Biden administration takes aim at Chinese military-related companies

Judith Alison Lee
Gibson Dunn, Washington DC
jalee@gibsondunn.com

On 3 June 2021, the Biden administration announced updated restrictions on the ability of United States persons to invest in publicly traded securities of certain companies determined to operate in the defence and related materiel sector or the surveillance technology sector of China’s economy. For ease of reference, the updated investment restrictions are set forth in a new Executive Order (EO) and a high-level, plain-English overview can be found in a fact sheet issued by the White House.

The investment restrictions supersede the Trump-era measures targeting so-called communist Chinese military companies (CCMCs). In particular, the measure announced today amends substantially all of EO 13959 and revokes EO 13974 in its entirety. Effective 3 June 2021, the US government’s former CCMC designations have been withdrawn and the NS-CCMC list has been deleted from OFAC’s website – however, many of the previously designated entities (plus several additional companies) have been added to a new restricted party list, discussed below. The Office of Foreign Assets Control (OFAC) also updated substantially all of the FAQs that the agency previously published concerning CCMCs and issued six entirely new FAQs (see OFAC, FAQ No 899 and Chinese Military Companies Sanctions FAQs).

In place of the earlier Trump-era restrictions, the Biden EO – which OFAC is calling EO 13959, as amended – prohibits US persons 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 certain companies named by the US Secretary of the Treasury. In particular, persons may now be designated as Chinese Military-Industrial Complex Companies (CMICs) if they are determined by the Secretary of the Treasury:

• to operate or have operated in the defence and related materiel sector or the surveillance technology sector of the economy of the People’s Republic of China; or
• to own or control, or to be owned or controlled by, such a company.

The designation criteria in EO 13959, as amended, are therefore broader than under the Trump-era restrictions in that they target surveillance technology companies. Indeed, the White House has indicated that it intends to use EO 13959, as amended, to target Chinese companies that ‘undermine the security or democratic values of the United States and our allies’ – including especially by targeting Chinese surveillance technology companies whose activities enable surveillance beyond China’s borders, repression, and/or serious human rights abuses.

The investment restrictions set forth in EO 13959, as amended, take effect 60 days after a company becomes designated as a CMIC. US persons have 365 days from a company’s designation date to divest their interest in that CMIC. The new investment restrictions presently target 59 companies that appear by name in an Annex to EO 13959, as amended, many of which were targeted by the earlier Trump-era measures. For this initial tranche of 59 companies, the investment restrictions come into effect on 2 August 2021, and US persons have until 3 June 2022 to divest their interest in such firms.

From a policy perspective, the newly announced investment restrictions appear designed to provide greater clarity regarding precisely which companies are being targeted – the investment restrictions apply only to entities that appear by name on a new Non-SDN Chinese Military-Industrial Complex Companies List (the NS-CMIC List) administered by OFAC.  In that sense, EO 13959, as amended, seems to be a reaction to widespread market uncertainty concerning which entities were covered by the Trump-era restrictions, along with a series of successful court challenges by companies like Xiaomi that were named CCMCs on the basis of a surprisingly thin evidentiary record. In our view, the newly announced restrictions appear calculated to put the earlier, Trump-era measures on firmer footing to withstand legal challenges – suggesting that the Biden administration is recalibrating investment restrictions targeting companies linked to China’s military-industrial complex to survive for the long term.