Biden Decision to Kill Nippon Steel Deal Could Spark Legal Challenge

The Washington Post / David J. Lynch

13:39 JST, September 11, 2024

A decision by President Joe Biden to kill Nippon Steel’s planned acquisition of U.S. Steel could ignite a legal fight over a corporate takeover that has become an election-year drama and threatens to complicate relations with one of the United States’ closest allies.

Both companies say privately that the Biden administration has politicized the interagency process that reviews foreign companies’ purchases of U.S. assets to gain the United Steelworkers union’s backing for Vice President Kamala Harris in the November election.

The Committee on Foreign Investment in the United States (CFIUS) recently informed both companies that it believes the deal would harm U.S. national security. Both Nippon Steel and U.S. Steel hotly contest that finding and have suggested a willingness to fight an eventual presidential verdict.

“The parties will challenge it. They will go to court and once you go into court, then all of the stuff that has been confidential and that is not going to make [the government] look good, will be out there for the whole world to see,” said one person familiar with the matter, who spoke on the condition of anonymity because they were not authorized to speak publicly.

The administration’s handling of Nippon Steel’s bid has been unusual enough to invite legal action, according to several CFIUS specialists. But a courtroom challenge could face a narrow path to success.

In March, Biden publicly said that he opposed the sale of U.S. Steel to a foreign company.

“U. S. Steel has been an iconic American steel company for more than a century, and it is vital for it to remain an American steel company that is domestically owned and operated,” he said at the time.

The U.S. Chamber of Commerce called the president’s remarks “inappropriate and counterproductive,” accusing Biden of politicizing the CFIUS process.

“This looks abnormal. This is not the way the process normally works,” said Rick Sofield, who was the Justice Department’s CFIUS representative from 2008 to 2018 and participated in the review of more than 1,000 transactions.

The committee typically develops what it calls a “risk-based analysis” of any transaction, weighing the national security threats and vulnerabilities it poses. The analysis, which includes intelligence community input and information from the parties, serves as the basis for a formal recommendation to the president.

By appearing to prejudge the case in March, the president may have opened the committee to significant legal risk, said Sofield, now a partner at Debevoise & Plimpton in New York.

In the wake of a June Supreme Court ruling that overturned the “Chevron doctrine,” courts also are less inclined to defer to government agencies. If a judge finds the committee’s national security arguments unreasonable, it could result in a decision that would curtail the committee’s powers, Sofield said.

As the CFIUS process in recent weeks seemed to be moving toward killing the deal, the companies wrote to the panel asking to withdraw their submission. By withdrawing a filing, companies can effectively reset the committee’s clock and gain more time to make their case.

But CFIUS did not reply to the withdrawal request, according to two people familiar with the matter, who described the failure as curious.

A Treasury spokesperson declined to comment on that account.

Biden, who bills himself as the most pro-union president in history, secured the United Steelworkers’ endorsement in March. After Harris replaced him on the ticket, the union – which has opposed the Nippon Steel takeover – announced its backing for her in July.

The union’s organizational muscle is a key to Democratic hopes of winning Pennsylvania and its 19 electoral votes in November.

On Wednesday, U.S. Steel said it would “pursue all possible options under the law” to close the deal. Nippon Steel said it “strongly believes that the U.S. government must appropriately handle procedures on this matter in accordance with the law.”

Under the 1950 Defense Production Act, which established CFIUS, presidential decisions in cases such as this one are not subject to judicial review. Judges, however, may scrutinize the process that the committee follows to ensure that it protects the parties’ constitutional rights to due process.

In CFIUS matters, the government “is generally seen as judge, jury and executioner, which is why it’s so important that they follow the facts and make the correct substantive analysis and conclusions based on those facts,” said Alexis Early, a partner at Jenner & Block in Washington.

In 2012, President Barack Obama blocked Ralls Corp., which was owned by two Chinese citizens, from buying four American wind farms in Oregon, which were located near a U.S. military installation. Ralls that year filed the first federal lawsuit challenging a CFIUS decision, but ultimately reached a settlement with the government.

Biden’s decision to nix the Nippon Steel bid came after CFIUS wrote both companies detailing its conclusion that the acquisition raised national security concerns. The committee has yet to deliver its final recommendation to the White House, Karine Jean-Pierre, the president’s press secretary, said on Thursday. No date has been set for any presidential announcement on the deal.

CFIUS, an interagency panel chaired by the Treasury Department, said the acquisition could lead to “a reduction in domestic steel production capacity,” according to a person who had seen the letter and spoke on the condition of anonymity because they were not authorized to speak publicly.

Nippon Steel’s takeover of the third-largest steelmaker in the United States could interrupt supplies for what CFIUS described as “sectors critical to national security, particularly transportation, infrastructure, construction and agriculture.”

Nippon Steel has challenged that conclusion, insisting for months that the acquisition will increase domestic steel output, thanks to billions of dollars in new investment.

Independent analysts also doubt that U.S. Steel’s sale to a company in Japan – a major U.S. ally for decades – raises any real security worries. The Pentagon’s annual steel requirements consume just 3 percent of total U.S. production, according to the Defense Department.

But CFIUS, a secretive committee that discloses few details of its operations, determined that the acquisition would imperil the U.S. industry’s ability “to meet the full spectrum of national security requirements.”

Nippon Steel and U.S. Steel dispute that conclusion, which also left some independent experts puzzled.

“Where many of us CFIUS practitioners are confused is, it’s like they’re adding one plus one and getting seven,” said Early.