On December 18, 2023, US Steel announced its agreement to be acquired by Nippon Steel, putting President Biden in a difficult position. On the one hand, many of his administration’s initiatives have been aimed at encouraging foreign investment to maintain and grow U.S. manufacturing capabilities. On the other hand, U.S. Steel’s facilities across the United States include headquarters, R&D, and manufacturing facilities employing 4,000 people in Pennsylvania, a key “swing” state in the November 2024 presidential election; the acquisition is viewed by some as threatening those jobs. President Biden, his presumptive opponent Donald Trump, and several members of Congress have made public statements opposing the acquisition.
In the meantime, the transaction has received all necessary regulatory approvals outside the United States, leaving only a pending antitrust review by the US Department of Justice and a national security review by the Committee on Foreign Investment in the United States (CFIUS). In our May 2024 article in The M&A Lawyer, we discussed the legal underpinnings of CFIUS’s review, and a possible CFIUS outcome that could address both national security and political concerns; the following is a summary of key points from that article.
National security versus economic security
Although CFIUS has been in existence since 1975, its role performing national security reviews of foreign investments did not begin until 1988, when the Exon-Florio amendment to the Defense Production Act of 1950 was enacted. As a provision of the Defense Production Act, it is not surprising that CFIUS’s initial national security reviews focused on protecting the defense supply chain. At the time, however, some members of Congress wanted “national security” to include elements of economic security, but then-President Reagan’s administration resisted, citing the importance of the US government’s open investment policy.
Over time, however, the definition of “national security” expanded, whether organically, through amendments to the law, or executive orders. The changes did not, however, blur the line between national security and economic security until September 2022, when President Biden’s Executive Order 14083 directed CFIUS to consider (among other things):
- 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.
This directive gave CFIUS the authority to consider broader supply chain implications of a transaction, implicitly bringing economic security into the mix.
CFIUS’s formula for evaluating national security risks
CFIUS’s primary duty is to identify “risks” to US national security presented by a foreign investment, with “risk” defined almost mathematically as a function of “vulnerabilities” (the nexus between the US business’s activities and national security), “threat” (the capability and intent of the investor, or others acting through the foreign investor, to exploit the vulnerabilities), and “consequences” (the magnitude of the impact if the investor were to exploit the vulnerabilities).
Executive Order 14083, though issued over a year before the Nippon Steel-US Steel transaction was announced, is critical to CFIUS’s national security review of the deal. Unlike two other US steel companies, Cleveland-Cliffs Steel and Nucor Corporation, both of which had previously bid to acquire US Steel, there is no public information suggesting that US Steel is currently a participant in the US defense supply chain. Nevertheless, as a domestic steel producer, US Steel is still an important participant in the broader US supply chain. Under Executive Order 14083, that qualifies as a vulnerability.
The “threat” posed by Nippon Steel is less certain. The company says it will honor US Steel’s current contract with the United Steelworkers Union and there would not be layoffs or plant closures “as a result of the transaction.” These promises may not convince CFIUS, especially since the union contract expires in just two years and some condition other than the transaction could result in U.S. layoffs or plant closures.
Members of Congress have also raised questions about possible threats caused by Nippon Steel’s ties to China. Just having business operations in China is not automatically a problem for CFIUS; if it were, a large number of foreign multinationals would be disqualified from investing in the United States. Still, CFIUS can be expected to evaluate potential “guilt by association” with China, which sometimes is an important factor in CFIUS’s decision.
Finally, with respect to vulnerabilities, in the absence of current support for the US defense supply chain CFIUS would have to evaluate the potential impacts to the broader economy if the transaction were to interrupt product deliveries by US Steel.
A possible solution
CFIUS does not “approve” transactions. CFIUS’s standard for clearing an investment is a determination that there are “no unresolved national security concerns with the transaction.” This means CFIUS either identified no potential national security risks (including prospective, “over-the-horizon” risks), or it identified potential national security risks but was able to “resolve” them through measures aimed at “mitigation,” rather than “elimination.” If risks are identified but mitigation is not feasible, CFIUS can recommend that the President block the transaction.
President Biden’s public statement opposing the acquisition should not be taken to mean that the CFIUS decision is a foregone conclusion. The CFIUS process is largely technocratic, as indicated by the statement of Lael Brainard, Director of the National Economic Council, that the Biden administration is “ready to look carefully at the findings of any [CFIUS] investigation and to act if appropriate.”
Assuming CFIUS agrees that the potential loss of US Steel’s manufacturing capacity is a national security risk, CFIUS mitigation could come in the form of a “supply assurance” condition. Such conditions are often used to ensure that the US business continues to supply specific products in sufficient quantities and meet pre-transaction quality standards. In this case, since US Steel is not supporting current defense production, it is more likely that CFIUS would simply require prior approval for any reduction or relocation of US Steel’s production capacity in the United States.
CFIUS mitigation along these lines would make it more difficult for Nippon Steel to reduce US Steel’s workforce in Pennsylvania or elsewhere in the United States. US Steel would become a foreign-owned company, but President Biden’s promise to protect the jobs of US steelworkers would still be met. CFIUS mitigation could therefore address national security concerns while preserving US jobs and maintaining strong relations with Japan.
For further information, please contact:
Jonathan Gafni Partner, Linklaters
jonathan.gafni@linklaters.com
