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For a very very long time, the Companies Law of the People's Republic of China has included a provision requiring the establishment of a Communist Party organization to undertake Party work within the company.
Article 19 In companies, Communist Party organizations shall, in accordance with the provisions of the Constitution of the Communist Party of China, be set up to carry out activities of the Party. Companies shall provide the necessary conditions for the Party organizations to carry out their activities.The provision caused very little trouble during the long period when the US and Chinese economies were moving closer together. Few paid much attention to the provision, and even within China, the organization and operation of these organizations was not viewed as a particularly sensitive issue much of the time and with respect to much of the work of these organizations within companies operating in China. Now, however, the politics of detachment has produced a renewed interest in this provision from both sides of the divide, especially as it may be applied to enterprises with bases of operation or connections outside Chinese territory.
One of the most contentious issues between China and the United States is the role of the Chinese Communist Party (CCP) in the economy. The CCP has become increasingly strident that it should play the leading role in guiding China’s economy. Xi Jinping has revived Mao Zedong’s mantra that “east, west, south, and north, the party leads everything.”Rather than reducing political intervention in the economy, Xi has declared that CCP leadership is the essential feature of Socialism with Chinese Characteristics, the formulation that describes China’s unique economic system. . . In 2015, Xi Jinping’s signature SOE reform plan, the “Guiding Opinion on Deepening the Reform of State-owned Enterprises,” cited the weak role of party organizations in many SOEs and called for strengthening the CCP’s leadership over these companies. Subsequent government proclamations have called for the promotion of party organizations within private companies, albeit with less intensity than the policies aimed at SOEs. (Party Committees in Chinese Companies)
The success or failure of these efforts remains unclear. But the effort to more assertively project the leadership pf the CPC in all collective organizations with which China has a relationship ought not to be surprising.
The issue has become sensitive. And now there is some sign of formal countermeasures from the United States. In February 2022, Senator Marco Rubio, once the Co-Chair of the Congressional-Executive Commission on China (CECC), introduced what he called the "No Chinese Communist Surprise Parties Act" (S.3598), the text of which follows below. It was read twice and referred to the Committee on Banking, Housing, and Urban Affairs, where it sits still. Congresswoman Claudia Tenney (R-NY) introduced companion legislation in the U.S. House of Representatives (Press Release HERE). That version now sits in the U.S. House Financial Services Committee. A one-pager providing further information on the legislation is available here.
In a 18 July 2022 Wall Street Journal "Letter to the Editor", Senator Rubio was allows to make his case for the passage of the bill.
Senator Rubio appears to have become a great advocate for further detachment of the US and Chinese economies--with portals overseen by the state through which trade between the two trading blocs may continue to be undertaken. But for him, the great era of intertwining, the Era of Reform and Opening Up, is as dead in the United States as it is in China. The New Era has produced a different ideological starting point in China; for Senator Rubio that also requires a new starting point in the U.S. That need is made greater for some of the same reasons that it has become important in China--notably national security (Senator Rubio wropte: "McKinsey & Co. employees touted their leadership of CCP branches in the company's Chinese offices. McKinsey is one of of the largest consulting companies in the world. It works closely with the U.S. government and intelligence community."). And thus the measure--one of a number of legislative actions, some enacted, that continue to have the effect of creating incentives for US companies to bifurcate their operations, shifting global supply chains away from China and detaching and isolating their Chinese operations.
The legislation follows the classic American pattern--it is a disclosure measure that requires that certain issuer companies subject to federal reporting rules disclose whether a Communist Party organization has been established within the issuer company, its subsidiaries or joint venture partners, and whether any such organization of the Chinese Communist Party has participated in the operations of the covered issuer, or of any subsidiary or joint venture partner with respect to the covered issuer, during the period covered by the report (Act § 3(b)(1) & (2)). In addition the covered issuer must disclose whether its board of directors owes a fiduciary duty to the covered issuer and shareholders of the covered issuer and is subject to heightened scrutiny with respect to conflicted controller transactions. The last, of course, would make it easier to enhance the success of shareholder suits.
The future of the legislation is unclear. It aligns, though, with the heavily human rights oriented discourse of the current Administration. It is a reminder, in any case, of the difficulties of developing the new economic post-global order and the sensitive state of relations between the two states. The Russo-Ukrainian War, however, may make the provision more tempting.
117th CONGRESS
2d Session
To require issuers filing annual reports with the Securities and Exchange Commission to disclose whether the issuers have connections with the Chinese Communist Party, and for other purposes.
IN THE SENATE OF THE UNITED STATESFebruary 8 (legislative day, February 3), 2022Mr. Rubio (for himself and Mrs. Blackburn) introduced the following bill; which was read twice and referred to the Committee on Banking, Housing, and Urban Affairs
A BILLTo require issuers filing annual reports with the Securities and Exchange Commission to disclose whether the issuers have connections with the Chinese Communist Party, and for other purposes.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
This Act may be cited as the “No Chinese Communist Subterfuge via Unregistered Regime Presence Rendered Invisible to Shareholders and Equivalent Parties Act” or the “No Chinese Communist SURPRISE Parties Act”.
SEC. 2. Reporting requirement.
(1) the term “Commission” means the Securities and Exchange Commission;
(2) the term “covered issuer” means an issuer, including a foreign private issuer, that is required to file annual reports with the Commission under section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a));
(3) the term “issuer” has the meaning given the term in section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a));
(A) a joint venture in which the covered issuer, or a subsidiary with respect to the covered issuer, is a party; or
(B) any other person that is a party in a joint venture described in subparagraph (A); and
(5) the term “subsidiary”, with respect to a covered issuer, means a wholly or partially owned subsidiary of the covered issuer.
(b) Requirement.—Each covered issuer, in each annual report that the covered issuer files with the Commission (beginning with the second annual report that the covered issuer files with the Commission after the date of enactment of this Act), shall—
(1) disclose whether the covered issuer, or any subsidiary or joint venture partner with respect to the covered issuer, has established or maintained an organization of the Chinese Communist Party during the period covered by the report;
(2) if an organization of the Chinese Communist Party has participated in the operations of the covered issuer, or of any subsidiary or joint venture partner with respect to the covered issuer, during the period covered by the report, summarize that participation; and
(3) disclose whether the board of directors of the covered issuer (or the equivalent body with respect to the covered issuer), under the laws of the jurisdiction in which the covered issuer is incorporated or otherwise organized—
(A) owes a fiduciary duty to the covered issuer and shareholders of the covered issuer; and
(B) is subject to heightened scrutiny with respect to conflicted controller transactions.
(c) Updates to rules.—Not later than 1 year after the date of enactment of this Act, the Commission shall make any updates to the rules of the Commission that are necessary as a result of this section.
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