Xiaomi Corporation sued the US Departments of Defense and Treasury Friday 29-1-2021 over its designation at a “Communist Chinese military company.”
Xiaomi was designated as a military company by the Department of Defense (DOD) on January 14 under the 1999 National Defense Authorization Act. Under former president Donald Trump’s Executive Order 13959, American investors cannot purchase or invest in the securities of any company designated as a communist Chinese military company. Investors have until January 14, 2022, to divest from such companies.
Allegations of military connections have dogged Chinese electronics and telecommunications companies for years. Huawei was Initially designated as a military company and has long faced associations with the Chinese military. The founder of Huawei, Ren Zhengfei, was an engineer in the People’s Liberation Army. Xiaomi’s ties are less direct, however. The DOD alleges that Xiaomi is connected with China’s Military-Civil Fusion strategy. The petition reads asunder:
“ 1. This action challenges the Trump Administration’s unlawful designation on January 14, 2021, of Plaintiff Xiaomi, a consumer electronics company, as a Communist Chinese military company (“CCMC”) subject to Executive Order 13959. As a result of that designation, U.S. persons will no longer be able to purchase publicly traded Xiaomi securities or derivatives of those securities as of March 15, 2021, and must divest their holdings by January 14, 2022. As explained below, the designation of Xiaomi as a CCMC (the “Designation”) is unlawful and should be enjoined. By failing to provide a reasoned explanation for the Designation, and by making a designation decision that necessarily runs counter to any accurate evidence before the agencies, the Departments of Defense and Treasury engaged in arbitrary and capricious decision making, in violation of the Administrative Procedure Act (“APA”), 5 U.S.C. § 706. Moreover, by failing to provide Xiaomi with notice of, or an opportunity to challenge, the basis for the Designation, Defendants have deprived Xiaomi of due process of law, in violation of the Fifth Amendment.”
Xiaomi alleges in its complaint that the company is primarily controlled by its two co-founders, Lei Jun and Bin Lin, who control more than 75 percent of voting power in the company. Moreover, three of Xiaomi’s largest investors are American investment companies: BlackRock, Vanguard, and State Street.
Xiaomi seeks a preliminary injunction against the designation as a military company, on the grounds that an officer of the company is an American, subject to the divestment order, and would lose control over corporate governance. This is in addition to the losses of access to capital markets and damage to Xiaomi’s reputation.
“(1) Issue a declaratory judgment pursuant to 28 U.S.C. § 2201(a) that the designation of Xiaomi as a CCMC is unlawful and unconstitutional; (2) Issue an order vacating and setting aside the designation of Xiaomi as a CCMC, preliminarily and permanently enjoining Defendants from implementing or enforcing that designation, and preserving the status quo; (3) Grant any other and further relief that this Court may deem just and proper.”