Introduction

On April 10, during a Senate Banking Committee confirmation hearing, Landon Heid, the nominee for Assistant Secretary of the U.S. Department of Commerce’s Bureau of Industry and Security (BIS), proposed that BIS should introduce a rule similar to the Office of Foreign Assets Control (OFAC)’s 50% rule for the Entity List. This marks a significant reform direction for the management mechanism of the Entity List. He argued that currently, when a company is placed on the Entity List, its subsidiaries are not automatically restricted, which could create a loophole exploitable by parent companies to acquire controlled items. Heid suggested that if an entity is 50% or more owned by a listed entity, it should also be restricted, mirroring OFAC’s approach to blocked entities.

Heid further stated, “We solved the sanctions issue with the OFAC 50% rule decades ago, but we didn’t set this rule for export controls, so companies can tell the Commerce Department that’s my entity in Malaysia. You didn’t put it on the Entity List, so I’m allowed to import it.”[1]

Citing OFAC sanctions legal provisions, the so-called 50% rule means that a person whose property and interests in property are blocked pursuant to an executive order or regulations implemented by OFAC (i.e., a “blocked person”) shall be deemed to have an interest in all property and interests in property of an entity in which the blocked person holds, individually or in the aggregate, directly or indirectly, a 50% or greater interest. Therefore, any entity that is owned, directly or indirectly, 50% or more in the aggregate by one or more blocked persons is itself considered a blocked person.

Based on our experience dealing directly with U.S. government officials (such as BIS, CBP, and DHS) and analyzing and handling various cases, the 50% rule can be simply understood as follows: if a company is sanctioned (e.g., listed on the SDN list), its subsidiaries in which it holds directly or indirectly 50% or more ownership are also automatically sanctioned (deemed SDN entities), with the same restrictive measures applied. If the 50% rule from sanctions law were also applied to the export control domain, the control requirements imposed on Entity List companies would similarly apply to their controlled subsidiaries. This would have an enormous impact on Chinese and foreign enterprises.

It is highly likely that the 50% rule will be fully applied to the Entity List, Denied Persons List (DPL), and Military End-User (MEU) List managed by the U.S. Department of Commerce (collectively referred to as “blacklisted entities” hereafter), with implementation being only a matter of time.

I. Challenges Faced by Foreign Enterprises

1. Can Joint Ventures in China Continue? — Foreign Enterprises Are Already Taking Action!

One of the significant impacts of the 50% rule on foreign enterprises is its effect on joint ventures in China, not only those involving U.S. investments but also those of the EU, UK, Japan, and other foreign entities in China. Extending this further, if U.S. laws regarding “headquarters” and “corporate independence” are considered, foreign enterprises’ joint ventures, collaborations, etc., with Chinese companies outside China also face real compliance issues.

Once a Chinese partner in a joint venture becomes a blacklisted entity due to the above rule changes, cooperating with, forming joint ventures with, or providing technology and items to these entities becomes a critical compliance concern for foreign enterprises. Specifically, they need to evaluate whether the products, technologies, equipment, software, or engineering services they provide, if involving U.S. components or technologies, will violate U.S. export control laws and regulations, thereby creating operational risks.

After an accurate and proper risk assessment, if the risks are deemed too high, foreign enterprises may need to consider exiting. However, how to withdraw poses its own set of unavoidable complexities. Joint ventures established and operating in China are subject to Chinese legal jurisdiction. Do previous agreements retain favorable clauses to withdraw? What reactions and countermeasures might the Chinese partner take? Due to space limitations, we only provide a brief overview here without further elaboration. However, some foreign enterprises have already contacted us to discuss such issues preliminarily.

2. Termination Faces Numerous Issues, Requiring Cautious Handling

Based on our experience assisting foreign enterprises with investments in China across various fields—such as factory establishment, mergers and acquisitions, technology contributions and collaborations, and the provision of raw materials and products in industries like electronics, servers, medical devices, automobiles, and industrial manufacturing—foreign investments in China share some common elements. In summary, these include joint venture agreements, decision-making charters and procedures, major supply chain arrangements, and separate technology transfer authorization agreements.

However, if the 50% rule applies and the worst-case commercial scenario occurs:

a) Terminating these agreements and contracts by the foreign party will involve a complex legal issue of interrelated rights, responsibilities, obligations, and benefits; and

b) If only the parent company is listed on the blacklist while the subsidiary has not engaged in any conduct violating applicable laws, whether the foreign enterprise has grounds to exit will require further exploration;

c) The scenario where the Chinese partner will take legal action to protect itself, posing a very tricky problem for the foreign party, is an obvious possibility.

II. Challenges Faced by Chinese Enterprises

1. Overseas Expansion Models May Completely Fail—Not an Exaggeration

In early August, an advanced technology company listed on the Entity List consulted us about its overseas technology expansion plans. The company was considering options such as establishing subsidiaries or acquiring local companies, and its founder also outlined the current impact of the Entity List on the business.

A key characteristic of Chinese enterprises’ overseas expansion is the full control of overseas companies in terms of personnel (management), authority (decision-making), and finances (funding), which typically exceeds 50% ownership, either directly or indirectly. In other words, if the Chinese parent company is an Entity List entity, under the 50% rule, its overseas subsidiaries would also be classified as Entity List entities. This would undoubtedly have a significant impact on the overseas operations of these subsidiaries. Consequently, the existing overseas expansion models of Chinese enterprises—whether establishing subsidiaries independently or acquiring local companies—will face substantial challenges.

We need to caution enterprises about a common misunderstanding regarding the Variable Interest Entity (VIE) structure. Many enterprises assume that the VIE can evade U.S. accountability, but this is incorrect. According to the U.S. First Investment Policy released on February 21,[2]it explicitly states: “(ii) review the variable interest entity and subsidiary structures used by foreign-adversary companies to trade on United States exchanges, which limit the ownership rights and protections for United States investors, as well as allegations of fraudulent behavior by these companies.” This statement indicates that the U.S. is fully aware of enterprises using VIE structures to violate U.S. laws, and U.S. legal accountability principles involve “piercing to natural persons.” Therefore, Chinese enterprises should try not to dig themselves into a hole due to misunderstandings.

In summary, the overseas expansion models of enterprises will face severe challenges, particularly for those that have already expanded and are therefore at significant risk. Some investments and factory establishments may fail.

2. Widespread Compliance Risks Will Emerge in Domestic Trade, Mergers and Acquisitions, and Cooperation

As of August 15, 1,089 Chinese enterprises have been listed on the Entity List, with 57 Chinese enterprises on the MEU List. If the 50% rule applies, it is evident that companies engaging in transactions with the controlled subsidiaries of these entities will face serious issues, such as:

a) Should trade continue?

b) Should joint ventures continue?

c) Should mergers, acquisitions, or being acquired continue?

d) If the above transactions proceed, what risks will arise? Will trading with blacklisted entities violate U.S. export controls, leading to U.S. sanctions? What is the extent of liability for corporate managers? Numerous questions will emerge.

e) If the above transactions continue, will upstream suppliers, due to concerns about risks associated with trading with blacklisted entities, terminate supply?

f) Will other technology partners also suspend cooperation due to these issues?

g) If the above transactions are not pursued, how can a safe exit be achieved?

Currently, in the export control domain, the U.S. enforcement investigation period is five years, posing a significant challenge for existing enterprises. Attempting to “muddle through” is unreliable, as the U.S. can hold violators accountable within five years. Therefore, enterprises need to make preemptive judgments and strategic plans to effectively manage various issues and risks.

III. Approaches to Addressing Challenges

Many enterprises habitually ask us for solutions, and while we understand their thought process, we cannot directly provide specific solutions. The reason is simple and clear: “Without investigation and research, there is no right to speak.” However, we hope to correct some habitual thinking, particularly for Chinese enterprises, which should prioritize research and learning, which can help them develop effective solutions.

1. Correctly Understanding Potential Issues and Risks

Taking the example of the aforementioned enterprise consulting us about technology overseas expansion: if the company is unaware of the rules and practical judgments regarding “headquarters” and “corporate independence,” lacks understanding of U.S. investigation practices for corporate violations, and has not considered potential rule changes, how can it correctly formulate or judge the reliability of a plan? Thus, correctly understanding potential issues is the first step and the foundation for preparing a plan. Foreign enterprises serve as excellent teachers; their common practice is to thoroughly research problems before drafting plans, ensuring the reliability of the solutions.

2. Competitors Are Not the Same as Your Own Enterprise, and Simple References Are Inadvisable

In fact, enterprises understand that each company’s upstream and downstream supply chains differ, as do the situations of their management teams (e.g., some have U.S. citizenship or assets while others do not), which determines varying risk appetites. Therefore, without similar conditions, the practices of other competitors may offer no help. In terms of formulating plans, mature enterprises rarely ask us about others’ practices. They are well aware that plans are tailored to their own needs and cannot be simply copied from others.

3. Plans Must Be Considered Alongside the Enterprise’s Business Development Strategy and Cannot Be Detached from Reality

Once, an enterprise required our plan to ensure viability for over three years. We responded: “We cannot guarantee a timeframe, but the enterprises we have assisted have been operating normally for over three years.” This is because we always consider plans beyond immediate issues. Current problems often stem from earlier issues, as the saying goes, “Without foresight, there will be immediate worries.” Therefore, Chinese enterprises must plan for the long term.

Due to space constraints, we only provide the above brief overview, hoping to help both Chinese and foreign enterprises conduct early analysis and preemptive planning to achieve healthy and stable development in an uncertain environment. We welcome enterprises to collaborate with us for research and discussion.

[Note] 

[1]https://mp.weixin.qq.com/s/mnBHtXjkcnWnQt9L2IsBxA.

[2]https://www.whitehouse.gov/presidential-actions/2025/02/america-first-investment-policy/.