Regulatory intelligence for US exporters

Companies Need to Update China-Related Risk Disclosures, Lawyers Say

Public U.S. companies should update their China-related risk disclosures to factor in a range of potential trade restrictions on the horizon, including possible U.S. sanctions against Beijing for aiding Russia and new outbound investment restrictions, said Carl Valenstein, a trade lawyer with Morgan Lewis.

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Valenstein, speaking during a webinar hosted by the firm this week, said “Chinese support” for Russia’s war in Ukraine “is kind of an open question.” The Biden administration could impose “a raft of new sanctions” against Chinese companies if it determines they’re supporting the Russian government despite Western sanctions. “We're in a watchful waiting period,” Valenstein said.

Companies should consider referencing these new sanctions and other China-related risks in their SEC filings, Valenstein said, adding that “many” of his clients recently updated their China risk-factor disclosures. “This isn't a one-and-done kind of issue,” he said. “It's a very dynamic relationship, and risk factors need to be updated on a quarterly basis.”

Firms with Chinese investments may also need to continue to update the risks they could face from a potential U.S. executive order establishing an outbound investment screening regime, Valenstein said, although it remains unclear when and if the order will be issued. "There's been speculation that we're about to get an executive order for six, nine months, and it hasn't emerged yet," he said. "But we have to watch this space very closely. We have a lot of clients doing that," adding that the scope of the regime is still unknown.

Reports in January said the administration was leaning toward narrowing the upcoming EO, but it would still focus on screening outbound investments in China’s quantum computing, artificial intelligence and semiconductor industries (see 2301120035). Other reports said the administration scaled back the order to focus on “increasing transparency” in certain outbound investments in China instead of potentially blocking investments in several sectors (see 2302280011). Valenstein suggested companies should prepare as if a range of industries in China will be affected.

“I wouldn't take anything off the table right now. I think it's all open for discussion,” he said. “A lot of companies may find that their projects could be affected by whatever this new regime is.”

Companies should also be mindful of rising U.S. scrutiny on inbound foreign direct investment, Morgan Lewis trade lawyer Christian Kozlowski said. He said the Committee on Foreign Investment in the U.S. is “becoming increasingly aggressive” in searching for non-notified deals -- investments that weren’t notified to the committee but may fall under CFIUS jurisdiction. CFIUS head Paul Rosen last month said the committee continued to be particularly active in pursuing non-notified transactions (see 2303150039), and lawyers have warned about upticks in non-notified outreaches (see 2206090053 and 2211030047).

“The committee continues to increase its attention on these types of transactions,” Kozlowski said. “I think it's a fair estimate to say that we have not yet hit the high water mark.”

Although companies should disclose their China-related risks in SEC filings and be mindful of new sanctions, Valenstein also said he has seen some businesses overreact. He said he recently received a “frantic” call from a client whose counterparty on a contract was added to the Unverified List. The UVL, unlike the Entity List, imposes no new export license requirements. “It doesn't have any immediate consequences,” Valenstein said. “The sky is not falling.”

Although the UVL is far less restrictive than the Entity List, UVL parties aren’t eligible for license exceptions, and suppliers to those entities must obtain a statement from the UVL party that they won’t use the shipment for any activity prohibited by U.S. export regulations. But “this is not an entity you have to stop doing business with,” Valenstein said. "Part of the complexity of this is the U.S. actions are very complicated and nuanced, and there's a lot of misperception as to the consequences of that."