Biden Administration Updates Framework for China-Related Investment Prohibitions and Expands the Scope of Restricted Chinese Companies

Pillsbury Winthrop Shaw Pittman LLP

E.O. 14032 signals that the Biden Administration will continue to restrict U.S. investments into China’s defense and surveillance technology sectors.

TAKEAWAYS

  • The prior Administration’s November 2020 Executive Order (E.O.) 13959 prohibited U.S. persons from engaging in the purchase or sale of any publicly traded securities of designated Communist Chinese Military Companies (CCMCs). Given that several companies designated as CCMCs had successfully challenged their designation in the U.S. courts, the new E.O. 14032 now provides the Treasury Department with designation authority and significantly expands the scope of companies, particularly Chinese Military-Industrial Complex Companies (CMICs), that may be subject to restrictions. The Non-SDN CMIC (NS-CMIC) List replaces the previous CCMC List.
  • The Department of Defense (DOD) independently released its annual list of Chinese military companies pursuant to Section 1260H of the 2021 NDAA. Publication on this list has no immediate impact and is not tied to President Biden’s new E.O. 14032. The Section 1260H list is broader than the prior Section 1237 list and introduces the concept of “military-civil fusion contributor.”
  • The newly published NS-CMIC List, currently including 59 designated companies, is limited to entities whose names exactly match the names of designated entities. As seen in the Attachment A, several entities on the NS-CMIC List overlap with the entities on the Section 1260H and the prior Section 1237 list. Some entities have been delisted.

Summary of the E.O.

On June 3, 2021, President Biden signed E.O. 14032 that alters the framework for restrictions on the purchase or sale of publicly traded securities of Chinese companies designated for military affiliations, but ultimately re-affirms the previous restrictions under E.O. 13959. These restrictions will continue to be applied to 31 entities previously sanctioned as well as 28 newly added companies. On the same day, the Department of Defense (DOD) independently released its annual list of Chinese military companies pursuant to recently enacted legislation.

The New Executive Order and “NS-CMIC List”

E.O. 13959, issued in November 2020, prohibited U.S. persons from engaging in the purchase or sale of any publicly traded securities of designated Communist Chinese Military Companies (CCMCs). The identification of CCMCs was largely administered by the DOD, which identifies entities “owned or controlled by the People’s Liberation Army” pursuant a reporting requirement under Section 1237 of the 1999 National Defense Authorization Act (1999 NDAA). Several companies designated as CCMCs had successfully challenged their designation in the U.S. courts.

The new E.O. 14032 now provides the Treasury Department with designation authority and significantly expands the scope of companies that may be subject to restrictions. Specifically, E.O. 14032 updates E.O. 13959 to authorize the Secretary of the Treasury to designate Chinese companies that:

  • operate or have operated in the defense and related materiel sector or the surveillance technology sector of the economy of the PRC; or
  • own or control, or are owned or controlled by, directly or indirectly, a person who operates or has operated in any sector described above or a person that is designated as a CMIC.

Designated entities will now be placed on the new NS-CMIC List administered by the Treasury Department’s Office of Foreign Assets Control (OFAC).

OFAC states that it expects to use its discretion to target persons whose operations include or support, or have included or supported:

(1) surveillance of persons by Chinese technology companies that occurs outside of the PRC; 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.

The operative provisions of the original E.O. 13959 as amended by E.O. 13974 have been revoked by E.O. 14032 and are no longer in effect. The new restrictions imposed pursuant to E.O. 14032 become effective on August 2, 2021. At that point, U.S. persons will be prohibited from engaging in “the purchase or sale of 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 identified CMICs. For future designated companies, prohibitions will come into effect 60 days after the date the entity is listed on the NS-CMIC List.

E.O. 13959, as amended by E.O. 14032, continues to allow for the divestment of the covered securities within a 365-day period following designation (i.e., through June 3, 2022, for those CMICs designated on June 3, 2021) and purchases or sales made solely to affect the divestment, in whole or in part, of such covered securities by U.S. persons.

The newly published NS-CMIC List, currently including 59 designated companies, is limited to entities whose names exactly match the names of designated entities. The new measures do not extend to “close matches” of unlisted entities. Additionally, guidance OFAC confirms that the “50 percent rule” does not apply. Thus, the restrictions are only applicable to explicitly designated entities.

New DOD List of Chinese Military Companies

Section 1260H of the 2021 NDAA sets forth a new requirement for DOD to publish an annual list of “Chinese military companies.” DOD published its initial list of June 3rd in its own separate action. Publication on this list has no immediate impact and is not tied to E.O. 14032.

Importantly, the Section 1260H list is broader than the prior Section 1237 list and introduces the concept of “military-civil fusion contributor,” which goes beyond parties connected to the PLA. The term, “military-civil fusion contributor,” includes any of the following:

  • Entities knowingly receiving assistance from the Government of China or the Chinese Communist Party through science and technology efforts initiated under the Chinese military industrial planning apparatus;
  • Entities affiliated with the Chinese Ministry of Industry and Information Technology, including research partnerships and state-aided science and technology projects;
  • Entities receiving assistance from the Government of China or operational direction or policy guidance from the State Administration for Science, Technology and Industry for National Defense;
  • Entities or subsidiaries defined as a “defense enterprise” by the State Council of China;
  • Entities residing in or affiliated with a military-civil fusion enterprise zone or receiving assistance from the Government of China through such enterprise zone;
  • Entities recognized and awarded with receipt of military production licenses by the Government of China or the innovation prize for science and technology by such State Administration;
  • Entities that advertise on national, provincial, and non-governmental military equipment procurement platforms in the People’s Republic of China; and
  • Other entities the Secretary of Defense determines is appropriate.

It remains unclear how the new Section 1260H list will be used, including whether it may serve as a basis for new restrictions in the future.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Pillsbury Winthrop Shaw Pittman LLP | Attorney Advertising

Written by:

Pillsbury Winthrop Shaw Pittman LLP
Contact
more
less

Pillsbury Winthrop Shaw Pittman LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.