As diplomatic tensions between Washington and Beijing rise, there is a corresponding increase in U.S. and Chinese regulation of corporate economic activity between the two nations.
This post addresses some important recent U.S. legal and regulatory developments; subsequent PHIRE posts will address the emerging Chinese response, and the seemingly inevitable increase in restrictive measures to be adopted by both sides in the future.
On February 13, 2020, wholesale changes took effect to the regulations implementing the U.S. Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). These rules cover a large number of provisions of FIRRMA that expanded the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS), but which lay dormant awaiting regulations to implement them. Chaired by the Secretary of the Treasury, CFIUS is an interagency body with power to review foreign investments that could pose a threat to U.S. national security. The key change implemented by the new regulations was to empower CFIUS to review even non-controlling foreign investments – at any level – in a U.S. business that manufactures, develops, designs or tests critical technology, operates or supports critical infrastructure or collects or stores large amounts of sensitive personal data (A “TID” U.S. business).  Other regulations issued by Treasury the same day implement FIRRMA’s coverage of certain covered real estate transactions.
These long-awaited changes to the CFIUS regulations greatly expand the number and types of foreign investment transactions that are subject to national security scrutiny. When coupled with CFIUS’s demonstrated increased focus on so-called “nonfiled transactions” (deals that closed without voluntarily seeking CFIUS clearance), there is little question but that foreign investors must evaluate the impact of a CFIUS review for any investment in a U.S. business engaged in sensitive or critical activities.
On May 20, 2020 the U.S. Senate passed the Holding Foreign Companies Accountable Act (HFCAA) which aims to amend the Sarbanes-Oxley Act of 2002. The legislation is currently being considered by the U.S. House of Representatives. Per the Senate bill’s terms, a non-U.S. issuer that retained a public accounting firm in a foreign jurisdiction that is not inspected by or registered with the Public Company Accounting Oversight Board (PCAOB) would be required to establish that it is not owned or controlled by a government or governmental entity in that jurisdiction, and the U.S. Securities and Exchange Commission (SEC) would be required to publicly identify all U.S.-listed companies that use public accounting firms in foreign jurisdictions which deny the access to audit information due to prohibitions imposed by a governmental authority in that foreign jurisdiction. Entities that fail to comply or have their financials audited by PCAOB-registered auditor for three consecutive years would risk being barred from listing on national and over-the-counter exchanges in the U.S.
There have been a number of high-profile accounting scandals of the past decade relating to Chinese so-called reverse-mergers, and the recent accounting scandals, has raised the temperature even higher. The potential implications of the HFCAA are enormous. There are currently over 200 Chinese-based U.S.-listed companies with a combined value north of $1.8 trillion USD, many of which could be faced with pressure to de-list. If the HFCAA became law, we would also expect the number of China-based companies listing on U.S. exchanges to be dramatically reduced.
In yet another development affecting operations of Chinese companies in the United States, on July 1, 2020 the U.S. Departments of State, Commerce, Homeland Security, and Treasury issued the Xinjiang Supply Chain Business Advisory (the “Advisory”). The Advisory cautions businesses that have connections to supply chains within Xinjiang of potential reputational, economic, and legal risks and recommends conducting due diligence in line with international best practices. Since the release of the Advisory, the United States has sanctioned Chinese governmental entities and government officials involved in alleged human rights abuses in Xinjiang.
Given the accelerating pace of U.S. policy developments involving foreign businesses, companies in China and abroad are well-advised to stay abreast of changes and ensure that their operations are fully compliant with relevant regulations, including measures that could expose them to risks of sanctions and penalties. Paul Hastings’ robust international regulatory enforcement practice remains highly focused on providing our clients with up-to-date information and guidance on best practices, to ensure successful navigation of the ever-more complex cross-border business landscape.