U.S. Capitol. Credit: Mike Scarcella/ NLJ

Washington lawmakers are moving forward on legislation that would broaden and toughen the national security review requirements for acquisitions of U.S. companies by foreign ones for possible risks to the nation's defense or security.

One prominent adviser on cross-border matters that involve national security issues, Morgan, Lewis & Bockius partner Giovanna Cinelli, said the reform push will mean more worries for dealmakers involved in transactions that could involve high-technology, big data or critical infrastructure, in particular.

Giovanna Cinelli.

The Committee on Foreign Investment in the United States, or CFIUS, is the multiagency panel composed of members of the Departments of Justice, Commerce, Treasury, Defense, Homeland Security and State that examines such acquisitions for risks.

Reform legislation currently before Congress includes the Foreign Investment Risk Review Modernization Act, which was introduced by Sen. John Cornyn, R-Texas, and Rep. Robert Pittenger, R-North Carolina, with bipartisan support earlier this month. The legislation would expand the CFIUS review process to include joint ventures and minority stakes, which are currently not specifically addressed by the statute.

In speeches before the Council on Foreign Relations, Cornyn and other lawmakers have voiced concerns about foreign access to technology with military applications and to critical infrastructure through startup and joint investments. Cyberattacks traced to state-sponsored groups in China and other countries also are prompting calls by lawmakers for greater investigation of transactions involving transfer of intellectual property or of personally identifiable information about Americans.

In September, President Donald Trump blocked a Chinese-backed company's $1.3 billion bid to acquire Lattice Semiconductor of Portland, Oregon, after the CFIUS panel recommended that he reject the deal. It was only the fourth time in history a U.S. president had done so.

According to the most recent CFIUS annual report released in September, about 20 percent of the 143 transactions it reviewed in 2015 involved Chinese companies. But because of the changing geopolitical picture, Russian and other countries' investments in the United States also have received heightened scrutiny lately.

What does that mean for lawyers and their clients?

The National Law Journal recently spoke with Cinelli, co-leader of the international trade, national security and economic sanctions practice at Morgan Lewis. She joined the firm from Dentons, where she led the export controls and national security practice, in May 2017. She previously worked for Jones Day.

At Morgan Lewis, Cinelli advises defense, energy and technology clients on national security issues including export compliance, cross-border due diligence and civil and criminal investigations, and on meeting regulatory and export requirements. She advises foreign and domestic clients on transactions requiring CFIUS review.

Cinelli also was a Naval Reserve intelligence officer and has participated in panel discussions on CFIUS and technology transfer hosted by the Council on Foreign Relations and the Center for Strategic and International Studies, according to her law firm bio.

Highlights from the conversation below were edited for length and clarity.

National Law Journal: What are your clients most worried or concerned about in connection with CFIUS reform? What are they asking you?

Giovanna Cinelli: There are four or five bills that have been put forth and the majority of attention is on Cornyn and Pittenger bills. There are a lot of questions about the likelihood of this proceeding. The second question is the manner in which CFIUS is expanding into joint ventures and certain offshore activity. And the third question is regarding the definitions of critical technology and critical infrastructure and whether the government is planning or intends to issue guidance documents. Those are the three most common general questions that we get.

We are seeing a lot of questions and a lot of requests for strategy and prognostication and a lot of questions about not only CFIUS, but about export controls and government procurement and how to navigate this upcoming process and what to do with transactions that may be coming before the committee. A lot more discussion and collaboration with clients.

What are you telling clients?

At a very high level the legislation that has been proposed, especially the Cornyn and Pittenger bills, are long overdue. The national security construct has been changing for a number of years and the time is right for some kind of modernization. It is not out of the realm of possibility and we tell companies that they should start to look at the changes in the legislation and, if they file, what kind of information they should include.

There was specific recommendation HR 4337 proposed by Congressman [Ed] Royce, R-California, a three-page bill that says CFIUS will consider any access on personal information. [The bill would amend the Defense Production Act of 1950 to require CFIUS reviews to take into account the effects of covered transactions on personally identifiable information.]

What the government currently collects under CFIUS is different from what the Royce bill would cover. CFIUS currently collects its information with regard to the foreign purchaser. But the Royce bill is focused on the personal information that the U.S. target holds and to which the foreign purchaser would gain access after the transaction is completed, such as the information about customers of a U.S. target, which is why transactions in the insurance industry such as Genworth are under review and going thru CFIUS. [Genworth Financial Inc., a long-term care and mortgage insurer that insures many federal employees and China Oceanwide Holdings Group Co., Ltd. recently announced the withdrawal of their joint voluntary notice with CFIUS with the intent to refile with additional mitigation measures.]

The proposed legislation would expand the types of transactions and industries that could be subject to CFIUS reviews. For example, the Cornyn and Pittenger bills open the aperture to including reviews of joint ventures, brokerage and insurance industry transactions or big data analytics transactions that involve personal information.

What other changes could be in store under the proposed legislation that have not been as well publicized?

Two areas that may not be as prominent are the access to supply chain, which includes who is in the supply chain and what is someone supplying within the United States. And number two is the concept that a less than 10 percent investment by a foreign party can be viewed as a passive investment by a foreign purchaser and may not be subject to CFIUS review. The Cornyn and Pittenger bills shift that focus by removing the 10 percent criteria, which could result in increasing the number and types of investments under the committee's jurisdiction.

What is your view on overhauling the regulation, personally?

My personal position based on my experience is that changes in the regulation are overdue. Generally, regulations are on 15-year cycles because of changes in investment and foreign policy. Major geopolitical shifts and national security changes and foreign policy changes, [make this] an excellent time to reconsider the current situation and … to modernize it.

What's the takeaway for readers about the proposed CFIUS overhaul then?

Readers should anticipate legislative and regulatory modifications to the current CFIUS framework. These changes could include the type of information reviewed by the committee as well as the types of investments and technologies subject to the committee's jurisdiction. As a complement, readers should anticipate policy changes that could alter the manner in which CFIUS clears transactions.

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U.S. Capitol. Credit: Mike Scarcella/ NLJ

Washington lawmakers are moving forward on legislation that would broaden and toughen the national security review requirements for acquisitions of U.S. companies by foreign ones for possible risks to the nation's defense or security.

One prominent adviser on cross-border matters that involve national security issues, Morgan, Lewis & Bockius partner Giovanna Cinelli, said the reform push will mean more worries for dealmakers involved in transactions that could involve high-technology, big data or critical infrastructure, in particular.