U.S. M&A Newsletter — April 18, 2024

The proposed acquisition of United States Steel Corporation by Japan’s Nippon Steel Corporation, announced in December 2023, has attracted a great deal of public and political scrutiny. The transaction is being reviewed by the Committee on Foreign Investment in the United States (“CFIUS”), a multi-agency executive branch body whose primary responsibility is to review foreign acquisitions of U.S. businesses to identify risks to U.S. national security. The proposed transaction has created a political headache for President Biden, particularly as 2024 is a presidential election year and U.S. Steel is based in Pennsylvania, a key “swing” state whose votes could decide the election’s outcome. Many observers assume that CFIUS will be the mechanism through which the Biden Administration will stop the deal,¹ though CFIUS could provide a path forward that addresses national security needs while also protecting the president politically. This article outlines the national security considerations most likely to be relevant to CFIUS’s review as well as a potential outcome that could address both national security and political (i.e., job security) concerns. 

Background

On December 18, 2023, U.S. Steel announced its agreement to be acquired by Nippon Steel,² and in doing so left President Biden politically caught between a rock and a hard place. On the one hand, the Biden Administration has encouraged foreign investment by allies to maintain and grow U.S. manufacturing capacity. On the other, U.S. Steel has facilities throughout the United States, most notably in Pennsylvania, where U.S. Steel is headquartered, conducts research and development, and has four manufacturing plants; a new (and foreign) owner could be viewed as potentially threatening up to 4,000 jobs in Pennsylvania, a key electoral swing state.

With this concern apparently in mind, President Biden in March 2023 came out against the transaction:

I told our steel workers I have their backs, and I meant it. . . . [I]t is vital for [U.S. Steel] to remain an American steel company that is domestically owned and operated.³

Biden’s opponent, Donald Trump, has also said he would block the deal if elected.⁴

Meanwhile, the chair of the U.S. Senate Banking Committee has urged the administration to examine the potential implications of Nippon Steel’s presence in China.⁵ As discussed below, the jobs question, Nippon Steel’s nexus to China, and other issues will likely be considered by CFIUS as it reviews the proposed transaction.

Scope of CFIUS Reviews

CFIUS was originally formed in 1975 by President Gerald Ford to monitor and coordinate policy on foreign investment in the United States.⁶ Presumably, a key concern at the time was reinvestment in the United States of foreign oil profits generated by the Organization of Petroleum Exporting Countries during the 1973-1974 oil embargo.

By 1988, the United States was more concerned with inbound investment from Japan. In the wake of the proposed 1983 acquisition by Nippon Steel of the Special Metals division of Allegheny International,⁷ followed by the proposed acquisition in 1986 of Fairchild Semiconductor by Fujitsu,⁸ both of which were abandoned in the face of objections from the U.S. Department of Defense (“DoD”), it became clear that the U.S. government needed a more formal process to identify and address concerns arising from inbound foreign investment. As a result, the Exon-Florio amendment (“Exon-Florio”) to the Defense Production Act of 1950 (“DPA”) was enacted. Exon-Florio created Section 721 of the DPA, which gave the U.S. president or his designee authority to investigate whether foreign acquisitions of control of U.S. businesses could impair U.S. national security. If so, the president could then block the transaction or force divestment if the transaction had already closed.⁹ Upon enactment of Exon-Florio, President Ronald Reagan delegated responsibility for collecting notifications of transactions and conducting national security reviews to CFIUS.¹⁰

Exon-Florio’s definition of “national security” was relatively narrow. As stated in the original version of Section 721 of the DPA, the president or his designee: 

may, taking into account the requirements of national security, consider among other factors—

1. domestic production needed for projected national defense requirements,

2. the capability and capacity of domestic industries to meet national defense requirements, including the availability of human resources, products, technology, materials, and other supplies and services, and

3. the control of domestic industries and commercial activities by foreign citizens as it affects the capability and capacity of the United States to meet the requirements of national security.

Putting aside the unspecified “other factors” that CFIUS and the president could consider, the definition was largely consistent with the principal purpose of the DPA—protecting the U.S. defense supply chain. 

There was, however, a view that Exon-Florio should have done more. In fact, the original Senate version of Exon-Florio (as proposed by Senator J. James Exon) would also have required the Secretary of Commerce to evaluate the effects of foreign acquisitions on “essential commerce” and “economic welfare.”¹¹ Not only did Commerce Secretary Malcolm Baldridge object, as this could impair the U.S. government’s open investment policy, but Secretary of the Treasury James Baker (who chaired CFIUS) implicitly threatened that President Reagan would veto the bill if the essential commerce and economic welfare remained.¹² Ultimately, the economic security-related language was dropped.

Nevertheless, CFIUS’s definition of national security has expanded—both formally and organically—beyond relatively narrow concerns with the defense supply chain. By the time the Foreign Investment and National Security Act of 2007 (“FINSA”) was enacted, comprehensively reforming the operation of CFIUS, Section 721(f) of the DPA had grown to include:

• Proliferation or diversion of military technology to state sponsors of terrorism or other countries of concern;
• U.S. technological leadership in areas relating to national security;
• National security-related effects on U.S. critical infrastructure;
• National security-related effects on U.S. critical technologies;
• Foreign government control of the acquirer;
• U.S. requirements for energy and critical resources and materials; and
• Other factors that the president or CFIUS deem appropriate.¹³

When Congress further amended Section 721 of the DPA through the Foreign Investment Risk Review Modernization Act of 2018, the national security considerations listed in FINSA’s version of Section 721(f) were left unchanged, though separate authorities relating to sensitive personal data formally made that a relevant national security consideration as well.¹⁴ However, in September 2022, President Biden issued an Executive Order 14083, which elaborated on the national security considerations established in Exon-Florio and FINSA. The executive order directed CFIUS to consider the following possible concerns (among others):¹⁵

• The effect of foreign investment on U.S. capacity to meet national security requirements, including needs beyond the defense industrial base;
• The effect of a transaction on supply chain resilience and security, both within and outside the defense security base, giving attention to the level of concentration and the availability of alternative suppliers in a given sector; and
• The cumulative effect of incremental foreign investment in a sector.¹⁶

While the executive order did not give CFIUS any new authority, and in fact CFIUS was already considering a number of these issues already, the executive order did serve to formally identify “other factors deemed appropriate” under the catch-all factor in Section 721(f).

CFIUS’s Evaluation of the Transaction

The same observers who are describing CFIUS as the mechanism through which the Biden Administration could stop Nippon Steel’s acquisition of U.S. Steel are generally treating the process as a politically-driven, binary “up/down” decision. In fact, the CFIUS process is largely technocratic, incorporating specific steps that could have a number of different outcomes. CFIUS’s primary responsibility is to determine the risks to U.S. national security presented by a transaction. “National security risk” is evaluated by CFIUS as a function of three factors: vulnerabilities, foreign threat, and consequences:

Vulnerabilities represent the nexus of the target U.S. business to U.S. national security. As noted earlier, the scope of relevant vulnerabilities has expanded over time from a narrow focus on defense-related contracts to considerations ranging from technology leadership to protection of critical infrastructure and personal data. Where economic security was explicitly ruled out of Exon-Florio, it has implicitly become a factor since the issuance of Executive Order 14083.

There is no indication that U.S. Steel currently supports the defense supply chain. In a search of USASpending.gov covering the last several fiscal years, U.S. Steel has not appeared as a prime or subcontractor supporting any U.S. government agency. USASpending.gov is not a comprehensive list of all U.S. government vendor relationships, but notably, Cleveland-Cliffs Steel and Nucor Corporation (both of which also bid to acquire U.S. Steel¹⁷)- are listed as having both active and recent subcontracts supporting DoD programs, suggesting similar U.S. Steel subcontracts would also be listed if there were any.

Absent a role for U.S. Steel in the current defense supply chain, CFIUS can still consider the other factors laid out in DPA Section 721(f) and Executive Order 14083. U.S. Steel’s current output meets needs beyond the defense industrial base, so CFIUS would want to determine whether there is a nexus between any of that output, the needs it serves, and national security. CFIUS can also consider the availability of U.S. Steel to meet future national security requirements, and while CFIUS does not perform a risk/benefit analysis, they may also consider whether the acquisition of U.S. Steel by a party other than Nippon Steel could increase concentration among U.S. steel companies to an unacceptable level. This last concern has already been raised by a trade association for the automobile industry.¹⁸

Foreign threat is the capability and intent of the foreign investor, or a third party acting through the foreign investor, to exploit the vulnerabilities associated with the U.S. business to the detriment of U.S. national security. Nippon Steel has had a U.S. presence for decades, with a current U.S. workforce of 4,000.¹⁹ Nippon Steel has argued that U.S. jobs are not at risk, because Nippon Steel will honor U.S Steel’s contract through 2026 with the United Steelworkers union (“USW”) and move Nippon Steel’s U.S. headquarters to Pittsburgh. Nippon Steel later added that there would not be layoffs or plant closures “as a result of the transaction.”²⁰ CFIUS is not always receptive to these types of arguments, taking the approach that past performance is not always indicative of future results, especially since the USW contract expires in just two years and some condition other than the transaction could result in U.S. layoffs or plant closures.

Although Nippon Steel is based in Japan, a close U.S. ally, CFIUS will also consider whether Nippon Steel’s dealings in China pose a threat in the context of this transaction. Despite the current state of U.S.-China relations, just having business operations in China is not automatically a problem; if it were, a large number of foreign multinationals would be disqualified from investing in the United States, and more than a few high-profile U.S. companies would have issues with the U.S. government. That said, “guilt by association” with China can sometimes be a determining factor in CFIUS’s deliberations.

The question concerning Nippon Steel will be whether the nature of its presence in and relationships in China would enable the Beijing government to influence Nippon Steel’s ownership and management of U.S. Steel. CFIUS would likely consider objective factors such as the relative value of Nippon Steel’s revenues and capital commitments in China to Nippon Steel’s global operations, as well as subjective factors such as personal ties between Nippon Steel personnel and Chinese government leadership and the Communist Party of China. 

Consequences are the effects on U.S. national security if the foreign acquirer were to exploit the vulnerabilities of the U.S. target. In this case, the most likely consequence, since U.S. Steel does not seem to be supporting DoD programs, would be a loss of U.S. Steel’s production capacity supporting future U.S. national security requirements.

Potential CFIUS Outcomes

CFIUS’s standard for clearing a transaction is to determine that there are “no unresolved national security concerns with the transaction.”²¹ “Unresolved” is not the same as “eliminated”; if it were, the word could have been omitted from the law. Instead, CFIUS tries to “mitigate” potential national security risks it has identified, bringing them down to an acceptable level. In doing so, CFIUS is not obligated to consider and seek to mitigate only those risks that might arise immediately upon closing; CFIUS can—and often does—look over the horizon at prospective risks that the transaction could enable in the future. 

It is premature to assume that CFIUS will find fault with the transaction. CFIUS could, of course, determine that the transaction does not present a national security risk. According to Lael Brainard, Director of the National Economic Council (which has periodically served as the White House’s nonvoting “eyes on CFIUS”), the Biden administration is “ready to look carefully at the findings of any [CFIUS] investigation and to act if appropriate,”²² an approach that acknowledges CFIUS’s technocratic nature and the absence of politically-imposed recommendations.

Assuming that U.S. Steel has no current involvement in the U.S. supply chain, CFIUS could still determine that U.S. Steel’s production capacity is important for non-defense needs or hypothetical future national security needs. CFIUS could also be concerned with a potential threat of layoffs and/or plant shutdowns by Nippon Steel, especially after the current USW contract expires, and even if Nippon Steel acts for purely commercial motives. The implications for U.S. national security, as currently defined, could be to reduce total U.S. steel manufacturing capacity and increase dependence of both defense and non-defense supply chains on some combination of a more concentrated U.S. industry and imported goods.

In this instance, CFIUS mitigation could come in the form of a “supply assurance” condition. Often, such conditions are used to ensure that the U.S. business continues to supply specific products in sufficient quantities and meeting pre-transaction quality standards. In this case, it is unlikely that CFIUS would be concerned with maintaining U.S. Steel’s production of specific products. As a result, the condition would likely be less focused; CFIUS would simply require prior approval for any reduction or relocation of U.S. Steel’s production capacity in the United States.

This form of CFIUS mitigation would make it more difficult for Nippon Steel to reduce U.S. Steel’s workforce in Pennsylvania or other U.S. plants. While U.S. Steel would become a foreign-owned company, President Biden’s promise to protect the jobs of U.S. steelworkers would still be met. CFIUS mitigation could therefore address national security concerns while preserving U.S. jobs and maintaining strong relations with Japan.

Written by Jonathan Gafni, based on the article that will be published in an upcoming issue of The M&A Lawyer. Jonathan is Head of U.S. Foreign Investment in the Washington, D.C. office of Linklaters LLP and formerly served on CFIUS for five years as a representative of the U.S. Intelligence Community.

In Other News

Read past issues of our U.S. M&A Newsletter here. We thought you might also find the following articles featuring our Linklaters colleagues useful.

• Linklaters: A Bigger Backyard for CFIUS? Part I: Bill Proposes Expansion of Real Estate Transaction Reviews
• Linklaters: U.S. Supreme Court Holds “Pure Omissions” Are Not Actionable Under Rule 10b-5
• Linklaters: ESG Update from Germany

¹ This view overlooks the parallel antitrust review by the U.S. Department of Justice, which reportedly has been escalated from an initial review phase. Josh Sisco, DOJ Opens Formal Investigation of US Steel Takeover, Politico, Apr. 10, 2024, available at https://www.politico.com/news/2024/04/10/doj-opens-formal-investigation-us-steel-takeover-00151615.

² Press Release, Nippon Steel Corporation & United States Steel Corporation, Nippon Steel Corporation (NSC) to Acquire U. S. Steel, Moving Forward Together as the ‘Best Steelmaker with World-Leading Capabilities’ (Dec. 18, 2023), available at https://investors.ussteel.com/news-events/news-releases/detail/659/nippon-steel-corporation-nsc-to-acquire-u-s-steel.

³ Statement from President Biden on US Steel (Mar. 14, 2024), available at https://www.whitehouse.gov/briefing-room/statements-releases/2024/03/14/statement-from-president-biden-on-us-steel/.

⁴ Anton Bridge et al., Trump Adds to Nippon-U.S. Steel Deal Woes in Blow for Japan Inc, Reuters, Feb. 5, 2024, available at https://www.reuters.com/markets/deals/trump-adds-nippon-us-steel-deal-woes-blow-japan-inc-2024-02-04/.

⁵ Letter from Sherrod Brown, U.S. Sen., to Joseph R. Biden, U.S. Pres. (Apr. 1, 2024), available at https://www.brown.senate.gov/imo/media/doc/040124nipponreportletter.pdf.

⁶ Exec. Order No. 11858, 40 Fed. Reg. 20,263 (May 9, 1975).

⁷ Allegheny Ends Nippon Steel Deal, N.Y. Times (July 4, 1983), available at https://www.nytimes.com/1983/07/04/business/allegheny-ends-nippon-steel-deal.html.

⁸ Stuart Auerbach, U.S. May Halt Sale of Firm to Japanese, Wash. Post (Nov. 8, 1986), available at https://www.washingtonpost.com/archive/politics/1986/11/08/us-may-halt-sale-of-firm-to-japanese/45eca569-b5a3-4940-b58c-2f0f4556a34b/.

⁹ Omnibus Trade and Competitiveness Act of 1988, Title V, Part II, Pub. L. No. 100-418, 102 Stat. 1425.

¹⁰ Exec. Order No. 12661, Part III, § 3-201, 54 Fed. Reg. 780 (Jan. 9, 1989).

¹¹ Legislative History of the Trade and International Economic Policy Reform Act of 1987, 100th Congress, Veto of H.R. 3, § 905, at 839 (1987).

¹² Edward M. Graham & David M. Marchick, US National Security and Foreign Direct Investment 43 (2006).

¹³ Foreign Investment and National Security Act of 2007, Pub. L. No. 110-49, 121 Stat. 246.

¹⁴ John S. McCain National Defense Authorization Act for Fiscal Year 2019, Title XVII, Subtitle A, Pub. L. No. 115-232, 132 Stat. 2173.

¹⁵ Exec. Order No. 14083, 87 Fed. Reg. 57,369 (Sept. 20, 2022).

¹⁶ For commentary on possible issues with considering the effect of cumulative foreign investments, see our September 16, 2022, blog post: https://techinsights.linklaters.com/post/102hx6s/cfius-executive-orders-aggregate-analysis-standard-raises-questions-about-transp.

¹⁷ Shivansh Tiwary & Anirban Sen, Japan’s Nippon Steel to Acquire U.S. Steel for $14.9 billion, Reuters, Dec. 18, 2023, available at https://www.reuters.com/markets/deals/japans-nippon-steel-plans-acquire-us-steel-7-bln-nikkei-2023-12-18/.

¹⁸ Letter from John Bozzella, Pres. & CEO, Alliance for Automotive Innovation, to Lael Brainard, Director, National Economic Council (Mar. 29, 2024), available at https://www.autosinnovate.org/association-update/Alliance%20for%20Automotive%20Innovation%20Letter%20to%20NEC%20on%20U.S.%20Steel%20-%20March%202024.pdf.

¹⁹ Yuka Obayashi & Ritsuko Shimizu, Nippon Steel Emphasises Its ‘Deep Roots’ in the US as It Pursues U.S. Steel Deal, Reuters, Apr. 1, 2024, available at https://www.reuters.com/markets/deals/nippon-steel-emphasises-its-deep-roots-us-it-pursues-us-steel-deal-2024-03-31/.

²⁰ Press Release, Nippon Steel Corporation, Statement about Acquisition of United States Steel Corporation (Mar. 15, 2024), available at https://www.nipponsteel.com/en/news/20240315_100.html.

²¹ Defense Production Act of 1950 § 721(b)(3)(C)(ii), 50 U.S.C. § 4565(b)(3)(C)(ii) (2018).

²² Andrea Shalal, White House: Nippon-U.S. Steel deal deserves ‘serious scrutiny’, Reuters, Dec. 21, 2023, available at https://www.reuters.com/markets/deals/nippon-us-steel-deal-deserves-serious-scrutiny-white-house-says-2023-12-21/.