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On June 3, 2021, in one of his first major China-related actions, President Biden issued an Executive Order that amends, but keeps intact the core elements of, previous orders issued by President Trump prohibiting US Persons from investing in the publicly traded securities of certain Chinese Military Companies designated on the Department of Treasury’s Non-SDN-Communist Chinese Military Company (NS-CCMC) List (Amended Order).

While the details of the Amended Order and addition of other named Chinese companies are discussed below, one major takeaway is that the Biden Administration does not plan a wholesale pullback from this type of trading ban. In fact, reports indicate that the Biden Administration is actively considering adding more companies to the list in the future. A ccording to the White House, the Amended Order “allows the United States to prohibit—in a targeted and scoped manner—US investments in Chinese companies that undermine the security or democratic values of the United States and [its] allies.”

Further, the Amended Order also extends the trading ban to additional Chinese companies with capabilities in defense, surveillance and related areas in a new Annex that supersedes the Annex from the original order. These newly covered companies include aerospace technology and electronics companies Shaanxi Zhongtian Rocket Technology Company and China Satellite Communications Co., and telecommunications companies, including China Telecom Corporation and China Unicom (Hong Kong). Also, the Amended Order removes a handful of Chinese companies, including Chinese chemical company Sinochem Group.

The Biden Administration’s application of the securities trading ban to new Chinese companies, some of which do not appear to be state-owned, comes on the heels of recent court actions by companies who have sought and obtained their removal from the list on the grounds that their ties to the Chinese military are too tenuous. In particular, two Chinese companies, Xiaomi Corporation and Luokung Technology Corp., have since been removed from the list after filing successful suits in the US District Court for the District of Columbia. The Amended Order appears to attempt to address this issue by expressly covering entities that, in part, “operate or have operated in the defense and related materiel [sic] sector or the surveillance technology sector of the economy” of China, as detailed more fully below.

The prohibition and impacted Chinese Companies

Similar to the original, under the Amended Order US persons are prohibited from purchasing or selling any publicly traded securities, or any publicly traded securities that are derivative of such securities or are designed to provide investment exposure to such securities, of any entity listed in the Annex. The Amended Order also changes the name of the list from the NS-CCMC List to the Non-SDN Chinese Military-Industrial Complex Companies (NS-CMIC) List.

However, the Amended Order clarifies which entities will be subject to possible future designation, providing that the prohibition is extended to entities determined by the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Defense to: (1) operate or have operated in the defense and related material sector or the surveillance technology sector of the Chinese economy; or (2) own or control, or to be owned or controlled by, directly or indirectly, a person who operates or has operated in the defense and related material sector or surveillance technology sector.

The Amended Order establishes a new effective date of August 2, 2021 at 12:01 am for the entities listed in the Annex. Going forward, for companies not on the Annex today that are later designated by the Secretary of the Treasury, the effective date will be 60 days after the Treasury designation.

Exceptions and other provisions

The Amended Order allows the purchase or sale of such securities solely for purposes of divestment by US persons, which must occur by June 3, 2022 for entities listed in yesterday’s Annex, or within one year from the date an entity is subsequently designated by the Secretary of the Treasury.

The Amended Order keeps some provisions and language the same, including those that prohibit transactions that evade or avoid, or are meant to evade or avoid, causes a violation of, or attempt to violate the prohibitions of the Amended Order. Similarly, the Amended Order remains broadly applicable not only to direct purchases of publicly traded securities, but also purchases by US persons of shares in investment funds that hold public securities in such companies. Like the original Order, the Amended Order applies to transactions by US persons involving public securities traded on foreign as well as US exchanges.

However, as alluded to by the White House in its statement, the Amended Order is more targeted than the original order issued by President Trump, specifically referencing certain sectors of concern, such as the surveillance technology sector. The specific addition of surveillance in the Amended Order demonstrates a more targeted approach while also signaling that this is an area where the Biden Administration would like to expand the coverage of the securities-trading prohibitions in light of the recent focus on potential human rights abuses in China.

Indeed, the newly-issued Office of Foreign Assets Control (OFAC) FAQ 900 states that OFAC expects to use its discretion to target those whose operations include or support, or have included or supported: (1) surveillance of persons by Chinese technology companies that occurs outside of China; or (2) the development, marketing, sale, or export of Chinese surveillance technology that is, was, or can be used for surveillance of religious or ethnic minorities or to otherwise facilitate repression or serious human rights abuse.

Other new notable OFAC FAQs

OFAC published a handful of other new FAQs that help further clarify some of the Amended Order’s provisions. For instance, FAQ 902 provides that US persons are not prohibited from providing investment advisory, investment management, or similar services to a non-US person, including a foreign entity or foreign fund, in connection with the non-US person’s purchase or sale of a covered security, provided that the underlying purchase or sale would not otherwise violate the Amended Order.

Similarly, FAQ 903 makes clear that US persons employed by non-US entities are not prohibited from being involved in, or otherwise facilitating, purchases or sales related to a covered security on behalf of their non-US employer, provided that such activity is in the ordinary course of their employment and the underlying purchase or sale would not otherwise violate the Amended Order.

Lastly, FAQ 905 expressly provides that the Amended Order does not prohibit activity with entities designated on the list that is unrelated to the purchase and sale of publicly traded securities, such as the purchase or sale of goods or services.

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By Jeffrey P. Bialos, Ginger T. Faulk, Mark D. Herlach, Sarah E. Paul, and Nicholas T. Hillman at Eversheds Sutherland (US) LLP

On November 12, 2020, President Trump issued an executive order (Order) that effectively prohibits US persons from transacting in publicly traded securities of Chinese firms determined by the US government to be owned or controlled by the Chinese military. The ban goes into effect January 11, 2021.

This action, which may foreshadow further tough measures against China in the waning days of the Trump Administration, is one of the first cases where Chinese access to capital markets has been limited for policy reasons. At this writing, the potential impact of this action on capital markets or US investors remains uncertain.

Authority and Rationale. The President issued the Order pursuant to his authority under the International Emergency Economic Powers Act (IEEPA) and the National Emergencies Act. Under IEEPA, upon the declaration of an international economic emergency, the President has the authority to regulate or prohibit a broad range of transactions subject to US jurisdiction.

The Order follows from a number of recent Trump Administration actions taken to effectively disengage from Chinese firms that support the Chinese military, including additional export control restrictions on Chinese end uses and end-users as well as Chinese firms assisting the Chinese military in its incursion into, and development and militarization of, artificial islands within the South China Sea. Notably, of direct relevance here, the Department of Defense, pursuant to Section 1237 of the National Defense Authorization Act for Fiscal Year 1999, recently designated 31 Chinese companies “engaged in providing commercial services, manufacturing, producing, or exporting” as “owned or controlled by, or affiliated with” the People’s Liberation Army (PLA) (DoD List). These companies are each considered to be a “Communist Chinese military company” according to the Order.

Building on these actions, the Order states that China is “increasingly exploiting United States capital to resource and to enable the development and modernization of its military, intelligence, and security apparatuses, which continues to allow the [China] to directly threaten the United States…” As Robert C. O’Brien, the national security adviser to President Trump, said, the action “serves to protect American investors from unintentionally providing capital that goes to enhancing the capabilities of the People’s Liberation Army and People’s Republic of China intelligence services.”

The Prohibition. Specifically, beginning on January 11, 2021, US persons are prohibited from transacting in the publically traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of any Chinese military company designated on the DoD List now or in the future. Through November 11, 2021, trades that only divest in such securities that a US person held as of January 11, 2021 are permitted.

The prohibition also extends to subsidiaries of an entity already designated on the DoD List if the subsidiaries have also been so designated. US persons would be prohibited from such investment transactions 60 days after additional Chinese companies are designated and would have 365 days to divest of shares held on that date.

By its terms, the Order, which is broad in scope, appears to apply not only to direct purchases of publicly traded securities but purchases by US persons of shares in investment funds that hold public securities in such companies. In this regard, there is no exemption for such indirect purchases in the Order and it applies to purchases designed to “provide investment exposure to such securities” – the purchase of shares in a diversified fund which hold shares in such Chinese military companies might be considered to “provide investment exposure” to those securities. This conclusion also is supported by the anti-circumvention provision in the Order, which bars US persons from actions that evade or avoid the effect of the Order.

Similarly, the Order also appears to apply to transactions by US persons involving public securities in such Chinese military firms traded on foreign as well as US exchanges. Whether Treasury, which is charged with implementing the Order, later exempts or limits transactions through investment funds or held on foreign exchanges from the scope of the Order remains to be seen.

The Order does permit US persons to engage in transactions to divest from such securities by certain deadlines. Moreover, the Order also prohibits any transaction by a US person or within the United States that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate the Order.

What Chinese Firms Securities are the Subject of the Rule? As noted above, the Order is directly applicable to transactions in publicly traded securities of Chinese companies on the DOD List. As such, if a company on the DOD List is not publically traded, it would apparently not be affected. During the summer of 2020, the DOD designated a total of 31 Chinese companies for the DOD List, including China Telecommunication Corp. and China Mobil Communications, both of which are listed on the New York Stock Exchange (NYSE), and China North Industries Group Corporation (Norinco Group), among others.

Why was this Order issued now? On one level, this Order is a continuation of and consistent with recent Administration actions with respect to Chinese military companies. Beyond that, with a change in administrations around the corner, it is possible the Trump Administration is trying to lock in a strong policy stance against China in this area. Of course, since the Order is administrative in nature, President-elect Biden, upon taking office, could rescind it or limit its scope. However, the Trump Administration may be taking the view that the incoming Administration would be reluctant to do that in the context of recent US-China relations and domestic politics.

This article originally appeared on the Eversheds Sutherland blog.

President Biden Issues Executive Order Modifying, but Mostly Retaining, the Trump Era Chinese Military Company Securities Ban

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