NYSE Restores Decision to Delist Subsidiaries of “Communist Chinese Military Companies”

As noted in our previous posts in November and December 2020, the current US Administration has targeted certain alleged “Communist Chinese military companies” (CCMCs) via Executive Order (EO) 13959 (“Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies”) (EO 13959 or Order), dated November 12, 2020. EO 13959 prohibits US persons from engaging in “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 [CCMC] . . . .” The Order as drafted left significant questions surrounding implementation, including, but not limited to, the question of whether subsidiaries of CCMCs would be subject to the restrictions of EO 13959. The Office of Foreign Assets Control (OFAC) of the US Department of the Treasury issued guidance on the interpretation of the Order in the form of five FAQs (FAQs 857-861) on December 28, 2020, an additional FAQ on January 4, 2021 (FAQ 862), and three additional FAQs on January 6, 2021 (FAQ 863, FAQ 864, and FAQ 865).

In a series of statements beginning December 31, 2020 in response to EO 13959, the New York Stock Exchange (NYSE) has addressed the impact of the Order on three listed subsidiaries of CCMCs (collectively, the Listed Chinese Companies). The NYSE initially announced the delisting of these companies on December 31, 2020, then abruptly reversed its delisting decision in a statement on January 4, 2021. On January 6, 2021, the NYSE reinstated its delisting decision; the Listed Chinese Companies will be removed from the NYSE by January 11, 2021. Public news reports indicated that US Secretary of the Treasury Steven Mnuchin personally expressed his disagreement with the decision to abandon the delisting in a call with the President of the NYSE. The January 6 NYSE statement indicates that the NYSE’s decision to reinstate the delisting was based upon “new specific guidance” received from OFAC on January 5, 2021.

The NYSE actions and recent OFAC guidance are significant for companies, investors, and fund managers with exposure to the designated CCMC entities or their subsidiaries. Notably, FAQ 864 suggests that any subsidiary whose name “exactly or closely matches” the name of a CCMC entity may be subject to EO 13959’s restrictions. However, OFAC has not provided guidance on the standard that will be used to assess whether a name “closely matches” the name of a designated CCMC. In parallel, FAQ 857 contemplates that certain subsidiaries of CCMCs will be “publicly listed” by OFAC, bringing them within the scope of EO 13959.

In summary, it remains unclear which additional CCMC subsidiaries (if any) will be subject to EO 13959 as of this writing, beyond the Listed Chinese Companies. Moreover, the new administration of President-elect Joseph R. Biden will begin on January 20, 2021. However, the President-elect has made no public comments on the recent developments to date. In light of the above, companies would be well-served to assess their exposure to subsidiaries owned or controlled by designated CCMCs.

We provide a timeline of the NYSE actions below, followed by a discussion of the interpretation of the Order and OFAC’s subsequent guidance.

Timeline of NYSE Actions

The NYSE has taken the following key actions over the course of the past week:

• On December 31, 2021, the NYSE responded to EO 13959 by announcing that it had determined “to commence proceedings to delist” the securities of the Listed Chinese Companies. The NYSE statement indicated that the three Listed Chinese Companies “are no longer suitable for listing pursuant to Listed Company Manual Section 802.01D in light of Executive Order 13959 . . . .” Section 802.01D is a catch-all provision that enumerates a broad range of “other criteria” that may result in a company being reviewed and delisted from the exchange. It includes grounds for review such as a company’s engaging in “Operations Contrary to Public Interest,” among others. The NYSE did not announce the specific grounds in Section 802.01D on which it based its decision to delist the Listed Chinese Companies. Moreover, the NYSE statement did not explain why it believed the continued listing of the Companies’ shares would violate EO 13959.
• On January 4, 2021, the NYSE released a statement that it “no longer intend[ed] to move forward” with its delisting action and was reversing its December 31 decision. The January 4 statement indicated that the NYSE rethought its decision following consultations with "relevant regulatory authorities," which likely included OFAC. The statement specifically refers to FAQ 857 ("Do the prohibitions in E.O. 13959 apply to transactions in publicly traded securities of subsidiaries of Communist Chinese military companies?), but does not elaborate on how FAQ 857 may have influenced the decision to reverse the delisting. The statement also suggested that the NYSE’s position would remain subject to possible further revision, noting that “NYSE Regulation will continue to evaluate the applicability of Executive Order 13959 to these Issuers and their continued listing status.”
• Finally, the NYSE announced in a statement on January 6, 2021 that it was reverting to its original plan to delist the Listed Chinese Companies. The NYSE's latest statement refers to “new specific guidance” received from OFAC as the grounds for its decision, specifically citing the following statement: "[P]ursuant to section 1(a)(i) of E.O. 13959, U.S. persons cannot engage in certain transactions (as specified in the E.O.) in the ADRs of [the Listed Chinese Companies] after 9:30 a.m. eastern time on January 11, 2021." This “specific guidance” is consistent with FAQ 864.

In summary, according to the NYSE’s January 6 statement, trading in the securities of the Listed Chinese Companies will be suspended at 4:00 a.m. Eastern Standard Time on January 11, 2021. The statement also indicated that NYSE was advised that the National Securities Clearing Corporation will clear trades in the securities of the Listed Chinese Companies executed through January 8, 2021.

New Guidance from OFAC

OFAC has issued three additional FAQs in the past three days:

• FAQ 862

FAQ 862 responds to the following question: “Does Executive Order (E.O.) 13959 require U.S. persons, including U.S. funds and related market intermediaries and participants, to divest their holdings in publicly traded securities (and securities that are derivative of, or are designed to provide investment exposure to, such securities) of the Communist Chinese military companies identified in the Annex to E.O. 13959 by January 11, 2021?”

The answer provided by OFAC is “no,” i.e., “U.S. persons, including U.S. funds and related market intermediaries and participants,” are not required to divest their holdings in the “publicly traded securities” of CCMCs by January 11, 2021. As a practical matter, FAQ 862 clarifies that holding the targeted CCMC securities past the deadline of January 11, 2021, as compared to engaging in a “transaction” or “purchase for value” of such securities, is not prohibited by EO 13959. FAQ 865 (discussed below) indicates that while divestment is not required prior to January 11, 2021, “[d]ivestment must be completed by November 11, 2021” for the securities on the initial list of CCMCs identified in the Annex to EO 13959.

• FAQ 863

FAQ 863 responds to the following question: “Can U.S. persons custody, offer for sale, serve as a transfer agent, and trade in covered securities?”

The answer provided by OFAC is a qualified “yes,” i.e., activities such as “clearing, execution, settlement, custody, transfer agency, back-end services, as well as other such support services” are all “permissible” for US persons under EO 13959, provided that the services are not rendered to US persons. As a practical matter, FAQ 863 suggests that fund managers and others dealing in the targeted CCMC securities will be required to segregate “United States person” clients to ensure that trades in the targeted CCMC securities are not made on their behalf, and to ensure that US person funds and other financial institutions do not otherwise engage in the “purchase for value” of the targeted CCMC securities. We note that the definition of a “United States person” in Section 4(f) of EO 13959 is consistent with the definition generally employed by OFAC, i.e., "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."

• FAQ 864

FAQ 864 responds to the following question: “Does the prohibition in E.O. 13959 apply to transactions in securities of a Communist Chinese military company subsidiary with a name that exactly or closely matches the name of an entity identified in the Annex to E.O. 13959?”

The answer provided by OFAC represents a significant update on previous OFAC guidance. As discussed in our previous post, FAQ 857, issued by OFAC on December 28, 2020, appeared to suggest that a subsidiary of a designated CCMC would only be subject to the restrictions of EO 13959 "after such subsidiary is publicly listed by Treasury pursuant to section (4)(a)(iii) of the Order." (emphasis added).

However, FAQ 864 indicates that the public listing of a subsidiary by OFAC is a sufficient, but not a necessary condition for subjecting such subsidiary to EO 13959. Specifically, FAQ 864 quotes FAQ 858 for the proposition that EO 13959 applies to the “publicly traded securities (or any publicly traded securities that are derivative of, or are designed to provide investment exposure to, such securities) of an entity with a name that exactly or closely matches the name of an entity identified in the Annex to E.O. 13959 (effectively January 11, 2021).” (emphasis added). In other words, even if a subsidiary has not been “publicly listed” by OFAC, it may still be subject to the restrictions in EO 13959 if its name “exactly or closely matches” the name of a CCMC as designated by the US Department of Defense or OFAC. OFAC has not provided guidance on the standard that will be used to assess whether a subsidiary’s name “closely matches” the name of a designated CCMC.

Regarding the public listing of subsidiaries referenced in FAQ 858, FAQ 864 states that “OFAC has published and will continue to update a list on its website to aid in the implementation of E.O. 13959, including the names of certain entities that closely match the name of entities identified in the Annex to E.O. 13959.”

Finally, FAQ 864 reaches a specific conclusion with respect to the Listed Chinese Companies, namely, that the names of the Listed Chinese Companies “closely matched” the names of certain CCMCs.

• FAQ 865

FAQ 865 responds to the following question: “May market intermediaries and other participants facilitate divestment from publicly traded securities of Communist Chinese military companies, including divestment by investment fund managers?”

The answer provided by OFAC is “yes,” that market intermediaries and other participants may “engage in ancillary or intermediary activities that are necessary to effect divestiture during the relevant wind-down periods or that are otherwise not prohibited under the E.O.” This is consistent with the authorization in EO 13959 for US persons to divest from the targeted CCMC securities.

FAQ 865 also speaks to the impact of EO 13959 on index funds, ETFs, “or [any] derivative thereof.” Notably, FAQ 865 clarifies that any “transaction” in such funds is prohibited, regardless of the share of targeted CCMC securities in the fund. Nevertheless, “U.S. funds are not required to divest covered securities of companies identified in the Annex to E.O. 13959 by January 11, 2021.” In other words, US funds may continue to hold the securities, but, consistent with the authorization in EO 13959, FAQ 865 indicates that “[d]ivestment must be completed by November 11, 2021” for the securities of CCMCs identified in the Annex to EO 13959.

Next Steps

The question of whether the three Listed Chinese Companies are subject to EO 13959 has been resolved by OFAC in the “new specific guidance” that it provided to the NYSE in combination with the issuance of FAQ 864. However, the Listed Chinese Companies are the only subsidiaries to date for which OFAC has clarified the applicability of EO 13959. As noted above, OFAC is expected to update the list of designated CCMCs to include affected subsidiaries. On the other hand, companies must independently assess whether the names of any relevant subsidiaries “closely match[]” the names of designated CCMCs. Moreover, we note that the new Biden Administration will take office on January 20, 2021. When President-elect Biden takes office, he may modify or rescind EO 13959 or the regulations and guidance regarding its implementation that have been issued to date. Mr. Biden has not made any public comments on the recent actions regarding CCMCs.

Given the evolving guidance from OFAC on implementation of EO 13959 and the uncertainty surrounding the new Biden Administration’s position on EO 13959, companies and investors would be well-served to assess their exposure to subsidiaries of designated CCMCs prior to January 11, 2021.

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We will continue to monitor the situation. Please reach out to your usual HSF contacts with any questions.