Companies brace for impending restrictions relating to TikTok and WeChat

US President Donald Trump issued two executive orders mandating a ban on transactions with ByteDance Ltd. (ByteDance) and Tencent Holdings Ltd. (Tencent), the companies that own TikTok and WeChat, respectively, which would take effect on September 20, 2020.

Executive Orders (EO) 13942 and 13943 (the Executive Orders), which are part of the escalating technology battle between the US and China, contain language that is exceedingly broad. The Executive Orders authorize the prohibition of all transactions with Tencent (relating to WeChat) and ByteDance, including their subsidiaries, by persons or involving property subject to the jurisdiction of the United States. US Secretary of Commerce Wilbur Ross is authorized to define, within 45 days of the issuance of the Executive Orders, the types of transactions that will be banned by these Executive Orders.

It is not clear how widely the net will be cast by the Department of Commerce, although it seems likely that the prohibitions will focus, at a minimum, on the download, importation, and use of the applications in the United States or on property owned by US persons. The applications likely will need to be removed from US application stores and use of existing application within the United States will likely decrease significantly. While the 45-day clock ticks, companies that have ties to the targeted Chinese technology companies should be taking steps to ensure that they are prepared to terminate any relationships or activities that may be subject to the Executive Orders.

Executive Orders

On August 6, 2020, President Trump, pursuant to the International Emergency Economic Powers Act (50 USC 1701 et seq.) (IEEPA) and other authorities, issued EO 13942 and 13943. The Executive Orders are based on the national emergency the President declared in EO 13873 of May 15, 2019, with respect to the information and communications technology and services supply chain. EO 13873 creates a framework for imposing restrictions on the acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology or service (transaction) by any US person or others subject to US jurisdiction involving any property in which any foreign country or national has any interest.

The Executive Orders cite to continued threats to the national security, foreign policy, and economy of the United States arising from the spread in the United States of mobile applications developed and owned by companies in China. In particular, EO 13942 focuses on TikTok, a video-sharing mobile application owned by the Chinese company ByteDance, while EO 13943 focuses on WeChat, a messaging, social media, and electronic payment application owned by the Chinese company Tencent.

TikTok and WeChat, according to the Executive Orders, capture "vast swaths of information" from their users, threatening to allow the Chinese government access to Americans' personal and proprietary information. Both applications, according to the Executive Orders, also reportedly censor content that the Chinese government deems politically sensitive and may also be used for disinformation campaigns. EO 13943 explains further that WeChat captures the personal and proprietary information of Chinese nationals visiting the United States, allowing the Chinese government to keep tabs on Chinese citizens.

To address these and other stated concerns, the President has ordered the following activities to be prohibited:

• EO 13942: any transaction by any person, or with respect to any property, subject to the jurisdiction of the United States, with ByteDance (a.k.a. Zìjié Tiàodòng), Beijing, China, or its subsidiaries, in which any such company has any interest; and
• EO 13943: any transaction that is related to WeChat by any person, or with respect to any property, subject to the jurisdiction of the US, with Tencent Holdings Ltd. (a.k.a. Téngxùn Kònggǔ Yǒuxiàn Gōngsī), Shenzhen, China, or any subsidiary of that entity.

The Commerce Secretary has 45 days from the date of the Executive Orders to identify or define the particular "transactions" subject to the prohibitions. The Executive Orders grant the Commerce Secretary the authority to employ all powers granted to the President by IEEPA as may be necessary to implement the Executive Orders.

Practical considerations

Importantly, nothing is prohibited under EO 13942 and 13943 until September 20, 2020. Until the Commerce Department has defined the covered transactions, we do not know the full scope and impact of the Executive Orders. In the interim, however, companies should consider the potential implications on their respective businesses and take steps to ensure that they are well-positioned to address any new compliance risks and obligations once the covered transactions are defined. In that regard, we believe the following observations may be instructive:

• Given the thrust of the Trump administration's stated concerns, we would expect the prohibitions to apply most significantly to the download, importation, and use of the applications in the United States or on property owned by US persons.
• The prohibitions on transactions with Tencent apply only to transactions that relate to WeChat, whereas, the prohibitions with ByteDance do not have a similar limitation. There have been reports of one or more US companies seeking to purchase TikTok, which could provide an exit for TikTok. ByteDance was the subject of another executive order, issued on August 14, 2020, which requires it to divest its interests in TikTok within 90 days. If TikTok is no longer owned by or otherwise affiliated with ByteDance, EO 13942, which prohibits transactions with ByteDance and its subsidiaries, should be less consequential for ByteDance.
• It is possible that the Commerce Secretary could place Tencent, ByteDance, and/or affiliated entities on the Bureau of Industry and Security (BIS) Entity List, as it has done with Huawei and several of its affiliates. The latest Huawei restrictions are discussed in our previous briefing. If the Commerce Secretary places certain entities on the Entity List pursuant to the Executive Orders, a license would be required for the export, re-export, or transfer (in-country) of any item subject to the Export Administration Regulations (EAR), including EAR99 items, to the listed entity, and there would be a presumption of denial for license applications. Any entities added to the Entity List pursuant to the Executive Orders could be listed with a footnote 1 designation, which applies only to transactions involving the direct products of technology covered by certain Export Control Classification Numbers (ECCNs). A footnote 1 designation expands the foreign-produced direct product (FDP) rule, also known as General Prohibition 3 (15 CFR § 736.2(b)(3)), to cover not only products developed or produced by the listed entity, but also any commercial off the shelf products that may be incorporated into, or used in the production or development, of items ordered, purchased, or produced by the listed entity, or that are part of a transaction to which the listed entity is otherwise a party (e.g., as a purchaser, end-user, or consignee).
• Businesses that have a significant ownership interest in Tencent are not expressly included in the prohibitions (only Tencent and its subsidiaries), however, they might need to reevaluate their relationship with Tencent to ensure that it complies with the prohibitions and they might be adversely impacted if Tencent faces any reputational harm, business losses, or other commercial consequences as a result of EO 13943. Further, WeChat's messaging functions and financial transfer services reportedly are widely used in the conduct of business in China. Therefore, even entities that do not have an ownership stake in Tencent but rely on WeChat to transact in China or communicate with customers in China could be significantly impacted if they are required to discontinue or limit their ties with Tencent.
• President Trump's orders may be tested in court as critics have begun to challenge them, including on First Amendment grounds. TikTok, for example, has sued to challenge EO 13942. It remains to be seen whether the Commerce Secretary will take these concerns into account in construing the transactions that are within the scope of the Executive Orders.

In sum, due to the sweeping powers the Executive Orders purport to grant the Secretary of Commerce, there could be widespread implications for various businesses. While it is premature to make any conclusions about the scope and impact of these Executive Orders, we think it is advisable for companies that have ties to Tencent and ByteDance to be prepared to face potentially challenging decisions regarding how to best proceed with their business dealings involving these companies.

The US government appears laser-focused on ramping up pressure on Chinese technology companies and these Executive Orders may be the tip of the regulatory iceberg if the US-China technology war continues to intensify.

We will continue to monitor these developments and provide updates, as needed.