PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 1750 K Street NW, Suite 800 Washington, DC 20006
MEMORANDUM
PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and constitutes attorney work product prepared in anticipation of litigation and regulatory proceedings. It is intended solely for the use of the addressees and authorized personnel within Calderwood & Harkness LLP. Any unauthorized disclosure, reproduction, or distribution of this memorandum or its contents is strictly prohibited.
TO: Beatrice Holloway, Responsible Partner Margaret "Peggy" Ashworth, Of Counsel, National Security & CFIUS
FROM: Lt. Col. (Ret.) David Caruso, Senior Counsel, Government Contracts & Export Controls Priya Venkataraman, Associate, International Trade & Sanctions
DATE: June 28, 2023
RE: Foreign Ownership, Control, or Influence (FOCI) Analysis — Halcyon Semiconductor AG Acquisition of Marlowe Asset Management Photonics Inc.
MATTER: Halcyon Semiconductor AG / Marlowe Asset Management Photonics Inc. — CFIUS Filing & Mitigation
CFIUS Case No.: CFIUS-023-07-3841 (anticipated assignment upon filing)
Right-click to update Table of Contents
I. Executive Summary
The purpose of this memorandum is to assess whether, and to what degree, the proposed acquisition of Marlowe Asset Management Photonics Inc. ("VPI") by Halcyon Semiconductor Aktiengesellschaft ("HSAG") will create foreign ownership, control, or influence ("FOCI") over VPI, a cleared U.S. defense contractor holding a Facility Security Clearance ("FCL") at the SECRET level. This analysis is being prepared in connection with Calderwood & Harkness's representation of HSAG in the forthcoming filing with the Committee on Foreign Investment in the United States ("CFIUS") and the attendant coordination with the Defense Counterintelligence and Security Agency ("DCSA") regarding VPI's facility clearance status.
Based on our comprehensive review of HSAG's corporate structure, ownership chain, corporate governance, government relationships, and financial arrangements — as well as VPI's facility clearance status, cleared personnel, active government contracts, and export-controlled and classified activities — we reach the following core conclusions:
First, the transaction will result in full foreign ownership of VPI by a German public company (HSAG), constituting the highest category of FOCI under the National Industrial Security Program Operating Manual ("NISPOM"), codified at 32 C.F.R. Part 117. Upon consummation of the stock purchase, HSAG will hold, through its wholly owned intermediate subsidiary Halcyon US Holdings Inc. (a Delaware C-corporation), 100% of the outstanding equity of VPI. This represents the most direct and comprehensive form of foreign ownership recognized under the NISPOM framework.
Second, however, no German government ownership or control of HSAG has been identified, and Germany is a member of the North Atlantic Treaty Organization ("NATO") and a longstanding defense cooperation partner of the United States. These are favorable factors under both the CFIUS analytical framework (50 U.S.C. § 4565(f)) and the DCSA FOCI mitigation evaluation process. HSAG's shareholder base is widely dispersed among institutional and retail investors, with no single shareholder holding more than 10% of the outstanding share capital. No sovereign wealth funds or state-controlled entities have been identified among HSAG's shareholders.
Third, we recommend that the National Security Agreement ("NSA") currently being negotiated with CFIUS be structured to serve as the functional equivalent of a Special Security Agreement ("SSA") under the NISPOM framework. This approach will enable VPI to retain its FCL while operating under robust mitigation measures, including a Government Security Committee, Security Board Members, a Technology Control Plan, facility access restrictions, cybersecurity segregation, personnel continuity requirements, and independent third-party compliance monitoring. This approach is consistent with CFIUS precedent in semiconductor-sector acquisitions by NATO-allied acquirors.
Fourth, coordination with DCSA will be necessary to formalize the FOCI mitigation instrument and ensure continuity of VPI's FCL (CAGE Code: 7VK92). Informal engagement with the DCSA Industrial Security field office should proceed in parallel with the CFIUS review process, and formal submissions should follow execution of the NSA.
The stakes of this analysis are substantial. VPI currently employs 486 individuals, of whom 212 — approximately 43.6% — hold active U.S. government security clearances at the SECRET and TS/SCI levels. VPI's Albuquerque fabrication facility, located at 9200 Innovation Boulevard, Albuquerque, NM 87113, holds a Facility Security Clearance at the SECRET level. VPI presently holds 14 active Department of Defense contracts, both as prime contractor and as subcontractor, with an aggregate contract backlog of approximately $193 million. These contracts encompass critical defense programs including AN/TPS-80 radar systems, next-generation millimeter-wave power amplifiers, missile defense transmit/receive modules, and border surveillance RF components. Any disruption to VPI's FCL status would jeopardize the entirety of this classified contract portfolio and could trigger contract defaults, terminations for cause, and debarment proceedings — with cascading consequences for the U.S. defense industrial base.
This memorandum sets forth the factual basis, legal analysis, and strategic recommendations supporting our proposed mitigation approach. The analysis is organized as follows: Section II describes the scope and methodology of our review; Section III examines HSAG's ownership structure, corporate governance, and government relationships; Section IV details VPI's current FCL status, cleared personnel, and government contracts; Section V applies the NISPOM FOCI factors to the proposed transaction; Section VI evaluates FOCI mitigation options and recommends the SSA-equivalent NSA approach; Section VII outlines the DCSA coordination strategy; Section VIII addresses the impact of HSAG's existing U.S. operations; Section IX discusses risk factors and mitigation adequacy; and Section X sets forth our recommendations.
II. Scope and Methodology
A. Scope of Analysis
This FOCI analysis covers the following areas, each of which is examined in detail in the sections that follow:
1. HSAG's full ownership chain, corporate governance, and financial relationships. We have traced HSAG's ownership from its publicly traded equity on the Frankfurt Stock Exchange through its subsidiary structure to the proposed acquisition vehicle, Halcyon US Holdings Inc. We have examined the composition and affiliations of HSAG's Management Board (Vorstand) and Supervisory Board (Aufsichtsrat), as well as all identified relationships between HSAG and any foreign government.
2. Foreign government ties that could give rise to FOCI concerns. We have assessed whether any foreign government — including but not limited to the Federal Republic of Germany, the People's Republic of China, or any other nation — exercises ownership, control, or influence over HSAG through equity holdings, board representation, contractual arrangements, debt instruments, subsidies, regulatory relationships, or intelligence service obligations.
3. VPI's current FCL status and the implications of a change in ownership. We have reviewed VPI's existing facility clearance documentation, including its DD Form 441, SF 328, and related security records, and assessed the impact that a change from 100% domestic ownership to 100% foreign ownership will have on VPI's FCL status under the NISPOM.
4. Evaluation of FOCI mitigation options under the NISPOM and CFIUS frameworks. We have analyzed the full range of FOCI mitigation instruments available under NISPOM § 117.11 — from Board Resolutions to Proxy Agreements — and assessed which instrument, or combination of instruments, is most appropriate for this transaction.
5. Coordination strategy with DCSA. We have developed a recommended timeline and sequencing for engagement with DCSA, including informal pre-filing notification, formal submissions, and post-closing coordination to ensure uninterrupted FCL continuity.
B. Methodology. Our analysis is based on the following sources and activities:
Documentary review. We have reviewed HSAG's public filings on the Frankfurt Stock Exchange (XETRA: HLC), including annual reports (Geschäftsberichte) for fiscal years 2020 through 2022, quarterly earnings releases, and the company's Satzung (articles of association) as registered with the German commercial register (Handelsregister). HSAG is registered as HRB 28416 with the Amtsgericht (local court) Dresden. We have also reviewed HSAG's regulatory filings with the German Federal Financial Supervisory Authority (BaFin), including major shareholder notifications (Stimmrechtsmitteilungen) filed under the German Securities Trading Act (Wertpapierhandelsgesetz, or WpHG).
VPI security documentation. We have reviewed VPI's DD Form 441 (Department of Defense Security Agreement), SF 328 (Certificate Pertaining to Foreign Interests), and facility clearance records maintained with DCSA. We have also reviewed VPI's DDTC registration materials, ITAR compliance records, and a summary of VPI's active export licenses.
Interviews. We conducted an in-person interview with Stefan Lohse, HSAG General Counsel (Chefjustitiar), on June 14, 2023, at Calderwood & Harkness's Washington, D.C. offices. Mr. Lohse holds an LL.M. from Georgetown University Law Center and is admitted to practice in both New York and Germany. He provided detailed information regarding HSAG's corporate governance, shareholder structure, government relationships, and China operations. We also conducted a secure telephonic interview with Col. (Ret.) Bryce Hendrickson, USAF, VPI's Vice President of Government Programs and Facility Security Officer, who holds an active TS/SCI clearance, on June 16, 2023. Col. Hendrickson provided information regarding VPI's FCL status, cleared personnel, active government contracts, and current FOCI disclosures.
Coordination with seller's counsel. We consulted with Harrison Whitfield of Wethersfield & Gale LLP, counsel to VPI and its selling shareholders, regarding VPI's existing FOCI disclosures, current ownership structure, and FCL documentation. Mr. Whitfield holds an active SECRET clearance, which facilitated discussion of certain sensitive matters relating to VPI's classified programs.
Legal and regulatory analysis. We have analyzed the applicable provisions of the NISPOM (32 C.F.R. Part 117), DCSA FOCI guidance memoranda, the CFIUS statute (50 U.S.C. § 4565, as amended by the Foreign Investment Risk Review Modernization Act of 2018, or "FIRRMA"), CFIUS implementing regulations (31 C.F.R. Parts 800–802), and relevant CFIUS precedent involving semiconductor-sector acquisitions by NATO-allied acquirors. We have also reviewed applicable provisions of the International Traffic in Arms Regulations ("ITAR," 22 C.F.R. Parts 120–130), the Export Administration Regulations ("EAR," 15 C.F.R. Parts 730–774), and relevant DFARS clauses governing government contract security requirements.
III. HSAG Ownership Structure and Corporate Governance
A. Entity Overview
HSAG is a publicly traded semiconductor company organized under the laws of the Federal Republic of Germany as an Aktiengesellschaft (AG), a form of stock corporation under the German Stock Corporation Act (Aktiengesetz, or AktG). The entity's full legal name is Halcyon Semiconductor Aktiengesellschaft. Its corporate headquarters are located at Industriestraße 44, 01099 Dresden, Saxony, Germany, in the historic semiconductor manufacturing region of eastern Germany.
HSAG is registered with the German commercial register (Handelsregister) under registration number HRB 28416, maintained by the Amtsgericht (local court) Dresden. The company's Legal Entity Identifier (LEI) is 5299007KXQ2M4GHILZ38. HSAG's shares are listed on the Frankfurt Stock Exchange and traded on the XETRA electronic trading platform under the ticker symbol HLC.
As of June 1, 2023, HSAG's market capitalization was approximately €14.8 billion, making it one of the mid-to-large capitalization semiconductor companies in Europe. For fiscal year 2022, HSAG reported revenue of €6.12 billion and EBITDA of €1.37 billion. HSAG's primary business lines include analog and mixed-signal semiconductors, power management integrated circuits, automotive semiconductor solutions, and — through the proposed acquisition of VPI — an anticipated expansion into gallium nitride (GaN) compound semiconductor technologies for both commercial 5G infrastructure and defense applications.
HSAG operates fabrication facilities in Dresden (Germany), Villach (Austria), and Penang (Malaysia), as well as design centers in Munich, Eindhoven, and Austin, Texas. HSAG's product portfolio is overwhelmingly commercial in nature; the company does not currently engage in any classified defense work in any jurisdiction and does not hold any facility security clearances in any country.
B. Shareholder Analysis
HSAG is a publicly traded corporation with widely dispersed institutional and retail shareholdings. Based on our review of the most recent Stimmrechtsmitteilungen (major shareholder notification) filings under the German Securities Trading Act (WpHG), no single shareholder holds more than 10% of HSAG's outstanding voting share capital. This dispersed ownership structure is consistent with a broadly held European public company and is a favorable factor in the FOCI analysis.
The major institutional shareholders of HSAG, as disclosed in public filings and as confirmed through our interview with HSAG General Counsel Stefan Lohse, include the following categories of investors:
• Pension funds and retirement systems. Several major European and U.S. pension funds hold positions in HSAG, including through index fund allocations. These are passive, commercially motivated financial investments made in the ordinary course of portfolio management.
• Asset managers. Global asset management firms hold HSAG shares as part of diversified portfolios. These holdings are commercially motivated and do not confer any operational control or board representation rights.
• Index funds and exchange-traded funds (ETFs). HSAG is included in several European semiconductor and technology indices, resulting in automatic allocations by index-tracking funds. These holdings are entirely passive.
• Retail shareholders. A significant portion of HSAG's free float is held by individual retail investors, primarily in Germany and other European markets.
Critically, we have identified no foreign government-controlled sovereign wealth funds, state-owned enterprises, or government-affiliated investment vehicles among HSAG's shareholders. Specifically:
• No German federal government ownership has been identified. The Federal Republic of Germany does not hold, directly or indirectly, any equity interest in HSAG.
• No German state (Land) government ownership has been identified. No German Landesregierung or Land-owned entity holds an equity interest in HSAG.
• No stake is held by KfW (the German state development bank, owned jointly by the German federal government and the German states), any Landesbank, or any German government ministry.
• No foreign government ownership has been identified from any jurisdiction, including but not limited to the People's Republic of China, the Russian Federation, or any country designated as a state sponsor of terrorism.
Based on this analysis, we conclude that HSAG's ownership structure is that of a commercially motivated, publicly traded European semiconductor company with no government ownership or control. This conclusion is a significant favorable factor in the FOCI analysis, as it eliminates concerns about a foreign government exercising ownership influence over VPI through HSAG.
C. Board and Management Structure
HSAG is governed under the German two-tier board system, as required by the German Stock Corporation Act (Aktiengesetz) for all German Aktiengesellschaft entities. This system consists of a Management Board (Vorstand), which is responsible for the day-to-day management and strategic direction of the company, and a Supervisory Board (Aufsichtsrat), which oversees the Management Board and appoints and removes its members. The two-tier structure is distinct from the unitary board model used by U.S. corporations, and understanding its implications is important for the FOCI analysis.
Vorstand (Management Board):
The Vorstand is composed of three members, each of whom was interviewed or reviewed in connection with this analysis:
• Dr. Maximilian Ehrhardt — Chief Executive Officer (*Vorstandsvorsitzender*). Dr. Ehrhardt, age 57, is a materials physicist by training who has spent 18 years at HSAG, rising through the company's R&D and business unit leadership ranks before being appointed CEO in 2018. He is a German citizen and does not hold a U.S. security clearance. Dr. Ehrhardt has no identified affiliations with any foreign government or intelligence service.
• Katarina Brückner — Chief Financial Officer (*Finanzvorstand*). Ms. Brückner, age 49, is a Wirtschaftsprüfer (the German equivalent of a Certified Public Accountant) and has served as HSAG's CFO since 2020, having previously held senior finance positions at a major European automotive supplier. She is a German citizen and does not hold a U.S. security clearance. Ms. Brückner has no identified affiliations with any foreign government or intelligence service.
• Stefan Lohse — General Counsel (*Chefjustitiar*). Mr. Lohse holds an LL.M. from Georgetown University Law Center and is admitted to practice law in both New York and Germany. He holds dual German and U.S. citizenship. He does not hold a U.S. security clearance. Mr. Lohse was the primary HSAG point of contact for our FOCI analysis and was cooperative and forthcoming in responding to our inquiries. He has no identified affiliations with any foreign government or intelligence service.
Aufsichtsrat (Supervisory Board):
The Aufsichtsrat is composed of shareholder representatives and employee representatives in accordance with the German Codetermination Act (Mitbestimmungsgesetz), which requires that employees of German companies above a certain size be represented on the Supervisory Board. This is a standard feature of German corporate governance and does not, in itself, create a FOCI concern.
Our review of the Aufsichtsrat membership has identified no government appointees, no members affiliated with any foreign government, and no members who serve at the direction of, or are beholden to, any foreign government. The shareholder representatives on the Aufsichtsrat include independent business leaders and industry experts; the employee representatives include senior HSAG employees and trade union representatives, all of whom are private-sector individuals.
In summary, there is no indication that any member of the Vorstand or Aufsichtsrat serves at the direction of, or is beholden to, any foreign government. The governance structure is that of a conventional, commercially motivated European public company.
D. German Government Relationships
We have conducted a thorough assessment of HSAG's relationships with the German federal government, German state governments, and German government-affiliated entities. Our conclusions are as follows:
No ownership ties. As detailed in Section III.B above, HSAG has no identified ownership ties to the German federal government, any German state government (Land), or any German government-owned entity. Neither KfW, any Landesbank, nor any German government ministry holds a direct or indirect equity interest in HSAG.
Research grants and subsidies. HSAG participates in EU and German government-funded research programs, including the Important Project of Common European Interest on Microelectronics ("IPCEI on Microelectronics"), which is a multi-country European initiative to strengthen the European semiconductor industry. HSAG has received research grants and subsidies through these programs. However, these grants and subsidies are provided under standard EU state aid rules and do not confer ownership rights, control rights, board representation, or any other form of governance influence over HSAG. Participation in government-funded research programs is standard practice for major European semiconductor companies and does not, under NISPOM or DCSA guidance, create a FOCI concern in the absence of ownership, control, or influence flowing from such participation.
Regulatory oversight. HSAG is subject to ordinary regulatory oversight by BaFin (the German Federal Financial Supervisory Authority), which regulates all publicly traded companies in Germany, and by BAFA (the German Federal Office for Economic Affairs and Export Control), which administers German export control laws. This regulatory oversight is standard for any publicly traded German company engaged in semiconductor manufacturing and does not constitute "control" or "influence" within the meaning of the NISPOM FOCI framework. Every major publicly traded company in any jurisdiction is subject to securities regulation and, where applicable, export control oversight; such relationships are not treated as FOCI-creating under DCSA guidance.
intelligence service relationships. We have found no evidence that HSAG has any relationship with, or obligations to, the German Federal intelligence Service (Bundesnachrichtendienst, or BND), the German Military Counterintelligence Service (Militärischer Abschirmdienst, or MAD), or the German Federal Office for the Protection of the Constitution (Bundesamt für Verfassungsschutz, or BfV). Mr. Lohse confirmed in his interview that HSAG has no such relationships or obligations. Germany, as a NATO ally, maintains intelligence cooperation with the United States, but this cooperation does not create a FOCI concern for a privately owned German company.
Conclusion. No German government ownership, control, or influence over HSAG exists beyond standard regulatory and commercial relationships that are inherent in operating as a publicly traded corporation in Germany. This is a favorable factor that supports the conclusion that the FOCI risk in this transaction arises solely from private foreign ownership, not from foreign government involvement.
E. Other Foreign Government Relationships
Beyond the German government analysis above, we have assessed HSAG's relationships with other foreign governments, with particular attention to countries that are of heightened concern from a CFIUS and DCSA perspective.
China operations. HSAG maintains a subsidiary in the People's Republic of China: Halcyon Semiconductor (Shanghai) Co., Ltd. This subsidiary generated revenue of approximately $81.4 million in fiscal year 2022, representing approximately 1.3% of HSAG's total consolidated revenue. The Shanghai subsidiary's activities are limited to the design and sale of consumer-grade power management integrated circuits for the Chinese consumer electronics market. Critically, the Shanghai subsidiary does not engage in any GaN, defense-related, or dual-use semiconductor activities. Its product portfolio consists entirely of commodity-grade analog and power management ICs that are widely available from multiple global suppliers and do not involve controlled technology.
We have identified no Chinese government ownership or control over the Shanghai subsidiary. The subsidiary was formed under standard PRC company formation procedures as a wholly foreign-owned enterprise (WFOE), without any special government partnership arrangements, joint venture structures with Chinese state-owned enterprises, or Chinese government equity participation. Mr. Lohse confirmed that the Shanghai subsidiary is not subject to any special governmental directives or oversight beyond the standard regulatory requirements applicable to all foreign-invested enterprises in China.
While the existence of a PRC subsidiary is a factor that CFIUS will likely examine, the subsidiary's minimal revenue contribution (1.3% of total), its limitation to consumer-grade products with no defense or dual-use nexus, and the absence of Chinese government ownership or control all weigh in favor of the conclusion that HSAG's China operations do not create a material FOCI concern for VPI. Nonetheless, we anticipate that CFIUS may seek assurances — potentially through provisions in the NSA — that HSAG will not transfer any VPI technology, technical data, or classified information to, through, or in connection with the Shanghai subsidiary. We recommend proactively offering such assurances in the CFIUS filing.
Other jurisdictions. HSAG does not have operations in, or significant commercial relationships with, countries designated as state sponsors of terrorism (currently Cuba, the Democratic People's Republic of Korea, Iran, and Syria) or countries subject to comprehensive U.S. sanctions. HSAG's operations outside of Germany, Austria, Malaysia, the United States, and China are limited to sales offices in South Korea, Japan, and the United Kingdom — all of which are U.S. allies.
No other non-allied foreign government ownership, control, or influence has been identified with respect to HSAG.
IV. VPI's Current Facility Security Clearance Status
A. FCL Details
VPI maintains a Facility Security Clearance at the SECRET level for its primary facility located at 9200 Innovation Boulevard, Albuquerque, NM 87113. This facility encompasses approximately 45,000 square feet of GaN-on-SiC (gallium nitride on silicon carbide) fabrication space, including cleanroom environments, testing laboratories, and classified work areas. The facility is identified by CAGE Code 7VK92 in the Department of Defense's Commercial and Government Entity system.
VPI's Facility Security Officer ("FSO") is Col. (Ret.) Bryce Hendrickson, USAF, who holds an active TS/SCI security clearance. Col. Hendrickson, who retired from the United States Air Force after a 28-year career that included assignments with Air Force Materiel Command and the Air Force Research Laboratory, has served as VPI's FSO since 2017. He brings extensive experience in industrial security, having managed classified programs at the command level during his military career. His continued service as FSO is a significant asset for the proposed FOCI mitigation framework.
VPI has been registered with the Directorate of Defense Trade Controls ("DDTC") of the U.S. Department of State since 2011, under Registration Number M-24817. This registration is required for any U.S. person engaged in the manufacture or export of defense articles or defense services subject to the ITAR. VPI's DUNS Number is 07-812-4493, and its Employer Identification Number ("EIN") is 26-4371885.
B. Cleared Personnel
VPI currently employs 486 individuals. Of these, 212 employees — approximately 43.6% — hold active U.S. government security clearances. This is an unusually high proportion of cleared personnel for a company of VPI's size and reflects the company's deep involvement in classified defense programs. Clearance levels held by VPI personnel include SECRET and TOP SECRET / Sensitive Compartmented Information (TS/SCI).
Key cleared personnel include:
• Dr. Nathan Trevorrow, Founder & CEO — holds an active TS/SCI clearance. Dr. Trevorrow, a physicist and materials scientist, founded VPI in 2009 and has served as its CEO since inception. He is the principal technical visionary behind VPI's GaN power amplifier technology and maintains close relationships with program managers at DARPA, the Air Force Research Laboratory, and the Missile Defense Agency.
• Marissa Sung-Avila, President & COO — holds an active SECRET clearance. Ms. Sung-Avila oversees VPI's day-to-day operations, including manufacturing, supply chain, and program management for both classified and unclassified programs.
• Col. (Ret.) Bryce Hendrickson, VP Government Programs / FSO — holds an active TS/SCI clearance. As noted above, Col. Hendrickson serves as both VPI's Vice President of Government Programs and its Facility Security Officer. His dual role provides integrated oversight of VPI's classified contract performance and industrial security compliance.
• Adrienne Delacroix, Independent Director — holds an active SECRET clearance. Ms. Delacroix serves on VPI's board of directors as an independent director and is a former senior executive at a major U.S. defense prime contractor. Her clearance and industry experience make her a strong candidate for the role of Security Board Member under the proposed FOCI mitigation framework.
Notably, Derek Wainsborough, CFO, does not hold a security clearance. Mr. Wainsborough manages VPI's financial operations, including accounting, treasury, tax, and investor relations, and does not require access to classified information in the performance of his duties.
C. Current FOCI Status
VPI's most recently filed SF 328 (Certificate Pertaining to Foreign Interests) reflects no foreign ownership, control, or influence. This is because VPI is currently 100% domestically owned, with the following ownership breakdown:
• Dr. Nathan Trevorrow and family trusts: 22.4%
• Marissa Sung-Avila: 4.1%
• Ridgecrest Ventures Fund III, L.P. (a U.S. venture capital fund; General Partner: Ridgecrest Ventures Management LLC; principal: Franklin Yee; offices at 3300 Sand Hill Road, Suite 220, Menlo Park, CA 94025): 31.7%
• Cascadian Capital Partners Growth Fund II, L.P. (a U.S. growth equity fund; General Partner: Cascadian Capital Partners Management LLC; principal: Olivia Hartmann; offices at 1201 Third Avenue, Suite 4400, Seattle, WA 98101): 24.3%
• Employee option pool (vested and exercised): 11.8%
• Other angel investors (all U.S. persons): 5.7%
All of VPI's current equity holders are U.S. persons. No foreign person or entity holds any direct or indirect equity interest in VPI. No foreign person or entity has any contractual right to acquire an equity interest in VPI, other than the Stock Purchase Agreement with HSAG that is the subject of this analysis.
Because VPI is currently under 100% domestic ownership, no FOCI mitigation instrument is currently in place. None has been required under VPI's current ownership structure. The proposed acquisition will fundamentally change this posture, as discussed in Section V below.
D. Government Contracts at Risk
VPI holds 14 active Department of Defense contracts, both as prime contractor and as subcontractor, with an aggregate remaining contract backlog of approximately $193 million. These contracts span multiple branches of the U.S. military and Department of Homeland Security. A disruption to VPI's FCL status — including any suspension, revocation, or administrative hold — would disqualify VPI from performing on these contracts and could trigger termination for default, claims for cover costs by the U.S. Government, and potential debarment or suspension proceedings.
The five largest contracts by remaining backlog are as follows:
VPI's products include defense articles classified under ITAR Category XI(a)(3) (electronic equipment specifically designed or modified for military use) and dual-use components classified under EAR Export Control Classification Number ("ECCN") 3A001 (electronic components). The ITAR-controlled items are subject to the jurisdiction of the Directorate of Defense Trade Controls and require State Department authorization for any export or transfer to a foreign person. The EAR-controlled items are subject to the jurisdiction of the Bureau of Industry and Security and require Commerce Department authorization for export to most destinations.
VPI currently holds three active DSP-5 (Application/License for Permanent Export of Unclassified Defense Articles and Related Unclassified Technical Data) export licenses for deliveries to NATO allies, specifically the United Kingdom and Australia. These licenses permit VPI to export certain GaN power amplifier products and associated technical data to cleared facilities operated by defense contractors in those allied nations. The status of these export licenses could be affected by a change in VPI's ownership structure, as DDTC may require amendments to reflect the new corporate parent.
The loss of VPI's FCL would have severe and cascading consequences: VPI would be disqualified from performing on all 14 active DoD contracts; the U.S. Government would have grounds to terminate these contracts for default; VPI's employees could lose their individual security clearances; VPI would be unable to bid on or receive new classified contract awards; and VPI's existing export licenses could be suspended or revoked. The aggregate financial exposure — including contract backlog, potential termination liability, and loss of future business — substantially exceeds the $193 million backlog figure.
V. FOCI Analysis Under NISPOM
A. Applicable Regulatory Framework
The principal regulatory framework governing FOCI is the National Industrial Security Program Operating Manual ("NISPOM"), codified at 32 C.F.R. Part 117. The NISPOM establishes the requirements that cleared contractors must meet to protect classified information in their possession, including requirements related to foreign ownership, control, or influence.
DCSA serves as the cognizant security agency ("CSA") for VPI's Facility Security Clearance. In this capacity, DCSA is responsible for evaluating FOCI concerns, approving FOCI mitigation instruments, and monitoring ongoing compliance. DCSA also serves as the primary monitoring agency for CFIUS-mandated national security agreements involving cleared contractors, creating a functional integration between the CFIUS and NISPOM frameworks that is advantageous for the coordination approach we recommend.
Under NISPOM § 117.11(b), a U.S. company is considered to be under FOCI whenever a foreign interest has the power, direct or indirect, whether or not exercised, and whether or not exercisable through the ownership of the U.S. company's securities, by contractual arrangements or other means, to direct or decide matters affecting the management or operations of that company in a manner which may result in unauthorized access to classified information or may adversely affect the performance of classified contracts. This definition is deliberately broad; it encompasses not only formal ownership but also any mechanism by which a foreign interest could influence a cleared contractor's operations.
FOCI is evaluated along multiple factors, which are examined in detail in Section V.B below. These factors include, but are not limited to: the record of economic and government espionage by the foreign country; the nature of bilateral and multilateral security and information exchange agreements in which the foreign country participates; the ownership percentage; the degree of board representation held by the foreign interest; the existence of contractual arrangements that grant management or operational rights to the foreign interest; the nature and extent of financial relationships; and whether the foreign interest has access to classified information or controlled technical data.
B. Assessment of FOCI Factors
We have assessed the proposed transaction against each of the FOCI factors identified in NISPOM § 117.11 and applicable DCSA guidance. Our assessment is as follows:
Ownership. Post-closing, HSAG will own 100% of VPI's outstanding equity through its wholly owned intermediate holding company, Halcyon US Holdings Inc. Halcyon US Holdings Inc. is a Delaware C-corporation formed on June 5, 2023, specifically as the acquisition vehicle for this transaction. Its registered agent is National Registered Agents of Delaware, located at 160 Greentree Drive, Suite 101, Dover, DE 19904, and its EIN is 93-2841067. Through this structure, HSAG — a German public company — will be VPI's sole and ultimate beneficial owner. This constitutes the most direct and comprehensive form of foreign ownership possible under the NISPOM framework and is the primary factor driving the FOCI determination.
Board Representation. Without mitigation, HSAG would have the ability to appoint all directors and officers of VPI. As the 100% equity holder, HSAG would have unrestricted power to elect VPI's board of directors, remove directors, and appoint or replace VPI's officers. This level of board control, in the absence of mitigation, would give HSAG — a foreign interest — complete authority over VPI's management and operations, including decisions affecting classified programs, cleared personnel, and facility security.
Financial Dependency. The purchase price for the transaction is $1.42 billion, payable in cash at closing. Post-closing, HSAG will be VPI's sole equity holder, and VPI's ongoing capital needs — including capital expenditures for fab upgrades, research and development funding, and working capital — will be funded by HSAG. This creates complete financial dependency of VPI on HSAG. While this dependency is inherent in any parent-subsidiary relationship, it is a relevant FOCI factor because it gives the foreign parent the ability to exert influence through the allocation (or withholding) of capital.
Contractual Arrangements. The Stock Purchase Agreement ("SPA") was executed on June 10, 2023, and provides HSAG with all customary rights of a 100% equity owner, including the right to appoint board members, approve budgets, and make strategic decisions regarding VPI's operations. The SPA contains standard representations, warranties, and closing conditions, including the closing condition at SPA § 7.1(c) that requires CFIUS approval (or the expiration of any applicable CFIUS review period without action) as a prerequisite to closing. The contractual arrangements grant HSAG complete legal authority over VPI, subject only to applicable law and any FOCI mitigation instrument.
Access to Information. Without restrictions, HSAG personnel — including German nationals and other non-U.S. persons — could have access to VPI's classified information, ITAR-controlled technical data, and EAR-controlled technology. This is perhaps the most critical FOCI concern, as it directly implicates the risk of unauthorized disclosure of classified information and controlled technology to foreign persons. The mitigation framework must establish robust barriers to prevent any such access.
Country of Ownership. Germany is a NATO ally, a member state of the European Union, and a party to bilateral defense cooperation agreements with the United States, including the General Security of Military Information Agreement (GSOMIA). Germany participates in multiple multilateral security and intelligence-sharing arrangements with the United States. From a DCSA and CFIUS perspective, Germany is generally viewed favorably relative to non-allied nations, and acquisitions by German companies are more likely to be approved with appropriate mitigation than acquisitions by companies from adversary or non-allied nations. However, FOCI mitigation is still required for any non-U.S. ownership of a cleared contractor, regardless of the country of origin. Even ownership by companies from the closest U.S. allies — including the United Kingdom, Canada, and Australia — requires FOCI mitigation under the NISPOM when the target company holds a facility security clearance.
No Government Ownership. As analyzed in detail in Section III of this memorandum, no German or other foreign government ownership of HSAG has been identified. This is a favorable factor that reduces, but does not eliminate, the FOCI risk. Government ownership or control creates an additional layer of concern because it raises the possibility that a foreign government could direct the foreign parent to take actions adverse to U.S. national security interests. The absence of such ownership here means that the FOCI risk arises solely from private commercial foreign ownership — a risk that is well-addressed by the standard mitigation instruments.
C. FOCI Determination
Based on the foregoing analysis, we conclude that the proposed acquisition will create FOCI over VPI at the highest level — 100% foreign ownership by a German publicly traded company. This is an unambiguous FOCI determination. Post-closing, VPI will be wholly owned by a foreign interest, and FOCI mitigation will be mandatory for VPI to retain its Facility Security Clearance.
Without an acceptable FOCI mitigation instrument in place, DCSA would be required to revoke VPI's FCL. Revocation would disqualify VPI from performing on all 14 active DoD contracts, potentially triggering contract defaults, terminations, and claims totaling substantially more than the $193 million aggregate backlog.
The absence of foreign government ownership, Germany's NATO ally status, HSAG's purely commercial motivation for the acquisition (expansion into GaN technology for the 5G infrastructure market), and the availability of robust mitigation mechanisms are all favorable factors that support the approval of a FOCI mitigation instrument short of full divestiture. In particular, these factors support the use of an SSA-equivalent structure, as discussed in Section VI below, rather than the more restrictive Proxy Agreement or Voting Trust Agreement instruments that are typically reserved for transactions involving heightened risk (such as acquisitions by companies from non-allied nations or involving foreign government ownership).
VI. FOCI Mitigation Options
A. Overview of NISPOM Mitigation Instruments
The NISPOM, at 32 C.F.R. § 117.11, provides a graduated framework of FOCI mitigation instruments, ranging from the least restrictive to the most restrictive. The selection of the appropriate instrument depends on the degree and nature of the FOCI, the level of classified access involved, and the country of the foreign owner. The available instruments are summarized below:
Board Resolution. The least restrictive mitigation instrument, a Board Resolution is appropriate only for cases involving minimal FOCI — for example, where a foreign interest holds a small minority equity stake and does not have board representation or management control. A Board Resolution is a formal action by the company's board of directors acknowledging the existence of FOCI and committing to take specified protective measures. Board Resolutions are not appropriate for cases involving 100% foreign ownership, and this instrument is therefore not suitable for the present transaction.
Security Control Agreement ("SCA"). An SCA is an agreement between the foreign owner, the cleared contractor, and DCSA that establishes security controls while permitting a degree of foreign owner involvement in the cleared contractor's management. SCAs are appropriate for situations involving foreign ownership that do not involve access to proscribed information (e.g., information classified at the TOP SECRET level or involving certain special access programs). While an SCA provides more robust protections than a Board Resolution, it is generally not considered sufficient for cases involving 100% foreign ownership by a non-U.S. entity, particularly where the cleared contractor holds contracts involving sensitive defense programs. An SCA would be insufficient for VPI given the 100% foreign ownership and the sensitivity of VPI's classified programs.
Special Security Agreement ("SSA"). An SSA is the most commonly used mitigation instrument for 100% foreign-owned companies that need to maintain a facility security clearance. Under an SSA, the foreign owner retains the economic benefits of ownership (dividends, capital appreciation) but is excluded from security-related decisions through the establishment of a Government Security Committee ("GSC") composed of Security Board Members. The GSC has exclusive authority over classified programs, personnel security, and facility security. An SSA also requires a Technology Control Plan ("TCP") to prevent unauthorized transfer of controlled technical data to the foreign owner. The SSA permits the foreign owner to participate in the management of unclassified, non-controlled aspects of the cleared contractor's business, subject to the overriding authority of the GSC over security matters. The SSA strikes a balance between protecting national security and preserving the foreign owner's legitimate commercial interests.
Proxy Agreement. A Proxy Agreement is more restrictive than an SSA. Under a Proxy Agreement, the foreign owner appoints proxy holders — typically three or more U.S. citizens with appropriate security clearances — who exercise all governance rights over the cleared contractor on behalf of the foreign owner. The foreign owner is completely separated from management and has no role in the cleared contractor's operations. Proxy Agreements are typically reserved for cases involving heightened risk, such as acquisitions by companies from non-allied nations, acquisitions involving foreign government ownership, or situations involving access to the most sensitive classified information.
Voting Trust Agreement ("VTA"). Similar in effect to a Proxy Agreement, a VTA places the cleared contractor's shares in a voting trust administered by voting trustees who are U.S. citizens with appropriate security clearances. The voting trustees exercise all governance rights over the cleared contractor. As with a Proxy Agreement, the foreign owner is completely separated from management. VTAs and Proxy Agreements are functionally equivalent and are used in the same categories of cases.
B. Recommended FOCI Mitigation: SSA-Equivalent Treatment Through NSA
Given the facts of this transaction, we recommend that the FOCI mitigation take the form of an SSA-equivalent framework incorporated into the National Security Agreement ("NSA") to be negotiated with CFIUS. The rationale for this recommendation is as follows:
Given 100% foreign ownership by HSAG, a Board Resolution or SCA would be plainly insufficient. These instruments are designed for lower levels of FOCI and would not provide the comprehensive protections required for a situation in which a cleared contractor is wholly owned by a foreign entity. DCSA would not accept either of these instruments for a transaction of this nature.
At the other end of the spectrum, a Proxy Agreement or Voting Trust Agreement would be overly restrictive and would undermine HSAG's legitimate commercial interest in integrating VPI's non-classified commercial operations. HSAG is acquiring VPI not only for its defense business but also for its commercial GaN technology capabilities, which have significant applications in the rapidly growing 5G infrastructure market. A Proxy Agreement or VTA would effectively preclude HSAG from any involvement in VPI's management, including management of the commercial side of the business. Such an outcome would be disproportionate to the risk profile of this transaction, given the favorable factors identified above (NATO ally, no government ownership, commercially motivated acquisition).
An SSA is the most appropriate instrument for this transaction. The SSA permits HSAG to retain the economic benefits of ownership and to participate in the management of VPI's unclassified, non-controlled commercial operations, while establishing robust protections — through the GSC, Security Board Members, TCP, and facility access restrictions — to prevent unauthorized foreign access to classified information and controlled technology. This structure appropriately balances national security requirements with the legitimate commercial interests of the parties.
However, because the transaction is subject to CFIUS review and will be governed by a National Security Agreement, the NSA itself will function as the SSA-equivalent instrument. This approach is consistent with CFIUS precedent in semiconductor-sector acquisitions by NATO-allied acquirors, where the NSA incorporates all substantive elements of an SSA and DCSA accepts the NSA as the operative FOCI mitigation document. Under this approach, a single integrated instrument — the NSA — serves both as the CFIUS mitigation agreement and the NISPOM FOCI mitigation agreement, avoiding the complexity and potential inconsistency of maintaining two separate instruments. The substantive SSA-equivalent elements to be incorporated into the NSA are described in Section VI.C below.
We anticipate that these elements will be proposed in our negotiations with CFIUS, which are expected to begin following the conclusion of the review and investigation phases of the CFIUS process. The pre-filing consultation, which occurred on June 19, 2023, provided an opportunity to preview the general contours of the proposed mitigation framework with the CFIUS staff. Initial feedback was constructive, though the staff reserved judgment on the specific terms pending receipt and review of the formal filing.
C. Key FOCI Mitigation Elements in Proposed NSA
The following elements represent the core provisions that we propose to incorporate into the NSA to achieve SSA-equivalent protection. Each element addresses a specific FOCI risk factor identified in Section V above.
1. Board Composition. VPI's board of directors must be reconstituted to include a majority of members who are independent of HSAG and who hold, or are eligible to hold, the highest level of security clearance required for VPI's operations. Specifically, we propose that VPI's board be composed of five members:
• Three "Security Board Members" who must be U.S. citizens holding, or eligible for, TS/SCI security clearances. One of these three Security Board Members must be an independent Security Director — an individual with no prior affiliation with either HSAG or VPI, who brings independent judgment and national security expertise to the board. The Security Board Members will have exclusive authority over classified and export-controlled programs, personnel security, and facility security matters.
• Two HSAG Designees who will represent HSAG's commercial interests on the board and will participate in the governance of VPI's unclassified, non-controlled commercial operations. The HSAG Designees may not hold or access classified information, ITAR-controlled technical data, or EAR-controlled technology. Their participation in board discussions and decisions must be limited to unclassified, non-controlled matters.
We propose the following individuals as the initial Security Board Members, subject to DCSA vetting and approval:
• Col. (Ret.) Bryce Hendrickson — current VPI VP Government Programs and FSO, holder of active TS/SCI clearance, with extensive military and industrial security experience.
• Adrienne Delacroix — current VPI independent board member, holder of active SECRET clearance, former senior executive at a major U.S. defense prime contractor.
• One independent Security Director — to be identified through a search process involving candidates with former senior DoD, intelligence community, or DCSA leadership experience. This individual must be approved by DCSA.
This board composition ensures that a majority of VPI's directors are U.S. citizens with security clearances and no allegiance to the foreign owner, while preserving HSAG's ability to have representation on the board for legitimate commercial governance purposes.
2. Government Security Committee (GSC). The three Security Board Members will constitute a Government Security Committee, which will serve as the governing body for all security-related matters at VPI. The GSC will exercise exclusive authority over the following:
• All classified programs, including the award, performance, and management of classified contracts;
• All ITAR-controlled and EAR-controlled programs, including decisions regarding exports, deemed exports, and technology transfers;
• All personnel security matters, including the sponsorship of individuals for security clearances, the adjudication of clearance-related issues, and any personnel actions affecting cleared employees (hiring, termination, reassignment, or changes in access);
• All facility security matters, including the maintenance of VPI's FCL, the operation and security of classified work areas, and the implementation of physical security measures;
• Any changes to VPI's security posture, security procedures, or security infrastructure;
• Approval of any modifications to classified contracts or classified program requirements; and
• Oversight of VPI's compliance with the NSA, the NISPOM, the ITAR, and the EAR.
The GSC will have the authority to act independently of HSAG and without the consent of the HSAG Designees on the VPI board. The HSAG Designees may not attend GSC meetings, review GSC materials, or participate in GSC decisions. The GSC will report directly to DCSA on all security matters.
3. Technology Control Plan (TCP). A comprehensive Technology Control Plan will be developed and incorporated into the NSA. The TCP will establish the following protections:
• Prohibition on unauthorized technology transfer. No VPI technical data — including ITAR-controlled defense articles and technical data, EAR-controlled technology, and classified information — may be transferred, disclosed, or made available to any non-U.S. person, including HSAG employees, without prior U.S. government authorization. This prohibition applies to both tangible and intangible transfers, including deemed exports to foreign nationals employed by or visiting VPI.
• Physical and logical IT segregation. VPI's information technology systems must be physically and logically separated from HSAG's global IT network. VPI will maintain its own independent IT infrastructure, including servers, email systems, and data storage. No shared cloud infrastructure, network connections, or data links between VPI and HSAG systems will be permitted. This requirement extends to development tools, source code repositories, design databases, and engineering collaboration platforms.
• Access controls and information barriers. Detailed access controls and information barriers must be established between VPI's classified and controlled operations and HSAG. These barriers must include physical separation of work areas (with badge-access controls), logical separation of IT systems, and administrative controls (such as need-to-know procedures and information classification protocols). All VPI employees who handle classified or controlled information must be trained on the TCP requirements.
4. Facility Access Restrictions. HSAG personnel will be prohibited from accessing VPI's classified facilities, including the Albuquerque fab clean room Sections C-7 through C-12, without prior written approval from both DCSA and the GSC. This restriction applies to all HSAG employees, officers, directors, contractors, and agents, regardless of nationality.
For unclassified areas of VPI's facilities, HSAG personnel may visit only in accordance with visitor protocols established by the GSC and the FSO. These protocols must include advance notice requirements, escort procedures, sign-in and identification verification, and restrictions on the areas that may be visited and the information that may be discussed or shared. All visits by HSAG personnel must be documented and records maintained for inspection by DCSA and the third-party compliance monitor.
5. Personnel Continuity. To ensure stability and continuity in VPI's leadership, security operations, and classified program management during the transition to foreign ownership, the following key VPI personnel must remain employed by VPI for a minimum of 24 months following the closing of the transaction:
• Dr. Nathan Trevorrow, Founder & CEO (TS/SCI clearance holder)
• Marissa Sung-Avila, President & COO (SECRET clearance holder)
• Col. (Ret.) Bryce Hendrickson, VP Government Programs / FSO (TS/SCI clearance holder)
If any of these individuals separates from VPI during the 24-month period, whether voluntarily or involuntarily, their replacement must be approved by the GSC and by DCSA prior to appointment. The replacement must meet the same clearance requirements and security qualifications as the departing individual.
Col. Hendrickson must be retained as VPI's Facility Security Officer for the duration of the NSA. Any change in the FSO position requires prior GSC and DCSA approval.
6. Cybersecurity. VPI must maintain compliance with NIST Special Publication 800-171 (Protecting Controlled Unclassified Information in Nonfederal Systems and Organizations) and any successor standards, as required by DFARS 252.204-7012 and applicable contract clauses. In addition, the following cybersecurity measures must be implemented:
• Annual third-party penetration testing. VPI must engage an independent, DCSA-approved cybersecurity firm to conduct annual penetration testing of VPI's IT systems, including both classified and unclassified networks. The results of penetration testing must be reported to the GSC and to DCSA.
• Incident reporting. VPI must report any cybersecurity incident — including any suspected or confirmed unauthorized access to classified information, controlled technical data, or VPI's IT systems — to DCSA within 72 hours of discovery. Cybersecurity incidents involving potential compromise of classified information must also be reported in accordance with the NISPOM's incident reporting requirements.
• Network segregation. As described in the TCP provisions above, VPI's IT systems must be completely segregated from HSAG's global network. This segregation must be verified through the annual penetration testing process.
7. Third-Party Compliance Monitor. To provide independent assurance of VPI's ongoing compliance with the NSA, we propose the engagement of Whitmore Compliance Group LLC as the third-party compliance monitor. Whitmore Compliance Group is a specialized national security compliance firm led by Gerald Whitmore, a former senior official of the FBI's Counterintelligence Division. The firm's offices are located at 1300 Crystal Drive, Suite 710, Arlington, VA 22202. The engagement of Whitmore Compliance Group is subject to CFIUS approval.
The third-party monitor's responsibilities will include:
• Conducting annual comprehensive compliance audits of VPI's adherence to all NSA provisions, including the board governance requirements, GSC operations, TCP implementation, facility access restrictions, cybersecurity measures, and personnel continuity obligations;
• Preparing and submitting annual compliance reports to the CFIUS monitoring agencies (DCSA and, as applicable, the Department of Defense and the Department of Justice);
• Conducting ad hoc reviews or investigations at the direction of the CFIUS monitoring agencies;
• Maintaining direct lines of communication with the GSC, the FSO, and DCSA for the purpose of reporting compliance concerns in real time; and
• Appearing before the CFIUS monitoring agencies, upon request, to discuss compliance findings.
The estimated fee for the third-party monitoring engagement is $1.2 million per annum ($300,000 per quarter), which will be payable by HSAG. This fee structure ensures that the cost of compliance monitoring is borne by the foreign acquiror rather than the cleared contractor.
8. Enforcement. Violations of the NSA will be subject to significant penalties designed to deter non-compliance and to provide the U.S. Government with effective remedies in the event of a breach. Specifically:
• Civil penalties. Violations may result in civil monetary penalties of u