A new executive order, effective January 11, 2021, bars U.S. companies and their foreign branches from investing in certain entities that provide support to the Chinese military. Declaring a national emergency under the Emergency Economic Powers Act (IEEPA), the President explained the emergency was caused by The People’s Republic of China (PRC) creating a “national strategy of Military-Civil Fusion” and compelling civilian Chinese companies, with access to United States capital, to directly support the country’s military, intelligence, and security branches. The safe harbor provision of the order provides investors until November 11, 2021 to divest themselves of any affected securities.
The order specifically prohibits a U.S. person from “any transaction in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of any Communist Chinese military company…” The order defines "Communist Chinese military company" as:
(i) any person that the Secretary of Defense has listed as a Communist Chinese military company pursuant to section 1237 of Public Law 105-261, the National Defense Authorization Act of 1999 (1999 NDAA),
(ii) any person that the Secretary of Defense, in consultation with the Secretary of the Treasury, determines is a Communist Chinese military company; or
(iii) any person that the Secretary of the Treasury publicly lists as meeting the criteria in section 1237(b)(4)(B) of Public Law 105-261, or publicly lists as a subsidiary of a person already determined to be a Communist Chinese military company.
Under section 1237 of the 1999 NDAA, Congress required the Department of Defense (DoD) to identify Chinese companies operating within the United States and linked to the Chinese military. The DoD only recently released an initial list of 20 companies linked to the Chinese military in June 2020 and an additional list of 11 companies in August 2020. These 31 countries identified by the DoD include some well-known entities like Huawei, China Mobile, and China Three Gorges Corporation among others. Going forward, these public DoD lists will continue to be updated.
In terms of which entities are designated by these DoD lists, the Section 1237 definition of “Communist Chinese military company” is:
any person identified in Defense Intelligence Agency publication VP-1920-271-90, dated September 1990, PC-1921-57-95, dated October 1995, or any update of those publications for the purposes of this section; or
any other person that:
is owned or controlled by the People's Liberation Army; and
is engaged in providing commercial services, manufacturing, producing or exporting.
The “People's Liberation Army” is defined as the land, naval and air military services, the police and the intelligence services of China.
Other key definitions provided by the order include a definition of “United States person” to include any U.S. citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States. This means that entities organized under the laws of a different country, including foreign subsidiaries of a U.S. companies would not qualify as U.S. persons here. "Security" and "securities" in the context of the order includes not only the definition of "security" found in section 3(a)(10) of the Securities Exchange Act of 1934, but also any currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding 9 months.
As noted above, investors have until November 11, 2021 to divest. In the meantime, it is unclear if the new administration will preserve the executive order as written, given the bipartisan support in Washington to increase pressure on China, or if the incoming President would modify the executive order to at exempt some types of transactions.
In a separate but related move, there are press reports that the Department of Commerce has prepared a list of 89 companies with ties to the Chinese military. Presently, no action has been taken. Theoretically, the Commerce Department could add the companies to list of Designated Entities and restrict exports to and other transactions with the companies.
If you have any questions about this executive order or the Department of Defense lists, please contact an attorney at Barnes, Richardson & Colburn, LLP.