The Nippon-U. S. Steel Deal, a Golden Share, and Magic Beans

On June 13, President Donald Trump issued an order authorizing the acquisition of U. S. Steel Corporation by the Japanese corporation Nippon Steel, ending an eighteen-month saga over the company’s ownership.  

Hovering over the deal was an important question of national policy: Would the U.S. government try to preserve a generally welcoming posture for foreign investment?  

This open investment policy has helped the United States obtain more foreign investment than any other country, a boon to innumerable U.S. companies. In the last decade, concerns about competition from China and national security have caused the United States to curtail that open investment policy, but those concerns were not present in the Nippon-U. S. Steel deal. Instead, domestic political considerations—particularly opposition by the United Steelworkers union leadership and concerns that the acquisition would be inconsistent with an image of U.S. manufacturing prowess (important to both Presidents Trump and Joe Biden)—threatened the deal. 

So, in the end, which prevailed—the national interest served by an open investment policy, or the political desire to maintain an upbeat image of U.S. manufacturing? The answer is “yes.”   

The acquisition’s ultimate authorization should be cheered, but simultaneously jeered because approval was conditioned on (1) Nippon agreeing to measures befitting a national security risk (which did not exist); (2) Nippon agreeing to economic obligations that strayed far from traditional national security measures (the imposition of unwarranted national security measures has become common, but the imposition of measures unrelated to national security is unprecedented); and (3) the characterization of the U.S. government as holding a “golden share” and other optical magic beans meant to portray the acquisition as a partnership between Nippon, U. S. Steel, and the U.S. government. That all of these trappings were needed suggests the U.S. open investment policy is not robust.  

Saga Background 

The Nippon-U. S. Steel story included a number of twists. President Biden initially blocked the acquisition on the grounds of national security risks cited by a few members of the Committee on Foreign Investment in the United States (CFIUS). CFIUS is the government arm that reviews foreign investments for national security implications and is comprised of many government agencies. Reporting indicates those who favored blocking were outliers, driven by Biden’s political concerns. 

President Trump, responding to those same concerns, stated repeatedly that he also would block the acquisition (“a horrible thing” that he would “block instantaneously”). But then faced with the likelihood that U. S. Steel would founder absent the Nippon acquisition and that thousands of manufacturing jobs would be at risk, Trump ordered an unprecedented re-review of the acquisition by CFIUS. He then reversed his opposition to the deal, finding that national security risks could be mitigated by conditions on the deal. 

The purchase price was $14.9 billion, excluding significant costs of government-imposed mitigation. 

Neither the deal parties nor the U.S. government have publicly disclosed all details, but they have described the mitigation in broad strokes. The measures generally fall within one of three categories: common CFIUS national security mitigation, unprecedented economic conditions, and optical magic beans such as the characterization of the mitigation as a “golden share.” 

Common CFIUS National Security Mitigation 

When CFIUS finds that a foreign investment creates national security risks, it can require mitigation measures to approve the deal or else refer it to the president for blocking.  

The vast majority of CFIUS activity is not visible by the public, but the committee does publish an anonymized list of commonly utilized mitigation measures. Nippon and U. S. Steel agreed to several such measures, including: a requirement that U.S. citizens occupy key management positions and make up the majority of the board of U. S. Steel (now a Nippon Steel subsidiary); U.S. government veto power over moving facilities overseas; and a company commitment to maintain U.S. production capacity.  

Although such measures are commonly used, that does not mean these measures were sensible here. The U.S. defense industry is not reliant on U. S. Steel. Further, Japan is a close ally, and it defies logic to think Nippon would purchase U. S. Steel and then curtail production to hamstring the United States. In recent years, though, CFIUS has often imposed mitigation because it is politically expedient to do so, and that seemingly was the case here. Mitigation enabled the government to claim it saved U. S. Steel and attendant jobs, prevented unfettered foreign control of U. S. Steel, and protected national security. The announced mitigation advanced a government narrative that the deal was a partnership, not an acquisition, a narrative more consistent with an image of U.S. manufacturing prowess. 

Unprecedented Economic Conditions 

Were it just the imposition of traditional CFIUS national security measures, that would have been unfortunate but commonplace. Yet it was worse than that. CFIUS has authority to negotiate “mitigation agreements or other conditions necessary to protect national security.” But as a practical matter, there is no court or other body to police CFIUS decisions; judicial review generally is unavailable. This means CFIUS can require virtually any mitigation measures in virtually any deal merely by invoking the words “national security.” 

Some of the mitigation measures outlined for the Nippon-U. S. Steel deal stray far from traditional national security measures. Protecting the salaries of workers and veto rights over moving headquarters from Pittsburgh to another U.S. location have no national security value; similarly, a requirement that Nippon invest billions of dollars in manufacturing facilities seems an opportunistic move by the U.S. government rather than one grounded in national security concerns. 

Those economic measures, though, further advanced the U.S. government narrative of a partnership rather than an acquisition. 

A Golden Share and Magic Beans 

Finally, the partnership-not-acquisition narrative was advanced through the characterization of the mitigation as a golden share—a label commonly associated with European governments’ special stakes in defense companies, whereby a small equity stake entitles the government to veto certain corporate transactions (e.g., if a defense company were going to sell its satellite business, the government could intervene).  

It is odd that the government characterized the mitigation agreement for the Nippon-U. S. Steel deal as a golden share, particularly because the terms are focused on U. S. Steel; there is no suggestion the U.S. government will broadly control Nippon at the parent level. But the golden share terminology conveys a sense of U.S. control, consistent with the partnership narrative. 

As an additional magic bean, the Trump administration has emphasized that the president himself, rather than CFIUS, can exercise prerogatives of the mitigation agreement. But CFIUS always reports to the president, and CFIUS authorities in any mitigation agreement can be exercised by the president. Regardless, Trump’s direct involvement in this agreement is an unprecedented rhetorical flourish and supports an image of a heavy U.S. government hand on the wheel as Nippon drives forward. 

The ability for Nippon to move forward with this deal at all arguably maintains an open investment stance better than Biden’s blocking the deal. But the mitigation measures could make other foreign suitors think twice about the U.S. market. If the U.S. government effectively doubles the purchase price for a stake in a U.S. company and requires an onerous partnership, the deal might be less appealing. 

Stephen Heifetz is a former U.S. government national security official and currently a partner at the law firm Wilson Sonsini Goodrich & Rosati. The views expressed do not necessarily represent the views of the firm or any of its clients.