DealLawyers.com Blog

Yes, the circumstances surrounding the U.S. Steel & Nippon Steel deal were unprecedented. You’re unlikely to ever face a similar combination of challenges in your career. But the Wachtell team via this CLS Blue Sky blog says there are some lessons to be learned from the deal — and the successful closing:

A transaction may face strong opposition, despite being a win for all key stakeholders:  The U. S. Steel – Nippon Steel combination will deliver resources, advanced technology and durable, well-paying domestic jobs, allowing U. S. Steel to grow and prosper.  Stockholders also benefited from one of the highest deal premia ever paid in an industrial transaction, a reflection of the successful turnaround recently executed by the U.S. Steel Board and management.  None of this was enough to insulate the transaction from becoming a political football, drawing opposition from state and federal elected officials and candidates from both political parties.

Trust your judgment and focus on the long-term:  The U.S. Steel Board and management team never wavered from their focus on delivering the transaction.  The chattering classes said the transaction was dead.  The Board was neither deterred nor distracted, pursuing a mix of strategies, including litigation, active public messaging and continued outreach to key constituencies.  Others do not have all the facts a well-informed board and management team will have, and directors and management should not let outside judgments replace their own, well-informed view.  Focus on the long game.

Regulatory contract terms matter, but strategic alignment and deal logic dominate:  Transacting parties need to be prepared for regulatory scrutiny, even if the risk is considered low.  In the current global environment, politics or other exogenous factors can easily come into play, often in unexpected ways.  Not all partners will be as fully committed as U.S. Steel and Nippon Steel, especially when deals take longer than expected.  Contractual efforts commitments by parties and outside dates will be critical when deals are tested, and must be considered with respect to foreign direct investment clearances, including our own CFIUS regime, in addition to antitrust requirements.  When unexpected barriers appear, the strength of the strategic and financial logic of the deal are paramount.  Such developments require innovative (“unprecedented”) solutions, often not capable of being addressed in advance in deal documentation nor anticipated at signing—strategic alignment and industrial logic may be determinative.

Communications and transparency matter:  U.S. Steel approached its internal and external communications transparently and candidly.  Employee communication was essential, but shareholders, customers, business partners and politicians were all critical constituencies that made a difference in the outcome.  A well-designed, clear, cogent messaging campaign, through both traditional and innovative media, achieved the necessary goal of cutting through the widespread misinformation about the transaction, speaking with one voice and gaining the enthusiastic support of much of the rank-and-file union membership, who became effective advocates for the combination.

One of the most unusual aspects of the deal was that, “in addition to a national security agreement, the transaction resulted in a first-of-its-kind’ golden share,’ with highly customized, specific rights issued to the U.S. government.”

The Administration wanted a strong mechanism to complement commitments being made in the national security agreement also being agreed by the parties as part of the CFIUS process, and to reinforce the continued American character of U.S. Steel.  The golden share provides the government with the right to appoint one director, and affords the President or his designee consent rights over specified matters, including reducing the capital commitments made by Nippon Steel, changing U. S. Steel’s name or headquarters, transferring jobs abroad, and certain decisions involving closing or idling of facilities, trade and labor matters and sourcing outside the United States. These rights are in addition to a commitment to a board of directors comprised of a majority of U.S. citizens.

What’s the broader lesson from this first-of-its-kind? Flexibility. The blog says staying flexible is key to identifying a creative path to closing that aligns with your “go-forward plans and strategy.”

– Meredith Ervine