President Biden issues Executive Order modifying, but mostly retaining, the Trump Era Chinese Military Company securities ban 

Eversheds Sutherland (US) LLP

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 take-away 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. According 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.

[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.

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