
Trump Administration Executive Order (EO) Tracker
On 12 November 2020, President Trump issued an executive order on "Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies" (EO), which prohibits U.S. persons and companies from engaging in the purchase of publicly traded securities (or derivatives thereof) of Communist Chinese military companies identified by the Department of Defense (DOD) or Department of the Treasury, with certain exceptions allowing U.S. persons to divest their holdings in such companies for a limited time. As certain of these entities are listed on U.S. exchanges, the EO would prohibit U.S. person investors, including investment firms, pension funds, and endowments, from buying shares in these companies, and also effectively would limit the ability of such investors to hold or sell such shares if exchanges decide to delist or suspend trading in such securities. The restrictions go into effect beginning on 11 January 2021, with a divestment deadline of 11 November 2021.
The EO states that through the national strategy of Military-Civil Fusion, the People’s Republic of China (PRC) is using U.S. capital to resource and enable the development and modernization of its military, intelligence, and other security apparatuses, which allows the PRC to threaten the U.S. homeland and forces overseas. The EO further states that the PRC enhances the country’s military industry by compelling civilian Chinese companies to support its military and intelligence activities; and those companies raise capital by selling securities to U.S. investors who trade on U.S. and foreign public exchanges.
In June and August 2020, pursuant to Section 1237 of the National Defense Authorization Act for Fiscal Year 1999, the DOD publicly identified 31 "Communist Chinese military companies" headquartered in the PRC, which the DOD determined are operating directly or indirectly in the United States and have links to the Communist Chinese military.
The EO refers to the 31 "Communist Chinese military companies" identified by the DOD and generally prohibits "any transaction 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 as defined in section 4(a)(i) of this order, by any United States person[.]" As set forth below, "transaction" is defined as a purchase for value of publicly traded securities.
For details, please see below a summary of the EO’s definitions, key restrictions, and exceptions, as well as future regulations authorized by the EO.
Section 4(a) of the EO defines "Communist Chinese military company" to mean the following:
(i) Companies currently identified as such pursuant to the 1999 National Defense Authorization Act (NDAA), as amended. The EO includes the list in an Annex, which encompasses the two prior lists published by the DOD on 12 June 2020 and 28 August 2020.
(ii) Companies identified in the future by the DOD pursuant to the 1999 NDAA.
(iii) Companies publicly listed by the Secretary of the Treasury as being one of the following:
Once identified as a Communist Chinese military company, a company will remain so designated until it is removed by the DOD (in the case of prongs (i) and (ii)) or Treasury (in the case of prong (iii)).
Section 4(f) of the EO defines a "U.S. person" to include U.S. citizens and permanent residents, any person located in the United States, or an entity organized under the laws of the United States or any U.S. jurisdiction (including foreign branches). This definition does not appear to include foreign subsidiaries of U.S. companies.
Section 4(e) of the EO defines "transaction" to mean the "purchase for value" of any publicly traded security. While "purchase for value" is not defined, it may mean that a gift of publicly traded securities is not a covered transaction.
Section 4(d) of the EO defines "security" or "securities" to include any instrument specified at 15 U.S.C. § 78c(a)(10) 1, including certain instruments with a maturity not exceeding nine months.
(i) As of 9:30 a.m. EST on 11 January 2021, any transaction by a U.S. person in publicly traded securities or securities that are derivative of or are designed to provide investment exposure to such securities, of any Communist Chinese military company identified under prong (i) of Section 4(a) (that is, the currently identified Communist Chinese military companies).
(ii) With respect to Communist Chinese military companies identified in the future under prongs (ii) or (iii), U.S. persons will be prohibited from engaging in any transaction in publicly traded securities or derivatives of such entities beginning at 9:30 a.m. EST 60 days after such identification.
Section 2 of the EO prohibits any transaction by a U.S. person or in the United States that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate the prohibitions of the EO. Likewise, any conspiracy to violate the prohibitions is itself prohibited.
Sections 1(b) and 1(c) exempt certain divestment transactions:
(i) Purchases for value or sales made on or before 11:59 p.m. EST on 11 November 2021, solely to divest, in whole or in part, from securities that any U.S. person held as of 9:30 a.m. EST on 11 January 2021, in a Communist Chinese military company identified under prong (i) of Section 4(a) are permitted; and
(ii) With respect to companies identified in the future under prongs (ii) and (iii) of Section 4(a), purchases for value or sales made on or before 365 days from the date of such determination, solely to divest, in whole or in part, from securities that any U.S. persons held in such company, as of the date 60 days from the date of such determination, are permitted.
In brief, this means that with respect to Section 4(a) prong (i), U.S. persons will have 10 months to divest their holdings, presumably to a non-U.S. person, once the prohibitions go into effect on 11 January 2021. Although the language is not entirely clear, Sections 1(b) and 1(c) appear to permit U.S. persons, such as brokers or intermediaries, to purchase the securities at issue for the purpose of divestment to a non-U.S. person. These issues may be further clarified when the Department of the Treasury issues implementing regulations.
With respect to Section 4(a) prongs (ii) and (iii), U.S. persons will also have 10 months to divest their holdings once the relevant prohibitions go into effect 60 days after the identification of such Communist Chinese military companies.
Section 3 of the EO authorizes the Department of the Treasury to promulgate regulations to implement the EO, in consultation with DOD and the Director of National Intelligence. These regulations may include procedures for licensing transactions otherwise prohibited by the EO.
U.S. person investors, including investment firms, pension funds, and endowments, should assess their exposure to publicly traded securities of the "Communist Chinese military companies" currently identified by the Department of Defense, and consider taking steps to divest from any such holdings. While there are certain Chinese companies identified by the Department of Defense traded on U.S. exchanges, U.S. person investors should also consider their activities on non-U.S. exchanges, including in Shanghai, Shenzhen, and Hong Kong. Finally, U.S. person investors should consider establishing processes to mitigate against the risk of additional Chinese entities being identified as "Communist Chinese military companies" by the Department of Defense or Department of the Treasury.
Hogan Lovells lawyers can assist you with assessing the potential impact of these restrictions on your company and any next steps.
If you have any questions, please contact the Hogan Lovells lawyers listed below.
Authored by Ajay Kuntamukkala, Kelly Ann Shaw, Adam J. Berry, Jane Z. Chen