On August 6, 2020, President Trump issued two executive orders banning widely used Chinese social media services TikTok and WeChat. Citing national security concerns due to the applications’ abilities to automatically capture the personal information of U.S. citizens, censor content “that the Chinese Communist Party deems politically sensitive” and spread “disinformation campaigns that benefit the Chinese Communist Party,” the executive orders prohibit all individuals and entities subject to the jurisdiction of the U.S. from carrying out “transaction[s]” with TikTok’s parent company and its subsidiaries, and WeChat’s parent company Tencent Holdings Ltd. and its subsidiaries. The orders came on the heels of the Committee on Foreign Investment in the U.S.’s (CFIUS) announcement that TikTok was under review for national security concerns.
The executive orders do not yet define “transactions” and leave unclear to whom the orders apply. These ambiguities have caused many to believe that the orders would not only prohibit doing business with TikTok and WeChat, but also apply to popular video game companies, as Tencent is the 100% stakeholder of Riot Games (maker of League of Legends), an 84% stakeholder of Supercell (maker of Clash of Clans), a 40% stakeholder of Epic Games (maker of Fortnite), a 37% stakeholder of Huya, Inc. (which provides a video game live-streaming service) and a 5% stakeholder of Activision Blizzard and Ubisoft.
While a White House official told the Los Angeles Times that the executive order banning WeChat would only apply to transactions related to WeChat, no official statement has been made, and with the order giving the Secretary of Commerce the power to define the transactions in question within 45 days after the date of the order, there is still room for the administration to go after the video game companies. Additionally, with the term “subsidiaries” not defined in the orders, it is possible that even companies Tencent has invested in, such as Snap, Spotify and Universal Music Group, may be affected.
The effect of the order banning WeChat is also uncertain given Tencent’s announcement that it has plans to grow its stake in Huya, after proposing to merge Huya with DouYu International Holdings Ltd., a Chinese video game live-streaming service, to become a leader in the gaming and e-sports market. Tencent’s announcement was made on August 10, 2020, just four days after the order was issued.
Both executive orders are issued under the International Emergency Economic Powers Act (IEEPA) (50 U.S.C 1701 et. seq.), the National Emergencies Act (50 U.S.C. 1601 et seq.) and 3 U.S.C. 301 (which provides the President with the power to designate and empower the head of any department or agency in the executive branch). The orders also refer to Executive Order 13873, issued on May 15, 2019, which conferred the authority to regulate the acquisition and use of information and communications technology and services from a “foreign adversary” to the Secretary of Commerce.
Both executive orders will take effect 45 days from the date of the orders, appearing to give TikTok leeway to be acquired by Microsoft, which confirmed that it is in talks to buy parts of the video-sharing mobile application. Microsoft has stated that it will complete such discussions by September 15, 2020, the date President Trump set as the deadline for TikTok to find a U.S. buyer. Microsoft’s purchase of TikTok would allow for all personal information of American users to be transferred to and remain in the U.S.
In addition to the executive orders, the President’s Working Group on Financial Markets released recommendations on protecting U.S. investors from significant risks from Chinese companies, which among other things, recommends that the U.S. Securities and Exchange Commission require enhanced listing standards for companies with Chinese ownership. The executive orders and the recommendations are just a preview of the increased scrutiny to come on transactions with Chinese companies, especially those collecting data from U.S. citizens. Entities doing business with such Chinese companies should pay close attention to additional restrictions that are to come as tensions between the U.S. and China heighten, and act prudently, not expanding their relationships in China without having the ability to terminate such relationships if and when the U.S. government imposes those additional restrictions.