Introduction

Since 2015, the number of countries with national security-based foreign direct investment (FDI) screening regimes has more than doubled. This expansion comes along with the broad regulatory touchstones, such as national security, public order, or national interest. These frameworks stem from concerns that cross-border mergers and acquisitions (M&A) don’t merely seek economic objectives and may facilitate espionage to reveal sensitive information, critical technologies, and proprietary know-how. These concerns are further shaped by the nationality of the acquirer and the sector in which the investment is targeted.

While there may be transactions that warrant legitimate assessment and blockade citing security concerns, the issue arises from the ambiguity in the regulation, which grants the government unfettered power to reject purely economic activities under politically charged notions of sovereignty and geopolitics. Using the Nippon Steel–U.S. Steel acquisition as a case study, this article examines how national security risks are being transformed from a protective safeguard into a bargaining tool. The article traces the transaction’s trajectory from initial prohibition to extensive conditional approval and argues for reforming contemporary FDI screening frameworks to strike a balance between national security concerns and the principles of openness, transparency, and institutional coordination.

Blocking First, Bargaining Later: Protectionism Wrapped in Elastic Security

Across jurisdictions, there is a growing convergence that maintains ambiguity about what ‘national security’ entails, raising concerns. These ambiguities are not incidental but intentional, enabling the state to invoke national security as a flexible justification to reject investments that may fall short of the rationales. This dynamic is illustrated by the United States (U.S.) handling of the proposed Nippon Steel–U.S. Steel acquisition.

The Initial Proposal, Blockade & Reversal

Nippon Steel Corporation (the world’s fourth largest steel producer) announced its decision to acquire U.S. Steel Corporation with the objective of becoming a global leader in steelmaking. However, the proposed transaction attracted criticism from the United Steelworkers and from the rare bipartisan unity in the U.S. The deal underwent review by the Committee on Foreign Investment in the United States (CFIUS) and was referred to the President for a decision under section 721(d), resulting in an order prohibiting the proposed transaction. The rationale offered behind the blockade was that allowing the transaction would result in foreign control of a domestic firm, which is relevant to the country’s infrastructure.

However, what began as a rare display of bipartisan unity soon dissolved into a sharp political reversal, and the authority to review and reconsider was taken into account, with the presidential memorandum being soon issued, directing the CFIUS for a de novo review for further assistance. The CFIUS recommended allowing the deal, subject to ‘mitigation measures’ and conditional approvals to the national security agreement (NSA).

The deal was contingent upon the Golden Share, which grants the state executive extraordinary controlling rights over the company. As per the Securities and Exchange Commission filing for the submission for conditional approvals, the U.S. Government will have certain rights with respect to U. S. Steel, relating to governance, domestic production, and trade matters, along with the reconstitution of the board of directors and officers based on the NSA.

Assessing the Finalised Deal from the Principle of Regulatory Proportionality

As the Organisation for Economic Co-operation and Development (OECD) guidelines suggest, the recipient country’s investment policy should be fair, with the impact on investment flows only to the extent required. The principle of ‘Regulatory Proportionality’ serves this purpose by ensuring that the decision to protect national security must not come at an unnecessary cost.

The Regulatory Proportionality recommendations call for –

First, A Clear, Identifiable Nexus between Investment Restrictions and National Security Concerns – The rationale offered at the time of the blockade, to protect critical infrastructure and maintain a resilient supply chain, seems to fail in maintaining a clear nexus between investment restrictions and National security concerns. The threshold for invoking national security requires a rigorous risk assessment that demonstrates how the transaction, if pursued, has the potential to compromise a defined security interest.  As Nippon Steel had already assured that production in the U.S. would continue, the need to invoke the NSA on national security grounds lacks any genuine rationale and suggests considerations beyond demonstrable security risk.

Second, Narrow Focus – The OECD guidelines emphasize that investment restrictions should be narrowly directed toward genuine national security concerns. Yet, in this case, the mandated $11 billion investment by 2028 and the U.S. government’s acquired rights over U.S. Steel’s name and headquarters appear difficult to reconcile with any plausible security rationale. It is unclear how imposing a fixed timeline for capital infusion directly mitigates a national security threat, rather than serving broader economic or political interests. Similarly, the authority to alter the company’s name or headquarters raises the question: what conceivable security risk is neutralised by such powers? These conditions fail to demonstrate a clear nexus between the identified risk and the restrictive measures.

The importance of U.S. steel during the proposed acquisition was often framed through the lens of it being ‘strategic’, ‘critical’, and ‘vital’ for National Security, a perspective that echoes the “no price is high enough” argument in FDI screening critiques. This view posits that no offer from a foreign acquirer should suffice, as it fails to take into account the effect on local communities and along supply chains, such as job losses or economic disruptions. However, what the host country during its assessment failed to self-assess is the ambiguity of FDI regulation and the failure to take into account the fundamental objective behind cross-border acquisitions, being simply motivated by the belief to use the acquired firm’s assets and capabilities to reap the efficiency gains. However, with the distortion of the narrow focus concept, the US restricted the benefits Nippon Steel could derive, prioritizing control over proportionate risk mitigation.

Third, Restrictive Measures as the Last Resort – No cogent risk could be drawn from an investor who had offered extensive mitigation strategies to mitigate national security concerns.  Still, the Golden Shares were ultimately imposed. As is often remarked, in matters of power, more is always less. Viewed against the stated security objectives, the condition operates less as a risk-mitigation measure and more as a means to satisfy the deeper appetite for control. If the golden share did not secure the “national security concern,” it certainly secured the “control concern,” as highlighted by the U.S. President himself: “We have a golden share, which I control, or the president controls. Now I’m a little concerned, whoever the president might be, but that gives you total control.” 

Fourth, National Security Restrictions must be weighed against their Impact on Open Investment – As this Article began by highlighting the growing convergence of FDI regulation measures, any cross-border M&A that takes place would be viewed as a precedent. Host countries with these open-ended regulatory touchstones could threaten to block an investment and later bargain that power to take control over something that falls outside legitimate security rationales.

The U.S steel-Nippon deal highlights how national security has been wielded as an open-textured regulatory tool, stretched beyond genuine risks.

Reforming FDI Screening: Principles, Clarity, and Institutional Alignment

The preceding section revealed how the finalized Nippon Steel-U.S. Steel deal failed to adhere to the principles of regulatory proportionality. This section proposes reforms that can be incorporated into FDI screening regimes, reconciling national security objectives with openness to investment, limiting discretionary or protectionist actions.

First, Institutional Coordination at the National Level – Though merger control and FDI screening regulation seek to interact with two distinct objectives, a single transaction may be subject to parallel review processes, resulting in a layer of complexities. For instance, the requirement to notify separately for different filings and provide different information to separate review mechanisms, passing through different application timelines, and the possibility of acceptance under one regime while being blocked under the other. Coordination between the parallel regimes and the relevant authorities would ease the investor’s concerns, thereby raising confidence in the recipient country, while also allowing the authorities to engage in reviews addressing similar concerns. The coordination can help the recipient country to devise a proportional measure that can be proposed to investors from both the lens of anti-competitive effect and national security.

Second, Ending the Ambiguities and Providing Clear Rationales – In international investment law, national security has traditionally been understood in regard to defence activities (e.g., military and military-related businesses); however, the scope has been broadened to include domestic industries or sectors considered vital, critical infrastructure, and natural resources. Nations across the globe, including the U.S., Australia, and the EU, converge on terms like ‘national Security’, ‘public order’, and ‘national interest’ that remain undefined. The Foreign Investment Risk Review Modernisation Act of 2018 adopts an understanding of ‘national security’ that extends beyond traditional defence to include homeland security and critical infrastructure. In contrast, Australia’s screening framework operates on a risk-based, case-by-case basis, leaving the notion of ‘national interest’ and ‘national security’ undefined. The EU FDI screening regulation follows a structured yet non-exhaustive indicative-factor approach, identifying the potential factors that can be helpful for member countries in determining the investment effect on critical infrastructure, critical technologies, supply of essential inputs, access to sensitive data, media pluralism, and the nature or control of the foreign investor. These divergent regulatory models, such as the U.S. expansionist approach, Australia’s discretionary risk-based balancing, and the EU’s factor-guiding approach, nonetheless share one commonality: preserving strategic flexibility in foreign investment regulation.

There can be no dispute that FDI policy and what constitutes ‘national security’ are matters of a country’s sovereignty and are shaped by its geopolitical and policy landscape. The issue of definitional ambiguity that accompanies it demands resolution. This can be achieved through a country’s approach to proper consultation with stakeholders who have firsthand experience with investment screening, as well as engagement with international organizations and governments that possess robust investment screening frameworks. One-way States may enhance regulatory clarity is by establishing clearer rules and guidelines to refine their regulatory approaches. Countries that are investment hubs themselves and have experienced cross-border investment approvals and declines can leverage that experience by analysing their patterns and crafting more precise definitions of what ‘national security,’ ‘national interest,’ and ‘public order’ might entail. Additionally, by publicly releasing non-confidential decisions, states can move towards greater transparency. This would provide investors with an ex-ante reference framework before submitting any investment proposal.

While exercise of discretion in certain investments on the part of the host country is required, a regulation that provides specificity in terms of what strategic sectors are subject to mandate screening and specific sectors that demand certain requirements to be fulfilled on the investor’s part would only enhance commitment to an open and predictable investment regime.             

Third, Abiding by What’s Right – As the OECD and World Trade Organisation (WTO) both consider national security to be of paramount importance, and reflect the need to have such FDI screening regulation in place. Such organisations also illustrate how an investment that effectively passes through the merger control regime, falling short of anti-competitive practices, can be hindered by the invocation of FDI regulation on protectionist grounds.  Anchoring FDI regulations in principles of proportionality, transparency, and non-discrimination would allow nations to safeguard national security while fostering investor confidence, promoting cross-border investment, and strengthening the global investment culture.

Conclusion

With ambiguous FDI screening measures expanding across nations, global FDI flows are likely to decline. The Nippon Steel–U.S. Steel deal illustrates how ambiguous terms in national security clauses can be invoked by states, diverging from guidelines such as the OECD principles that call for balancing national interest with proportionality, transparency, and predictable evaluation standards. The task ahead is to establish a regulatory framework that clarifies necessary definitional ambiguities, aligns with OECD-recommended standards, and takes a step toward acknowledging the need for coordination between merger control and FDI screening measures, thereby advancing both investor confidence and effective state oversight. Ultimately, national security must remain a safeguard, not a shield for state discretion.  

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Deepika Kapoor is a third-year B.A. LL.B. (Hons.) student at Dr. Ram Manohar Lohiya National Law University, Lucknow.

Divyanshu Ray is a first-year B.B.A. LL.B. (Hons.) student at Chanakya National Law University, Patna. 

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