President Trump Issues Executive Order Prohibiting Investment in Securities of Chinese Military Companies

By Brett W. Johnson, Derek Flint, and Vinnie Lichvar

On November 12, 2020, President Donald Trump signed an executive order prohibiting “United States persons” from engaging in “transactions” in securities of “Chinese Communist military companies.” The order marks another escalation in the ongoing trade dispute between the United States and China, which has enmeshed a number of Chinese companies integral to the United States industrial supply chain. Although it is unclear whether President-elect Joe Biden will maintain the executive order, which does not take effect until January 2021, the action provides an opportunity for companies to review international supply chains and distribution platforms to ensure compliance with applicable international trade compliance requirements.

The key provisions in this latest executive order include the following:

Who is prohibited from engaging in “transactions?"

The executive order applies to “United States persons,” which it defines as United States citizens, permanent resident aliens, entities organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), and any person in the United States.

What companies qualify as “Chinese Communist military companies?"

The executive order applies to the securities of companies on the Department of Defense’s (“DoD”) list of “Chinese Communist military companies” that operate in the United States (until those companies are removed from the list). Of note, Huawei is included on the DoD list, as are China Telecom Corporation and China Mobile—both of which are listed on the New York Stock Exchange. The order also applies to companies that the DoD subsequently adds to its list, and to certain subsidiaries of Chinese Communist military companies. This DoD list is only one of several lists maintained by government agencies that restrict international trade with specific individuals, entities, or countries.

What types of “transactions” does the executive order prohibit?

The executive order defines a “transaction” as “the purchase for value of any publicly traded security.” On its face, the order does not appear to prohibit United States persons from holding or selling securities of Chinese Communist military companies. However, it is expected that further guidance on this issue will be issued and companies should consider reviewing equity portfolios to evaluate risk.

When does the executive order take effect?

For securities transactions involving companies already on the DoD list, the order takes effect “beginning 9:30 a.m. Eastern Standard Time on January 11, 2021.” For securities transactions involving companies that are subsequently added to the DoD list, the order applies 60 days after the company’s addition. Of note, the presidential inauguration date is January 20, 2021. President-elect Biden has already indicated that his administration will scrutinize all executive orders, especially those issues in the last months of President Trump’s administration.

Are there any exceptions?

The executive order allows United States persons to make “purchases for value or sales” of Chinese Communist military company securities on or before November 11, 2021 “solely to divest” from securities the United States person held “as of 9:30 a.m. Eastern Standard Time on January 11, 2021.” The order also allows the Secretary of Treasury to issue licenses that permit securities trade with Chinese Communist military companies under certain circumstances.

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United States companies and individuals may want to assess the impact of new regulations on existing supply chains and business relationships. This is particularly important when a United States company does business with state-owned enterprises in China, or when a company exports a product or technical information that requires an export license. If a United States company does business with an entity in China that is subject to sanctions, export licenses may be available to circumvent the sanctions. Companies should also consider implementing foreign transaction policies and procedures to address changing regulations that impact international trade.