Biden Administration's Blocking Order Sparks Legal Battles

President Joe Biden on Jan. 3, 2025, issued a blocking order (the Order) addressing the proposed acquisition of United States Steel Corporation (U.S. Steel) by Nippon Steel Corporation (Nippon Steel), Japan's largest steelmaker. The Order stated that there is credible evidence suggesting that Nippon Steel might take actions that could impair the national security of the U.S. through the proposed acquisition of U.S. Steel. As a result, the Order mandates the following:

• Prohibition of the Acquisition: The proposed acquisition of U.S. Steel by Nippon Steel and its affiliates is prohibited. This prohibition extends to any substantially similar transactions, whether direct or indirect, involving the purchasers, their shareholders or any foreign person beneficial owners.
• Abandonment of the Transaction: Nippon Steel and U.S. Steel are required to take all necessary steps to fully and permanently abandon the proposed acquisition within 30 days of the Order. This includes certifying in writing to the Committee on Foreign Investment in the United States (CFIUS) that the transaction has been abandoned.
• Weekly Compliance Reporting: Until the transaction is fully abandoned, Nippon Steel and U.S. Steel must provide weekly certifications to CFIUS. These certifications must detail their compliance efforts and include a timeline for the projected completion of the abandonment.

Political Background

The political background of President Biden's decision to block the acquisition of U.S. Steel by Nippon Steel is deeply intertwined with various national, economic and labor interests. This decision has sparked significant controversy and legal action, highlighting the interplay between national security, economic interests and political considerations. Importantly, the deal was announced to the backdrop of the heated presidential election campaign in 2024, and the outcome was inevitable given that all three candidates – President Biden, Vice President Kamala Harris and President-Elect Donald Trump – have expressed concerns with the deal and signaled that they would block the transaction. The blocking order confirms that timing was a key factor in the final decision.

National Security and Economic Policy

The Biden Administration has consistently emphasized the importance of protecting critical industries from foreign control, particularly those vital to national security. Steel production is considered a cornerstone of the U.S. defense industrial base, infrastructure and manufacturing sectors. By blocking the acquisition, the Biden Administration aims to ensure that the U.S. maintains control over its steel production capabilities, which are crucial for national security and economic resilience.

Labor Union Influence

A significant political factor in this decision is the influence of the United Steelworkers (USW) union. The USW is a powerful labor organization with a substantial membership base in key swing states such as Pennsylvania, Ohio and Michigan. These states are crucial for electoral success, and the support of the USW can be pivotal in securing votes. The Biden Administration's decision to block the acquisition aligns with the interests of the USW, which has been vocal about preserving American jobs and preventing foreign control of U.S. industries.

Pending Litigation

U.S. Steel and Nippon Steel vs. U.S. Government

U.S. Steel and Nippon Steel have alleged that the decision to block the acquisition was driven by political motives rather than genuine national security concerns. They claim that the Biden Administration's actions were aimed at currying favor with the USW and other labor groups. The companies have filed a lawsuit against the U.S. government, arguing that the review process conducted by CFIUS was corrupted by political interference. They allege that the decision was predetermined to satisfy the political objectives of the Biden Administration. The lawsuit, filed in the U.S. Court of Appeals for the District of Columbia Circuit, challenges the violation of constitutional guarantees of due process and statutory procedural requirements. The companies are asking the court to set aside the CFIUS review process and President Biden's blocking order.

U.S. Steel and Nippon Steel vs. Cleveland-Cliffs and USW

In addition to the lawsuit against the U.S. government, U.S. Steel and Nippon Steel have filed a second lawsuit against Cleveland-Cliffs, a rival steelmaker, and the USW. They accuse Cleveland-Cliffs and the USW of colluding to block the acquisition. Cleveland-Cliffs had previously attempted to acquire U.S. Steel and allegedly worked with the USW to prevent Nippon Steel's bid from succeeding. This lawsuit, filed in the U.S. District Court for the Western District of Pennsylvania, alleges illegal and coordinated actions aimed at preventing the transaction and undermining U.S. Steel's ability to compete.

Implications

The decision to block Nippon Steel's acquisition of U.S. Steel has significant implications.

First, the Japanese government might feel honor-bound to block a U.S. investment in Japan to save face. However, such a move is unlikely to affect the strong relationship between the two allies.

Second, the outcome of the lawsuits filed by U.S. Steel and Nippon Steel could set important legal precedents. Although it is not expected that the courts will challenge the president's authority to block the transaction and have a final say on the national security concerns, this case is important because it is one of the very few litigated CFIUS decisions, and the court rulings might affect some procedural aspects of the CFIUS review process in future transactions. These precedents could shape future CFIUS reviews.

Further, the legal challenges and allegations of political interference may lead to increased scrutiny of CFIUS' review processes. Although the ultimate outcome of a CFIUS review reflects the policy priorities of the sitting president – and political accountability was legislated in the review process in 2007 with the adoption of the Foreign Investment and National Security Act (FINSA) – there could be calls for greater transparency and accountability in how CFIUS evaluates national security risks associated with foreign investment. It is important to note that CFIUS functions through civil servants; however, ultimate sign-off is reserved to the heads of the represented departments and, ultimately, the president. To address concerns about political influence, CFIUS might implement revised procedures to ensure that the career employees conduct the reviews impartially and based solely on national security considerations. This could involve stricter guidelines and oversight mechanisms. Ultimately, the final decision is a political one.

Lastly, the controversy surrounding the blocked acquisition and the subsequent legal battles may affect foreign investors' calculations in the timing of an investment and create a new ripple in the business cycle, including altogether abstaining from major investments in a campaign year. Potential investors might become more cautious, fearing that their transactions could be subject to similar political considerations.

If you have any questions, reach out to the authors or another member of Holland & Knight's CFIUS and Industrial Security Team.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.