by H. Christopher Boehning, Jessica S. Carey, Christopher D. Frey, Michael E. Gertzman, Roberto J. Gonzalez, Brad S. Karp, Xiaoyu Greg Liu, Richard S. Elliott, Rachel M. Fiorill, and Karen R. King

On November 12, 2020, President Trump issued an Executive Order titled “Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies” (the “Order”), which went into effect on January 11, 2021 (after a 60-day grace period).[1] The Order prohibits U.S. persons[2] from engaging in transactions in publicly traded securities (or any securities that are derivative or otherwise designed to provide investment exposure to such publicly traded securities) of any identified “Communist Chinese Military Companies” (“CCMCs”). In the Order, President Trump cited the national security threat posed by the People’s Republic of China’s (the “PRC”) national strategy of Military-Civil Fusion, and, specifically, the threat posed by PRC companies that sell securities to U.S. investors and then invest this capital to finance the development and modernization of the Chinese military.

There has been considerable attention on and uncertainty about these sanctions as well as concerns regarding the potential harms that these sanctions may inflict on U.S. investors.[3] It is also currently unclear what the views of the incoming Biden Administration (which will take office on January 20, 2021) are with respect to the CCMC sanctions.

This post (which is being published in these pages in two parts) updates our prior memoranda of November 18, 2020[4] and January 4, 2021 to cover additional developments.[5]

First, on January 1, 2021, the Senate overrode the President’s veto of the 2021 National Defense Authorization Act (“2021 NDAA”), a spending bill that includes a significant expansion of the identification criteria for CCMCs.[6] The House had previously overridden the veto and, as a result, the Senate’s override vote enacted the 2021 NDAA into law on January 1, 2021.[7] The relevant provisions of the 2021 NDAA build on the Order’s focus on the PRC’s Military-Civil Fusion and significantly expand the criteria for identification as a CCMC to include Chinese entities that the U.S. Secretary of Defense determines to be a “Military-Civil Fusion Contributor.” The 2021 NDAA lists seven broad classes of entities that are considered to be Military-Civil Fusion Contributors and also provides the Secretary of Defense with the discretion to add other classes of entities determined to be Military-Civil Fusion Contributors to the Department of Defense’s (“DoD”) CCMC list. Prior to the enactment of the 2021 NDAA, the criteria for identification as a CCMC had been limited to companies determined to be owned or controlled by, or affiliated with, the PRC government or the People’s Liberation Army, or owned or controlled by an entity affiliated with the defense industrial base of the PRC.

Second, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) has released additional guidance and its first two general licenses under the CCMC sanctions. Specifically:

• On January 6, 2021, OFAC issued additional guidance clarifying the application of the Order. This guidance adds to the six Frequently Asked Questions (“FAQs”) that OFAC had previously issued to define key terms and explain the scope of the Order’s prohibitions. Among other things, guidance states that U.S. persons can continue to invest in funds that hold CCMC securities if the fund is complying with the Order and in the process of divesting such CCMC securities.
• On January 8, 2021, OFAC published an updated version of its Non-SDN Communist Chinese Military Companies List (the “CCMC List”) which lists the CCMCs that are subject to sanctions under the Order. OFAC’s CCMC List, originally published on December 28, 2020, now provides a chart of CCMCs, “aka” names, other “issuer names” (g., CCMC subsidiaries with names that “closely match” a listed CCMC), and relevant security tickers.[8]
• Also on January 8, 2021, OFAC issued General License Number 1 under the CCMC sanctions program, which authorizes U.S. person transactions through January 28, 2021 that involve the publicly traded securities of entities “whose name closely matches” the name of a listed CCMC, but that have not themselves been listed on OFAC’s CCMC List.[9]
• On January 14, 2021, OFAC issued General License Number 2 under the CCMC sanctions program, which authorizes all transactions and activities by securities exchanges operated by U.S. persons related to CCMC securities (for CCMCs not identified on OFAC’s CCMC List as of 12:01 am January 14, 2021) through the applicable 365-day divestment period.[10]

Third, on January 13, 2021, President Trump issued an Executive Order to amend the Order.[11] The amendments clarifies that U.S. persons are required to divest any CCMC securities that they possess by November 11, 2021 (if the relevant CCMC was one of the original 31 entities identified in the annex of the Order) or 365 days after the date that the entity is identified as a CCMC. The amended Order continues to permit U.S. person transactions in the publicly listed securities of a CCMC that are solely to divest, in whole or in part, from such securities during the applicable one-year divestment period. Notably, the Order as amended does not make specific reference to the CCMC-related provisions of the 2021 NDAA, including the 2021 NDAA’s expanded criteria for CCMC identification. On January 14, 2021, OFAC issued additional FAQs and guidance to reflect the amendments to the Order.

Fourth, on January 14, 2021 DoD identified an additional nine aviation, technology, and semiconductor companies as CCMCs, including the Commercial Aircraft Corporation of China, China National Aviation Holding Company, Xiaomi Corporation, and GOWIN Semiconductor Corp., among others.[12] 

To date, the U.S. government has identified 44 PRC companies as CCMCs, including the three principal telecom companies in the PRC: China Telecommunications Group, China Mobile Communications Corp., and China United Network Communications Group (collectively, the “PRC Telecom Companies”). Consistent with guidance issued on January 6, 2021, OFAC has identified four subsidiaries of  four CCMCs—the PRC Telecom Companies and China National Offshore Oil Corp. (“CNOOC”)—as having names that “closely match” the name of a listed CCMC such that U.S. person trading in these subsidiaries’ securities is prohibited as of the dates the prohibition goes into effect for their respective parent companies.[13]  The four subsidiaries are: China Telecom Corporation Limited (NYSE: CHA), China Mobile Limited (NYSE: CHL), China Unicom (Hong Kong) Limited (NYSE: CHU), and CNOOC Limited (NYSE: CEO).

In a series of remarkable back-and-forth decisions related to OFAC’s recent guidance, the New York Stock Exchange (“NYSE”) on December 31, 2020 announced its intention to delist the PRC Telecom Companies’ subsidiaries’ securities as of January 11, 2021.[14] The NYSE then reversed course on January 4, 2021, announcing that after further consultation with regulators regarding OFAC’s guidance, it had decided not to move forward with delisting.[15] However, after publication of an OFAC FAQ specifically noting these subsidiaries as “closely matching” the names of listed CMCCs, the NYSE again reversed course and stated that these subsidiaries’ securities would, in fact, be delisted as of January 11, 2021.[16] The NYSE’s actions are indicative of the ambiguities surrounding the scope and implementation of the Order that persist even following OFAC’s most recent guidance.

Background on the Order

1. Identification as a CCMC

Under the Order, a CCMC means any person that is: (1) currently listed on the DoD list of CCMCs operating directly or indirectly within the United States (as defined by the National Defense Authorization Act for Fiscal Year 1999, as amended (the “Act”)) and listed in the Annex of the Order[17]; (2) identified at a future date by the Secretary of Defense or Secretary of the Treasury as a CCMC under the Act; or (3) any person publicly listed by the Secretary of the Treasury as a subsidiary of a CCMC.

DoD has been required to maintain classified and unclassified versions of a list of CCMCs and share such list with Congress and relevant U.S. government agencies annually since 1999, pursuant to the Act. Earlier this year, DoD issued the first public version of its CCMC list. Specifically, on June 24, 2020, DoD sent a public letter to U.S. Senator Tom Cotton that included an attachment listing 20 companies headquartered in the PRC that DoD determined to be CCMCs operating directly or indirectly in the United States.[18] On August 28, 2020, DoD published a list of another 11 companies that DoD had determined to be CCMCs. These 31 entities were identified in an Annex to the Order and are now subject to the Order’s prohibitions after expiration of the initial grace period. On December 3, 2020, DoD identified an additional four companies as CCMCs.[19] To date, DoD has publicly identified a total of 44 PRC companies as CCMCs for purposes of the Act (and therefore, by reference, also for purposes of the Order) and these companies are also listed on OFAC’s CCMC List, which was most recently updated on January 8, 2021.

2. Identification Criteria for a CCMC Under the Act Prior to the 2021 NDAA Amendments

Prior to the 2021 NDAA amendments, the Act defined the criteria for identification as a CCMC as:

• “[A]ny person identified in the Defense Intelligence Agency publication numbered VP-1920-271-90, dated September 1990, or PC-1921-57-95, dated October 1995, and any update of those publications for the purposes of [the 1999 Act];” and
• [A]ny other person that: (i) is owned or controlled by, or affiliated with, the People’s Liberation Army or a ministry of the government of the People’s Republic of China or that is owned or controlled by an entity affiliated with the defense industrial base of the People’s Republic of China; and (ii) is engaged in providing commercial services, manufacturing, producing, or exporting.”[20]
• For purposes of the Act, the term “People’s Liberation Army” means the land, naval, and air military services, the police, and the intelligence services of the PRC, and any member of any such service or police force.
• Pursuant to the Act, changes to the DoD CCMC list are to be made in consultation with the Attorney General, the Director of National Intelligence, and the Director of the Federal Bureau of Investigation.

3. Expansion of CCMC Identification Criteria in the 2021 NDAA

The 2021 NDAA amendments significantly expand the criteria under which an entity can be identified as a CCMC and added to the DoD list under the Act. The 2021 NDAA defines the criteria for identification as a CCMC as:

• An entity (the criteria state specifically that natural persons cannot be CCMCs) that is:
  • “[D]irectly or indirectly owned, controlled, or beneficially owned by, or in an official or unofficial capacity acting as an agent of or on behalf of, the People’s Liberation Army or any other organization subordinate to the Central Military Commission of the Chinese Communist Party; or “[I]dentified as a military-civil fusion contributor to the Chinese defense industrial base; and
  • engaged in providing commercial services, manufacturing, producing, or exporting [emphasis added].”[21]
• The definition of “military-civil fusion contributor” for purposes of the 2021 NDAA includes:
  • “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 projects.”
  • “Entities receiving assistance, operational direction or policy guidance from the State Administration for Science, Technology and Industry for National Defense.”
  • “Any entities or subsidiaries defined as a ‘defense enterprise’ by the State Council of the People’s Republic 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 awarded with receipt of military production licenses by the Government of China, such as a Weapons and Equipment Research and Production Unit Classified Qualification Permit, Weapons and Equipment Research and Production Certificate, Weapons and Equipment Quality Management System Certificate, or Equipment Manufacturing Unit Qualification.”
    • “Entities that advertise on national, provincial, and non-governmental military equipment procurement platforms in the People’s Republic of China.”
  • “Any other entities the Secretary [of Defense] determines is appropriate.”[22]

Additionally, the 2021 NDAA shortens the term “Communist Chinese Military Company,” to “Chinese Military Company.”

4. The Order’s Prohibitions

The Order, after a 60-day grace period, which ended on January 11, 2021 for the 31 entities identified in the Order annex, broadly prohibits U.S. persons from engaging in any transaction in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such publicly traded securities, of the CCMCs. “Transaction” is defined for purposes of the Order (as amended) to mean “the purchase for value, or sale, of any publicly traded security.” To the extent that a U.S. person holds publicly traded securities of a CCMC’s identified in the Order after January 11, 2021, the Order requires divestment by U.S. persons over the course of a wind down period that permits purchase and sale of CCMC securities for the sole purpose of divestment by such U.S. person until November 11, 2021, after which time U.S. persons will be prohibited from possessing or trading in CCMC securities (of the 31 CCMCs identified in the annex of the Order; for those CCMCs added later, the wind down period extends 365 days from their date of identification, after which time U.S. persons are prohibited from possessing such CCMC securities).

With respect to any entity identified and listed as a CCMC after the date of the Order, the Order prohibits U.S. persons, wherever located, from transacting in that newly-listed entity’s publicly traded securities (or any securities that are derivative or otherwise designed to provide investment exposure to such publicly traded securities) after 60 days from the date of the entity’s listing as a CCMC. The Order further allows U.S. persons to engage in purchases and sales of such securities for the sole purpose of divestment 365 days from the date of the relevant CCMC identification.

As noted above, after some debate within the Trump Administration according to public reporting,[23] the amended Order also requires U.S. persons to divest any CCMC securities that they possess by November 11, 2021 (or 365 days after the date that the relevant entity is identified as a CCMC) and permits U.S. person transactions in publicly traded CCMC securities prior to that date. For the four CCMC entities identified by DoD on December 4, 2020, the Order’s prohibitions take effect February 1, 2021 and the wind down period ends December 3, 2021.

The Order also prohibits any transaction by a U.S. person or within the United States that evades or avoids, has the purpose of evading or avoiding, causes a violation or, or attempts to violate the prohibitions of the Order. The Order also prohibits any conspiracy (not limited to U.S. persons or within the United States) to violate the prohibitions of the Order.

The Order defines the term “U.S. person” to include “any [U.S.] citizen, permanent resident alien, entity organized under the laws of the United States. . .or any person [located] in the United States.”  For purposes of the Order, the terms “security” and “securities” “include” the broad definition of the term “security” under the U.S. Securities Exchange Act, which encompasses American depositary receipts (“ADRs”) and reads as follows:

any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.[24] 

• The Order also states that any “note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding 9 months, exclusive of days of grace, or any renewal thereof. . .shall be a security for purposes of the [Order].”
• As broad as the Securities Exchange Act definition is, it is not all-encompassing and excludes, for example, certain derivatives, namely swaps and futures based on broad-based indices (covering 10 or more securities). While OFAC has not spoken to this issue, there appears to be a reasonable argument that the Executive Order does not cover such instruments.

For Part II of this post, please click here.

Footnotes

[1]       The White House, “Executive Order on Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies,” (Nov. 12, 2020), available here (PDF 171 KB).

[2]       “U.S. persons” means, for purposes of the Order, U.S. citizens, permanent residents, entities organized under U.S. laws, or any person located within the United States.

[3]       Jeremy Mark, “U.S. Investors Face Half-Baked Trump Restrictions on Chinese Securities,” The Atlantic Council (Dec. 7, 2020), available here.

[4]       Paul, Weiss, “President Trump Issues an Executive Order Prohibiting U.S. Persons from Investing in Listed “Communist Chinese Military Companies,” (Nov. 18, 2020), available here.

[5]       Paul, Weiss, “New Guidance Clarifies OFAC’s Broad Interpretation of Recent Sanctions Against Communist Chinese Military Companies,” (Jan. 4, 2021), available here.

[6]       Connor O’Brien, Senate Hands Trump His First Veto Override, Politico (Jan. 1, 2021), available here.

[7]       Connor O’Brien, House Votes to Override Trump Veto of Defense Bill, Politico (Dec. 28, 2020), available here

[8]       OFAC, “Non-SDN Communist Chinese Military Companies List” (Jan. 8, 2021), available here (PDF 116 KB).

[9]       OFAC, “General License No. 1 Authorizing Transactions Involving Securities of Certain Communist Chinese Military Companies” (Jan. 8, 2021), available here (PDF 175 KB). 

[10]      OFAC, “General License No. 2 Authorizing Securities Exchanges Operated by U.S. Persons to Engage in Transactions Involving Securities of Communist Chinese Military Companies” (Jan. 14, 2021), available here (PDF 209 KB).

[11]      The White House, “Executive Order on Amending Executive Order 13959—Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies,” (Jan. 13, 2021), available here.

[12]      Dep’t of Defense, Press Release, “DOD Releases List of Additional Companies, In Accordance with Section 1237 of FY99 NDAA” (Jan. 14, 2021), available here.

[13]      OFAC, “Frequently Asked Question 864,” (Jan. 6, 2021), available here.

[14]      Intercontinental Exchange, “NYSE to Commence Delisting Proceedings in Securities of Three Issuers to Comply with Executive Order 13959,” (Dec. 31, 2020), available here.

[15]      Intercontinental Exchange, “NYSE Updates Guidance on Delisting Determination for Securities of Three Issuers in Relation to Executive Order 13959,” (Jan. 4, 2021), available here.

[16]      Jesse Pound, “NYSE Will Delist Three Big China Telecoms, Reversing Decision Once Again,” CNBC (Jan. 6, 2021), available here. The NYSE has not yet announced its intent with respect to CNOOC Limited, the Order’s prohibitions against CNOOC go into effect on February 1, 2021.

[17]      See U.S. Dep’t of Defense, Press Release, “DoD Releases List of Additional Companies in Accordance with Section 1237 of FY99 NDAA,” (Aug. 28, 2020), available here;  Annex to the Order, available here (PDF 171 KB).

[18]      Office of Senator Tom Cotton, Press Release, “Cotton, Gallagher React to DoD List of Chinese Military Companies,” (Jun. 24, 2020), available here.

[19]      See U.S. Dep’t of Defense, Press Release, “DoD Releases List of Additional Companies in Accordance with Section 1237 of FY99 NDAA,” (Dec. 3, 2020), available here.

[20]      Strom Thurmond National Defense Authorization Act for Fiscal Year 1999, Pub. L. No. 105-261 § 1237 (1999), available here (PDF 1,336 KB).

[21]      The William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Pub. L. No. 116-283 § 1260H(d)(1) (2021), available here.

[22]      Id. at § 1260H(d)(2).

[23]      Alexandra Alper, et al., “Trump Administration to Mull Expansion of China Investment Ban –Sources,” Reuters (Jan. 7, 2021), available here.

[24]      Securities Exchange Act of 1934, Pub. L. 73-291 § 3(a)(10), as codified as amended at 15 U.S.C. 78c(a)(10).

Brad S. Karp is chairman, H. Christopher Boehning, Jessica S. Carey, Christopher D. Frey, Michael E. Gertzman, Roberto J. Gonzalez, and Xiaoyu Greg Liu are partners, and Richard S. Elliott, Rachel M. Fiorill, and Karen R. King are counsel, at Paul, Weiss, Rifkind, Wharton & Garrison. 

Disclaimer

The views, opinions and positions expressed within all posts are those of the authors alone and do not represent those of the Program on Corporate Compliance and Enforcement or of New York University School of Law.  The accuracy, completeness and validity of any statements made within this article are not guaranteed.  We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the authors and any liability with regards to infringement of intellectual property rights remains with them.