Assessing the Legal Bases for the Defense Department’s Equity Stakes
The Department of Defense has long been a mover of markets, but, over the past year, it has become a direct investor in them. In mid-2025, the Department of Defense announced that it was taking a 15 percent stake—valued at $400 million—in MP Materials, a critical minerals firm. Over the following months, the Defense Department announced investments in an array of other private companies, including a 10 percent stake in Trilogy Metals and a 40 percent stake in a smelting joint venture with Korea Zinc. These investments were limited to upstream inputs—mostly critical minerals—until January, when the Defense Department announced that it was taking a $1 billion stake in L3Harris’s Missile Solutions (L3MS). The department hailed the move as a key step toward realizing its Acquisition Transformation Strategy, which emphasizes direct investments to enhance the resilience of the defense industrial base (DIB). Both the Defense Department, which sought a reliable stream of solid rocket motors, and L3Harris, whose stock value increased by 11 percent on the announcement of the news, stood to benefit from the deal.
This comes as part of a broader governmental move to take stakes in private companies such as Intel and U.S. Steel. The Trump administration has touted the strategic and economic logic of its equity stakes, which it views as increasing the alignment between the federal government and the defense industrial base. But it has never publicly articulated the legal authority for the Defense Department investments. All of this begs the question: Are the Defense Department’s equity purchases lawful? The answer, it seems, is probably not.
As with many of the second Trump administration’s economic security measures, the Defense Department’s efforts to take equity stakes in private companies are without recent precedent. That is not to say that the department’s involvement in the economy is entirely new. Throughout American history, the Defense Department has taken an active role in supporting firms that meet critical economic and national security needs. But that role has not previously extended to purchasing equity stakes in private firms—likely because the Pentagon’s lawyers believed that it did not have the authority to do so.
For those interested in forcing the Defense Department to justify itself, the answer might seem obvious: sue. But the benefits of receiving government dollars make it unlikely that the recipient will challenge the action, and standing case law makes it hard for anyone else to do so. Ordinarily, then, these stakes would be unreviewable. But recent Defense Department stakes in companies from which it procures goods and services raise a glaring conflict of interest, potentially opening the courthouse doors to would-be challengers. Notably, the department is not shy about the potential conflict; instead, it has hailed the link between procurement and investment. In its press release announcing the L3MS deal, the Pentagon boasted that the “$1 billion convertible preferred equity investment” would not only allow the “[Department of War] and L3Harris to negotiate multi-year procurement framework agreements” but also provide the “US government the opportunity to benefit on this unique investment framework.”
That possibility of financial “benefit,” in turn, could provide competitors with a basis to sue. Federal procurement law requires that contracting be governed by “full and open competition.” To promote accountability, Congress created a bid protest system, which permits firms to challenge agency procurement decisions in court. As for the nature of the protest, there are multiple avenues a challenger could take: alleging that the Defense Department violated the Federal Acquisition Regulation’s conflict of interest requirements, that it breached its duty of good faith, or that the fact of the department’s pecuniary interest made it structurally impossible for the contracting officer to act impartially. Each of these would be an issue of first impression; indeed, the federal acquisition statutes and regulations do not seem to have anticipated that an agency itself would have a pecuniary interest in a contractor.
With competitor standing and a cause of action, there is, for the first time, a clear path to take the issue of governmental equity stakes to court. The most salient question then becomes how the department will justify its actions.
The Defense Department’s assertion of authority to take equity stakes has a complex past. At the outset of the second Trump administration, the executive branch evidently believed that the department lacked clear authority to take equity stakes, and the Office of Management and Budget requested language in the National Defense Authorization Act (NDAA) for Fiscal Year 2026 that would have granted the Defense Department the authority to do so. Nevertheless, no such language was added to the NDAA—or any other law. In other words, the only thing that could have changed between the beginning of the Trump administration, when the White House evidently believed that the Defense Department lacked clear authority, and mid-2025, when the department began making its investments, is its interpretation of existing authorities.
The Pentagon has never been clear about what existing authorities provide the basis for its equity stakes. Indeed, senior officials have provided ambiguous and unclear answers when pressed. When asked by Ranking Member Sen. Jack Reed (D-R.I.) about the department’s legal basis for equity stakes at a recent Senate Armed Services Committee hearing, Assistant Secretary of Defense for Industrial Base Policy Michael Cadenazzi claimed that “the Department’s OGC has worked on providing those legal justifications to the Congress … and we’ll submit that request again[.]” When Chairman Sen. Roger Wicker (R-Miss.) asked how long that might take, Cadenazzi declined to give a timeline. At another point in the hearing, Sen. Reed implied that the Defense Department had previously argued that the Defense Production Act (DPA) provided the relevant authority, but, as he noted, the DPA makes no mention of equity authorities. In other circumstances, the Defense Department has pointed to different sources entirely—including its Industrial Base Analysis and Sustainment (IBAS) authority—as the basis for its investments. Neither of these statutes, however, provides a clear basis for the stakes.
The DPA is the government’s primary peacetime tool for shaping domestic industrial capacity. Enacted during the Korean War, it gave the Defense Department and the president vast authority over the economy, although much of it has since lapsed. Of the original authorities, only three have been reauthorized: Title I, which permits the president to require contracts and production for the national defense; Title III, which allows the president to extend incentives to expand productive capacity; and Title VII, which, among other things, establishes the Committee on Foreign Investment in the United States and allows the president to approve voluntary agreements between producers.
The DPA is intentionally broad, designed to facilitate flexible industrial responses to an array of national security concerns. But it makes no explicit mention of equity authority. The department, then, had to infer it from somewhere. Peter Harrell has argued that the most likely source is 50 U.S.C. § 4533 (also known as Section 303 of the DPA), which provides that:
(1) To create, maintain, protect, expand, or restore domestic industrial base capabilities essential for the national defense, the President may make provision … for purchases of or commitments to purchase an industrial resource or a critical technology item, for Government use … [and] … for the development of production capabilities …
(b) … purchases … may be made without regard to the limitations of existing law … on such terms and conditions … and for such periods … as the President deems necessary.
On this reading, the Defense Department might argue that the purchase of equities is “mak[ing] provision … for purchases of … an industrial resource … for Government use.” But this runs into a definitional constraint: The DPA defines “industrial resource” as “materials, services, processes, or manufacturing equipment” needed for the defense industrial base. Finding equity authority, then, requires going one layer deeper. The term “services” provides the most plausible definition-within-the-definition. It is defined in the DPA as “any effort that is needed for or incidental to ... the development, production, processing, distribution, delivery, or use of an industrial resource or a critical technology item” or any “other national defense programs and activities.” Here, the Defense Department might argue that raising capital through equity sales is needed for and incidental to the development of critical technology items. Zooming out, then, the department might read § 4533 to say that the president may make provision for it to “purchase” services, which includes within it any effort related to national defense activities—including raising capital by selling equity. Alternatively, the Defense Department might avoid the definitional debate entirely and argue that the equity stakes are simply “making provision … for the development of production capabilities.” After all, Title III is premised on the idea that the development of the DIB requires the infusion of government capital—and the DPA imposes only limited constraints on the means by which that capital may be deployed.
These readings, however, would likely run into hurdles. First, any action taken pursuant to Section 303 requires taking procedural steps that the government does not appear to have taken. For instance, the president—on a nondelegable basis—must certify (a) that there is a “domestic industrial base shortfall” of a particular input that threatens the national defense; (b) that “without presidential action under this section, United States industry cannot reasonably be expected to provide the capability ... in a timely manner;” and (c) that “purchases ... or other action ... are the most cost effective, expedient, and practical alternative method for meeting the need.” If he makes such a finding, the president must then provide notice to Congress in writing, which he has not done. And even if he had, the DPA provides that expenditures above $50 million—a threshold that all of the equity purchases exceed—must be previously authorized by Congress. While these requirements are waivable if the president determines that “action is necessary to avert an industrial resource or critical technology item shortfall,” no waiver has ever been disclosed.
Second, the authority to “make provision” for the “purchase of ... services” or the “development of production capabilities” likely does not encompass equity stakes. The DPA does not define “make provision,” and no court has addressed its meaning. But two pieces of context suggest that it does not imply a power to purchase equity stakes. In the first instance, the original meaning of the phrase implied a power to achieve statutory objectives through contracts. When enacted in 1951, the “make provision” language of Title III appeared under a heading entitled “Purchases of raw materials”; the section allowed the president to “make provision for … purchases of raw materials” and “provide for … encouragement” of minerals mining. Congress presumably retained this contractual meaning when it updated the statute.
That narrow reading is supported by the history of the DPA itself. When the act was written in 1950, the government’s power to take an interest in property—in that case, by requisitioning it—was governed by Title II. But Congress allowed Title II to expire in 1953 and formally repealed it in 2009. If the “make provision” language of Title III already implicitly authorized the government to acquire interests in private firms, much of Title II would have been superfluous. The more natural reading is that the two titles served distinct purposes, and that Title III should be limited to the forms of industrial incentives identified explicitly therein: loans, grants, purchases, and subsidies.
The other basis that the department has publicly cited for its equity stakes is its Industrial Base Analysis and Sustainment authority. The IBAS Program “expands and modernizes the U.S. Defense Industrial Base (DIB) and its skilled workforce through focused investment in six essential areas.” Its primary responsibility is administering the Industrial Base Fund (IBF), a multibillion-dollar pool of funding first established in 2011 to support the DIB. IBF disbursements have helped expand critical minerals processing, scale solid rocket motor production, and support defense workforce development. These funds have been obligated through contracts, grants, and cooperative agreements—and, in the second Trump administration, through equity purchases.
The Defense Department is likely grounding its equity purchase authority in the fact that the IBF statute does not, at least on its face, restrict the form that disbursements may take. Absent any restriction on the form of the disbursements, the department likely felt free to disburse resources in whatever form to facilitate the IBF’s objectives—a view that may be supported by the language of the underlying appropriations. In the One Big Beautiful Bill Act of 2025, Congress appropriated more than $8 billion for the IBF, including $5 billion for “investments in critical minerals supply chains,” $200 million for “investments in [sic] solid rocket motor industrial base,” and another $400 million for “investments in the emerging solid rocket motor industrial base.” The phrasing was unusual for appropriations legislation. The Defense Department might have concluded that the appropriation for “investments” carried with it an implied authorization to use these funds to take equity stakes—the textbook form of “investing.”
Yet each of these interpretations would also face major challenges. First, the IBAS authority may not extend as far as the Pentagon hopes, especially in light of recent amendments to the statute. Signed into law in December 2025 as § 867 of the NDAA for Fiscal Year 2026, a host of amendments added detail to the IBF framework. Among other things, the amendments prevent IBF funds from flowing to adversary countries and enumerate which defense supply chains are eligible for IBF support. Importantly, however, § 867 also sets out the permissible forms of disbursement from the IBF. Equity purchasing was not among them.
The lack of authority in the underlying statute makes it harder for the Defense Department to argue that its equity stakes were authorized by the appropriations for “investments.” As a general rule, appropriations language is construed in light of the authorizing legislation and is presumed to be governed by the purposes and mechanisms in the authorizing statute. While a freestanding appropriation can sometimes carry its own implicit authorization, that inference will usually not be drawn where Congress has already adopted authorizing legislation. Ultimately, then, neither the appropriations legislation nor the authorizing statute for the IBF clearly gives the Defense Department the authority to take equity stakes in private companies—even those types of companies that the statute might otherwise seek to support.
None of this is to say that the department does not or cannot have a sound legal basis for taking equity stakes. Still, neither of the department’s publicly stated bases clearly establishes that its equity stakes are lawful. The Defense Department may well have other grounds for claiming this authority. The Other Transaction Authority, which allows the Defense Department to circumvent procurement restrictions for certain purposes, may provide a hook. So, too, might the Defense Department’s broad authority to define the terms of its contracts. But ultimately, until and unless the Pentagon sets forth a clear legal basis, the legality of these deals will remain contestable.
That legal uncertainty cuts in multiple directions. It is bad for the firms that receive equity investment, which cannot be assured that the deal will withstand legal scrutiny—which carries with it the risk that the investment will have to be unwound. It is bad for the competing contractors and investors, because their businesses may be harmed by unlawful activity. And it is bad for the taxpayer, who cannot readily assess whether public funds are being deployed lawfully. Judicial resolution, through a bid protest or some other avenue, may clarify whether these authorities are sufficient. But even if a court were to bless the arrangements, it would resolve only the question of whether the Defense Department’s equity investments are permissible; it would leave unanswered the deeper question of whether they should be permitted, and on what terms. That question is a legislative one, and only Congress can answer it. Fortunately, Congress appears to have made progress in this direction; the Senate-enacted NDAA for Fiscal Year 2027 would locate equity authority in the Office of Strategic Capital, ban the use of IBF authorities for equity stakes, and limit both the amount of investments and the fields in which stakes could be taken.
Whatever form future legislation takes, it should be guided by a clear organizing principle: Equity investment authority should be limited to contexts where there is a market failure that existing tools have not successfully addressed. The government’s comparative advantage as an investor lies precisely in its willingness to deploy capital in circumstances where private markets will not. But this ability counsels against deploying equity investments in sectors where private capital is already available and the market is already functioning. Whatever legislative scheme emerges from these debates should be guided by a principle that government intervention in markets should not work to their detriment. If the market ain’t broke, as the saying goes, then government equity is not needed to fix it.
