RPT-BREAKINGVIEWS-US Steel spat strengthens case for deal guardrails

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Jonathan Guilford

NEW YORK, Jan 8 (Reuters Breakingviews) - A 123-year-old steelmaker’s fate could yet become a restraint on modern-day executive power. United States Steel X.N and suitor Nippon Steel 5401.T have gone to court over U.S. President Joe Biden’s decision to nix their $15 billion deal. Reversing the decision is implausible. The best outcome would be one that strengthens trust in the opaque process by which the U.S. reviews investments from overseas.

The takeover of U.S. Steel in an election year was always going to be a political tinderbox. The company is one of two crucial domestic suppliers to the automotive industry. The United Steelworkers union, which represents its employees and supports Biden’s Democratic Party, is hostile to the company’s shift from coal-fired blast furnaces to cleaner and less labor-intensive electric furnaces. That enmity boiled over when U.S. Steel spurned a deal with union-friendly rival Cleveland-Cliffs CLF.N, instead selling to Nippon.

The transaction was subject to review by the Committee on Foreign Investment in the United States, an inter-agency panel that screens deals for security risks and can refer them to the White House to be blocked. On Friday, that is exactly what happened.

CFIUS had never blocked a Japanese buyer. Moreover, its constituent agencies disagreed on whether the takeover of U.S. Steel posed a threat, CNN reported. Attorneys say such internal division is unprecedented. Stopping the Nippon takeover could potentially push U.S. Steel into Cleveland-Cliffs’ arms, an outcome the union prefers. Given that Biden had declared his opposition to the Japanese takeover before the CFIUS review began, the appearance of political trading is clear.

Suing the government is not as far-fetched as it may seem. American courts have been limiting federal agencies’ discretion, from circumscribing internal tribunals to ending a doctrine that deferred to regulators’ interpretations of statutes. Official bodies have taken note. The Federal Reserve last month preemptively softened the stress tests to which it subjects banks right before lenders took the unusual step of suing their regulator.

National security determinations are ordinarily beyond legal review. But courts have tinkered with the CFIUS process before. A 2014 ruling held that the body’s black-box proceedings violated due process protections. The U.S. Steel case is broader, however. It turns on whether pressure from Cleveland-Cliffs and the steelworkers’ union perverted the review.

The most dramatic plausible outcome might be a re-run of the review under President-elect Donald Trump, who is also hostile to the deal. But a court could also try to force CFIUS to show that it is laser-focused on legitimate security concerns or at least subject its decision process to public scrutiny. As an unabashedly transactional president prepares to take office, the case for courts installing some guardrails for future takeovers by foreign investors is overwhelming.

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CONTEXT NEWS

United States Steel and Nippon Steel on Jan. 6 filed a petition for review of the decision by President Joe Biden to block their $15 billion deal in the United States Court of Appeals for the District of Columbia Circuit. The petition claims that a review by the Committee on Foreign Investment in the United States, which referred the transaction to the President, violated the companies’ due process rights, that it violated the Administrative Procedures Act and the law authorizing CFIUS, and that the President acted beyond his authority.

The companies also filed a complaint in the United States District Court for the Western District of Pennsylvania against rival U.S. steelmaker Cleveland-Cliffs, its CEO Lourenco Goncalves, and David McCall, the president of the United Steelworkers union, which represents many U.S. Steel employees. The complaint claims that Goncalves and McCall illegally interfered in the deal review and sought to monopolize the domestic steel market.

On Dec. 24, groups representing major U.S. banks, along with the Chamber of Commerce, filed suit against the Board of Governors of the U.S. Federal Reserve, claiming that the regulator’s annual stress tests used to set capital requirements violate the APA and banks’ due process rights. The suit came one day after the Federal Reserve announced it would make changes to the stress tests owing to the “evolving legal landscape.”

(Editing by Peter Thal Larsen and Pranav Kiran)

((For previous columns by the author, Reuters customers can click on GUILFORD/
Jonathan.Guilford@thomsonreuters.com))