Executive Order Prohibiting U.S. Investments in Communist Chinese Military Companies

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A Presidential executive order was issued on November 12, 2020 finding that “the People’s Republic of China (“PRC”) is increasingly exploiting United States capital to resource and to enable the development and modernization of its military, intelligence, and other security apparatuses, which continues to allow the PRC to directly threaten the United States homeland and United States forces overseas, including by developing and deploying weapons of mass destruction, advanced conventional weapons, and malicious cyber-enabled actions against the United States and its people.”

The executive order is directly aimed at investments by U.S. individuals or entities in “Communist Chinese military companies” which pertains to:

  1. any individual or entity that the Secretary of Defense has listed as a Communist Chinese military company operating directly or indirectly in the United States or in any of its territories or possessions, as of the date of the executive order, and as set forth in the Annex to the executive order, until such time as the Secretary of Defense removes such individual or entity from such list. There is no Annex of listed companies attached to the executive order, but the Department of Defense has already identified 31 companies in its first and second lists;
  2. any individual or entity that the Secretary of Defense, in consultation with the Secretary of the Treasury, determines is a Communist Chinese military company operating directly or indirectly in the United States or in any of its territories or possessions and therefore lists as such, until such time as the Secretary of Defense removes such individual or entity from such list; or
  3. any individual or entity 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 an entity already determined to be a Communist Chinese military company, until the Secretary of the Treasury determines that such individual or entity no longer meets that criteria and removes such individual or entity from such list.

The executive order prohibits, beginning at 9:30 a.m. EST on January 11, 2021, any transaction by any United States individual or entity 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. This prohibition does not apply to purchases for value or sales made on or before November 11, 2021, that were made solely to divest, in whole or in part, from securities in a Communist Chinese military company that any United States individual or entity held as of 9:30 a.m. EST on January 11, 2021.

The executive order also prohibits, beginning at 9:30 a.m. EST 60 days after an individual or entity is determined to be a Communist Chinese military company pursuant to section (4)(a)(ii) or (iii) of the executive order, any transaction by any United States individual or entity in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of that individual or entity. This prohibition does not apply to purchases for value or sales made on or before 365 days from the date of such determination, that were made solely to divest, in whole or in part, from securities that any United States individual or entity held in such individual or entity, as of the date 60 days from the date of such determination, are permitted.

The executive order will go into effect on January 11, 2021.

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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.

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