While Trump has repeatedly stated his objection to the transaction (most recently after the Presidential election), perhaps he could offer such a settlement as a bargaining chip in negotiations with Japan on issues such as tariffs and defense spending.
Although we do not address it in this post, the parties have separately filed suit against Cleveland-Cliffs (another steel company) and the United Steelworkers union, asserting “illegal and coordinated actions aimed at preventing the transaction and attempting to undermine U.S. Steel’s ability to compete, and Nippon Steel’s ability to provide American-made steel to American consumers.” The claims in that suit include tortious interference with contractual relations, violations of Articles 1 and 2 of the Sherman Antitrust Act of 1890, and violations of the Racketeer Influenced and Corrupt Organizations Act. We would not expect that suit to affect the outcome of the suit against the US government.
We have long considered the CFIUS process to be a technocratic process focused on an expanding, but relatively narrow definition of national security as a basis for its decisions. We would therefore like to think that the handling of this transaction, including pre-CFIUS statements on the case by President Biden and other members of his administration, CFIUS’s failure to reach a consensus, and the President’s ultimate decision, represents an exceptional circumstance fuelled in large part by the juxtaposition of the transaction with election year politics.
However, we cannot be sure that will be the case, and we would not be surprised if foreign parties are less inclined to pursue politically fraught US investments if CFIUS will have jurisdiction. As noted in our July 2024 review of CFIUS’s 2023 annual report to Congress, it seems that parties are already submitting fewer voluntary filings to CFIUS. If the CFIUS process is viewed as more political and less technocratic, the number of voluntary filings could continue to decline.