There have been several significant developments over the past week in connection with Executive Order (EO) 13959 (“Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies”) (EO 13959 or Order), dated November 12, 2020. We have previously addressed developments related to EO 13959 in our posts in November 2020, December 2020, and January 2021. The three key developments include the following:
- On January 13, 2021, President Donald J. Trump issued “Executive Order on Amending Executive Order 13959–Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies” (Amended Order), which makes significant amendments to EO 13959 regarding the scope of restrictions on US persons. Notably, it prohibits the “possession” of covered CCMC securities by US persons after the end of the divestment period.
- On January 14, 2021, the US Department of Defense (DoD) designated nine further Chinese companies as “Communist Chinese military companies” (CCMC) targeted under EO 13959.
- Finally, the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury issued General License 1 (GL1), which authorizes transactions in the securities of subsidiaries of designated CCMCs, regardless of whether those subsidiaries bear names that “closely match” the name of designated CCMCs, until 9:30am on January 28, 2021.
We address each of these developments in turn below.
Amendments to EO 13959
The Amended Order clarifies ambiguities that were present in EO 13959 in connection with divestment and the scope of permissible actions for US persons. The changes significantly expand the practical impact of the Order for companies, investors, and fund managers with exposure to the “publicly traded” securities of CCMCs.
The two key changes implemented by the Amended Order are the following:
- Prohibition on “Possession” Following Divestment Period
Sections 1(b)(i) and 1(b)(ii) of EO 13959 authorized US persons to divest, in whole or in part, from CCMC securities, within one year of the entity’s designation as a CCMC (the Divestment Period). For the 31 CCMCs designated as of the issuance of EO 13959 on November 12, 2020, the Divestment Period extends to 11:59pm on November 11, 2021. For any CCMCs designated subsequent to the issuance of EO 13959, e.g., the CCMCs designated on December 3, 2020 or the CCMCs designated on January 14, 2021, the Divestment Period extends for 365 days from the date the CCMC was designated. As originally drafted, the divestment period did not expressly prohibit US persons from holding or possessing CCMC securities after the Divestment Period ends.
The Amended Order significantly revises Sections 1(b)(i) and 1(b)(ii) of EO 13959 by prohibiting “possession” of CCMC securities following the end of the applicable Divestment Period. OFAC has not provided guidance on the definition of the term “possession,” and the term is not otherwise defined in the Amended Order. However, given the significant discretion OFAC has in implementing US sanctions, companies would be well-served to construe the term broadly, unless indicated otherwise by OFAC guidance.
In summary, the revisions to Sections 1(b)(i) and 1(b)(ii) appear to preclude US persons from retaining title or ownership following the end of the applicable Divestment Period of any publicly traded CCMC security, “or any securities that are derivative of, or are designed to provide investment exposure to such securities.” The term “United States person” refers to “any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.”
- Expansion of the Definition of the Term “Transaction”
The Amended Order revised the definition of the term “transaction” in Section 4(e) of EO 13959 to include “the purchase for value, or sale, of any publicly traded security.” The original definition referred only to the “purchase for value” of CCMC securities; the term “sale” was not present in the original EO. As a result, the Order as originally drafted appeared to suggest that the “sale” of CCMC securities was not prohibited or otherwise restricted under the EO.
In summary, the revision to the definition of the term “transaction” broadens the reach of EO 13959. As a practical matter, US persons should avoid any transactions in covered CCMC securities, except for purposes of divestment, during the applicable Divestment Period.
Designation of Additional CCMCs
On January 14, 2021, the US Department of Defense designated nine additional Chinese companies as CCMCs. These entities join the 31 entities designated in August 2020, the four entities designated in December 2020, and the four subsidiaries that were publicly listed by OFAC on January 6, 2021.
General License 1
On January 8, 2021, OFAC issued a General License 1 (GL1) for EO 13959. GL1 addressed the confusion that had arisen in relation to when and how subsidiaries of CCMCs would be deemed subject to EO 13959. As discussed in our previous post, OFAC FAQ 864 (issued on January 6, 2021), made clear that the public listing of a subsidiary by OFAC is a sufficient, but not a necessary condition for bringing such subsidiary within EO 13959. FAQ 864 stated that any subsidiary with a name that “exactly or closely matches” the name of the designated CCMC would be considered by OFAC to be subject to EO 13959. Unfortunately, FAQ 864 provided no guidance on the standard that would be applied to assess whether a match constitutes a “close match” for purposes of EO 13959.
GL1 affords some temporary breathing room to companies with exposure to the “publicly traded securities” of subsidiaries of CCMCs. Specifically, GL1 authorizes “all transactions and activities prohibited by section 1(a)(i)” of EO 13959 in the securities of an entity whose name closely matches the name of a CCMC that has not been “publicly listed” on OFAC’s Non-SDN Communist Chinese Military Companies List through 9:30 a.m. eastern standard time, January 28, 2021.
OFAC general licenses may be extended at OFAC’s discretion. OFAC has not indicated whether GL1 will be extended at the time of writing.
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We will continue to monitor developments. Please reach out to your usual HSF contacts with any questions.