New Executive Order Bars Certain U.S. Investments in Chinese "Military Companies"

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On November 12, 2020, President Trump issued an Executive Order titled "Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies," which will prohibit U.S. persons from participating in certain types of "transactions" involving securities of "Communist Chinese military compan[ies]" beginning January 11, 2021.

On November 12, 2020, President Trump issued an Executive Order titled "Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies." Starting January 11, 2021, the Executive Order will prohibit U.S. persons from participating in certain types of "transactions" involving securities of "Communist Chinese military compan[ies]" identified by the Secretaries of Defense and of the Treasury. The Executive Order’s terms are broad, but the prohibitions fall well short of a ban on all dealings with the covered entities—emphasizing the importance of fact-specific analysis. "Transaction" is defined as "the purchase for value of any publicly traded security" and the prohibitions apply to any "transaction in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities" of designated companies.

The Department of Defense previously issued several lists of "Communist Chinese military companies," comprising 31 in total, and the Executive Order references these lists. The Executive Order also authorizes the Treasury and Defense Secretaries to supplement these lists with additional entities. The Executive Order contains grace periods for the prohibitions and allows transactions with listed entities solely for the purposes of divestment for specified periods of time, depending on when the company was first listed.

The Executive Order is the latest in a string of expansive restrictions issued under the International Emergency Economic Powers Act ("IEEPA") to address perceived national security threats related to Chinese companies. In some cases, the specific prohibitions have yet to take effect due to various ongoing legal challenges. In other cases, as here, restrictions are slated to go into effect next year. These and other China-focused measures—including Hong Kong-related sanctions; restrictions on exports; and the addition of 24 Chinese companies to the Entity List—warrant close attention as the U.S. political and policy landscape continues to evolve.

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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