The proposed merger between U.S. Steel Corp. and Japan’s Nippon Steel Corp. has hit a seemingly insurmountable wall, with legal experts citing long odds for success in the face of legal and political challenges.
“This is completely uncharted territory, and anyone who has confidence about the outcome is fooling themselves,” said Stephen Heifetz, a partner at Wilson Sonsini and a former Deputy Assistant Secretary for Export Administration.
President Joe Biden on Jan. 3 blocked Nippon’s $14.9 billion proposal to purchase Pittsburgh-based U.S. Steel after the Committee on Foreign Investment in the United States (CFIUS) failed to reach consensus on the possible national security risks of the deal.
Once CFIUS deferred the decision to Biden, the president also nixed it based on national security concerns.
Then, in a development that reflects confidence that the U.S. Steel-Nippon deal is likely dead: Ohio-based steel-making rival Cleveland-Cliffs Inc. is reportedly partnering with Charlotte, N.C.-based steel producer Nucor Corp. to make a takeover bid for U.S. Steel. Cleveland-Cliffs in 2023 attempted to buy U.S. Steel, but its offer was rejected after Nippon made a higher bid.
Despite the roadblocks, U.S. Steel and Nippon Steel remain determined to fight, and Jan. 6 filed a federal lawsuit in the U.S. Court of Appeals for the District of Columbia challenging Biden’s decision, which they allege was a political decision without legal basis. “Nippon Steel and U.S. Steel have engaged in good faith with all parties to underscore how the transaction will enhance, not threaten, United States national security,” the companies said in a statement.
In a separate lawsuit filed the same day, the parties also accuse Cleveland-Cliffs and the national United Steelworkers union of orchestrating a campaign to derail their proposed merger.
And in yet another lawsuit filed this month by the parties — this one in the District Court for the Western District of Pennsylvania — U.S. Steel and Nippon accuse Cleveland-Cliffs and its CEO Lourenco Goncalves, along with David McCall, the head of the steelworkers union, of “engaging in a coordinated series of anticompetitive and racketeering activities” to block their deal.
So what’s the path forward for the steel companies?
“Anything, truly anything, could happen in this case,” said Heifetz, adding that the parties could refile a new transaction with CFIUS, one that looks much like the deal that Biden blocked but that would receive a new CFIUS review, or litigate with respect to the CFIUS case that Biden blocked.
“There are an array of potential obstacles for each path, but with respect to either path the parties might ultimately end up in front of President Trump, who could make a decision different than the one Biden made,” Heifetz wrote in an email on Wednesday.
Refiling the transaction with CFIUS would be unprecedented, and CFIUS might refuse to review it — particularly because the Biden order purports to block the transaction and all similar transactions — but the litigation path also is nearly unprecedented, he explained.
“We just don’t know how the many potential participants in this mess will act or how others will respond,” wrote Heifetz.
Additionally, Heifetz said in an interview that litigation involving national security issues tends to heavily favor the Executive Branch, with courts traditionally deferring to presidential decisions. And that seems especially likely in this case, he said, because the statute says that the president’s decision is not subject to judicial review in such matters, and courts might not want to second guess the administration on matters of national security.
Other legal experts agree.
Aimen Mir, partner and head of the CFIUS Practice at Freshfields US LLP, explained that the CFIUS statute provides that the president’s findings that there is a threat to national security and the action he deems necessary to prohibit a transaction are not subject to judicial review, “so the bar to challenge any finding of the president pursuant to the CFIUS statute is high,” he said.
The president and CFIUS have been sued once by private parties under the CFIUS law, explained Mir, who cited Ralls Corporation v. Committee on Foreign Investment in the United States.
Ralls, a U.S. company owned by Chinese investors, challenged a presidential order requiring it to divest its interest in four Oregon wind farms due to national security concerns, Mir wrote in an email.
“The Court of Appeals held in 2014 that Ralls was deprived of its constitutionally protected property interest without due process and ordered CFIUS to provide Ralls with access to the unclassified evidence on which the president relied and the opportunity to respond,” he said. “Ralls ultimately settled with the government.”
Likewise, Jonathan Gafni, senior counsel and head of U.S. Foreign Investment at global law firm Linklaters LLP, detailed in a Jan. 7 blog the legal challenges surrounding the deal, and emphasized the limited scope for court intervention in cases reviewed by CFIUS.
“The law governing CFIUS limits the potential scope of court challenges to adverse decisions following CFIUS reviews, but does not limit them entirely,” Gafni wrote.
He explained further that, 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 U.S. 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, wrote Gafni.
“However, FIRRMA adds one other provision: A civil action challenging an action or finding under FIRRMA may be brought (only) in the D.C. Circuit Court,” he wrote, noting that this third provision recognizes that court challenges following CFIUS reviews cannot be barred completely, acknowledging the D.C. Circuit Court’s 2014 decision in Ralls v. CFIUS that parties can assert that the CFIUS process violated the Fifth Amendment to the U.S. Constitution by depriving parties of property without due process of law.
Gafni added that to succeed with their due process claim, Nippon Steel and U.S. Steel would have to convince the D.C. Circuit Court that they had a constitutionally protected property interest and that the CFIUS process leading to President Biden’s order did not constitute “due process.”
And regarding the parties’ claims that Biden’s decision to block the merger was politically motivated rather than grounded in national security, Gafni said that, assuming CFIUS didn’t 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.
In another scenario, if U.S. Steel wanted to amend the commercial terms of the transaction with Nippon, any significant change of material terms would likely again need shareholder approval.
For its part, U.S. Steel said in a Jan. 13 statement that it “remains committed to completing” its merger agreement with Nippon.
In related action, the White House last weekend did extend the deadline for Nippon to permanently end its pursuit of U.S. Steel until June.
More federal disapproval
There are also opponents to the deal on Capitol Hill. Trump said during his presidential re-election campaign that he wouldn’t support the merger. Newly elected U.S. Sen. Elissa Slotkin (D-MI) and U.S. Rep. Debbie Dingell (D-MI), for instance, also have voiced opposition to foreign ownership of key industries like steel.
Slotkin, who serves on the U.S. Senate Homeland Security and Governmental Affairs Committee, said during a Jan. 3 virtual press conference that Biden’s decision to block the deal was a “positive thing,” and cited the importance of maintaining domestic control over critical supply chains for economic and national security concerns.
Likewise, Dingell issued a separate statement saying the United States must keep American steel manufacturing capacity owned and operated within the country.
“It is critical to our economic security and national security that we keep our steel manufacturing ability and jobs strong here in America,” she said. “The backbone of our economy cannot be dependent on foreign countries and manufacturers.”