On November 12, 2020, the President signed an Executive Order (EO) on “Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies.”  The EO 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 Chinese military company, by any US person. This prohibition applies to companies currently listed as Chinese military companies pursuant to Section 1237 of the Fiscal Year (FY) 1999 National Defense Authorization Act (NDAA), as amended, beginning on January 11, 2021, at 9:30am EST.  For companies that are later added to the list of Chinese military companies pursuant to Section 1237, or those that the Secretary of the Treasury publicly lists as meeting the criteria set forth in Section 1237(b), the prohibition will apply at 9:30am EST on the day that is 60 days after their listing.

Two lists have been issued thus far on June 2020 and August 2020.

The EO exempts certain divestment activities.  For those companies already listed as a Chinese military company, it exempts purchases for value or sales made on or before 11:59pm EST on November 11, 2021, solely to divest, in whole or in part, from securities that any US person held as of 9:30am EST on January 11, 2021.  For those companies later added to the list either pursuant to Section 1237 or to a finding by the Secretary of the Treasury, it exempts 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 US person held in such person, as of the date 60 days from the date of such determination.

The prohibitions apply except to the extent they are permitted by statute, or in regulations, order, directives, or licenses issued pursuant to the order, but also regardless of any contract entered into, or license or permit granted, before the date of the EO.  The EO also prohibits any transactions by US persons or within the United States that evade or avoid, have the purpose of evading or avoiding, cause a violation of, or attempt to violate its provisions, as well as any conspiracy to violate any of these prohibitions.

The Secretary of the Treasury is authorized to take any actions, including the promulgation of rules and regulations, as well as all powers granted to the President under the International Emergency Economic Powers Act (IEEPA), to carry out the EO’s purposes.  In doing so, the Secretary is directed to consult with the Secretary of State, the Secretary of Defense, the Director of National Intelligence, and the heads of other executive departments and agencies as the Secretary deems appropriate.  The EO also authorizes the Secretary of the Treasury to establish licensing procedures to authorize transactions that would otherwise be prohibited under the EO, but before issuing any such license, the Secretary must consult with the Secretary of State, the Secretary of Defense, and the Director of National Intelligence.

Notably, for the purposes of the EO only, the definition of “Communist Chinese military company” is expanded to include any person that the Secretary of the Treasury publicly lists as meeting the criteria set forth in Section 1237(b)(4)(B), namely any company that:  (1) 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 (2) is engaged in providing commercial services, manufacturing, producing, or exporting.  Doing so would put the Secretary of the Treasury in the same position as the Secretary of Defense in making such determinations (but again, such a determination would only impose the EO’s prohibitions, and not any other actions taken pursuant to Section 1237)