───────────────────────────────────────────────────────────── PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
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Dear Dr. Ehrhardt and Ms. Brückner,
We are writing to provide you with a board-level summary of the preliminary national security concerns that CFIUS communicated to the parties yesterday, October 20, 2023, in connection with the proposed acquisition of Marlowe Asset Management Photonics, Inc. ("VPI") by Halcyon Semiconductor AG ("HSAG").
As you will recall, following completion of its initial 45-day review, CFIUS initiated a 45-day investigation on September 4, 2023. Calderwood & Harkness filed our second supplemental response on October 6, 2023, in reply to the second Request for Information ("RFI") issued by the Committee on September 22, 2023. The communication of preliminary national security concerns is a standard procedural step during the investigation phase and was anticipated in our initial risk assessment. The communication was issued by the Department of the Treasury, acting in its capacity as CFIUS Chair, with the Department of Defense ("DoD") and the Department of Energy ("DOE") serving as co-lead agencies for this review.
This email is intended to give you and the Board a clear, actionable overview of the concerns raised and our recommended path forward. A more detailed internal legal assessment memorandum analyzing each concern and our full recommended responses is being prepared separately by our team and will be circulated to you by October 23, 2023.
**I. SIGNIFICANCE OF THE COMMUNICATION**
At the outset, we want to provide important context. The issuance of preliminary national security concerns is a procedural step within the CFIUS investigation and **does not** represent a final determination or an adverse decision on the transaction. In transactions involving classified defense programs, ITAR/EAR-controlled technologies, and critical semiconductor capabilities — all of which are present here — receipt of such concerns is typical. Indeed, we flagged this as the expected course of events in our initial risk assessment presented to your Board in May.
Importantly, the communication of these concerns signals CFIUS's willingness to explore mitigation measures rather than moving toward a recommendation of presidential block. We view this as a constructive development. The next step in the process will be CFIUS's circulation of an initial draft National Security Agreement ("NSA") containing proposed mitigation terms, which we expect to receive in the coming weeks.
**II. SUMMARY OF THE FOUR PRELIMINARY NATIONAL SECURITY CONCERNS**
CFIUS identified four distinct areas of national security concern. We summarize each below.
**Concern 1: Foreign Access to Classified Defense Programs**
CFIUS has expressed concern that, following the closing of the transaction, HSAG — as a German parent company — or its personnel could gain direct or indirect access to VPI's classified programs conducted at VPI's Albuquerque, New Mexico facility (9200 Innovation Boulevard). This is a 45,000-square-foot GaN-on-SiC fabrication facility that holds a Facility Security Clearance ("FCL") at the SECRET level (CAGE Code 7VK92).
The scope of VPI's classified and sensitive government work is substantial. VPI currently holds 14 active DoD contracts (both prime and subcontract) with an aggregate backlog of approximately $193 million. These contracts span multiple agencies, including U.S. Army PEO IEW&S, the Air Force Research Laboratory ("AFRL"), the Missile Defense Agency ("MDA"), NAVSEA (via subcontract to Ironclad Defense Systems Inc.), and the Department of Homeland Security Science and Technology Directorate ("DHS S&T"). Of VPI's 486 employees, 212 hold active U.S. government security clearances.
The core concern is ensuring that foreign ownership does not compromise the integrity of classified programs or result in unauthorized disclosure of classified national security information.
**Concern 2: Potential Transfer of ITAR/EAR-Controlled Technology to Non-U.S. Persons**
CFIUS is concerned that VPI's controlled technology could be transferred to non-U.S. HSAG personnel or entities without appropriate authorization. VPI's technology portfolio includes ITAR Category XI(a)(3) defense articles, EAR ECCN 3A001 and 3E001 dual-use components, 47 granted U.S. patents (23 of which were developed under government-funded contracts), and 12 pending patent applications. VPI also maintains 31 registered internal trade secrets, primarily comprising proprietary GaN epitaxial recipes and die-level reliability screening processes.
CFIUS's specific focus is on VPI's proprietary GaN epitaxial growth processes, HEMT gate structure designs, and mmWave power amplifier architectures — technologies that are at the core of VPI's value proposition and defense relevance.
The concern extends to HSAG's existing non-U.S. operations, including Halcyon Semiconductor (Shanghai) Co., Ltd. We recognize that HSAG's China operations are limited to consumer-grade power management ICs, generating revenue of approximately $81.4 million (roughly 1.3% of HSAG's total revenue), and involve no GaN or defense-related activities whatsoever. Nonetheless, CFIUS is sensitive to any China nexus in transactions of this nature, and the Shanghai entity was specifically referenced in the communication.
**Concern 3: Cybersecurity Risks from Integration with HSAG IT Infrastructure**
CFIUS has raised concerns about the potential for VPI's IT systems — which process and store classified information and controlled unclassified information ("CUI") — to be connected to or integrated with HSAG's global IT network following the closing. The Committee identifies risks of cyber intrusion, data exfiltration, or unauthorized access to sensitive technical data through shared infrastructure or cloud environments, particularly given HSAG's global footprint and the attendant cyber threat landscape.
**Concern 4: Continuity of Critical DoD Supply Chain**
Finally, CFIUS is concerned about ensuring the uninterrupted supply of VPI's GaN power amplifier chips to DoD end users post-closing. The concern encompasses the risk that changes in corporate ownership, management, or strategic priorities could disrupt VPI's performance under its government contracts or its willingness to continue serving the U.S. defense industrial base.
This concern also specifically addresses the retention of key cleared personnel, including Dr. Nathan Trevorrow (CEO, TS/SCI clearance), Marissa Sung-Avila (COO, SECRET clearance), and Col. (Ret.) Bryce Hendrickson (VP Government Programs and Facility Security Officer, TS/SCI clearance).
**III. CALDERWOOD & HARKNESS'S RECOMMENDED RESPONSES / MITIGATION FRAMEWORK**
Peggy Ashworth's national security team and I have analyzed each of the four concerns in detail. We believe all four can be effectively addressed through a comprehensive National Security Agreement. Notably, CFIUS's concerns align closely with the risk factors we identified in the mitigation strategy framework we developed at the outset of this engagement. We summarize our recommended responses below, with greater detail to follow in the October 23 memorandum.
**Response to Concern 1 (Classified Program Access):**
We recommend proposing the reconstitution of VPI's board of directors with a majority of Security Board Members — independent U.S. citizens who hold or are eligible for TS/SCI security clearances. We would propose a five-member board, with three Security Board Members and two HSAG designees. The Security Board Members would compose a Government Security Committee ("GSC") with exclusive authority over all classified and ITAR-controlled programs, personnel security, and facility security matters. HSAG designees would be expressly excluded from access to classified information.
We further recommend retaining Col. (Ret.) Bryce Hendrickson as Facility Security Officer to maintain continuity and institutional knowledge. Facility access restrictions would prohibit HSAG personnel from accessing classified areas of the Albuquerque fabrication facility — specifically clean room Sections C-7 through C-12 — without prior written approval from the Defense Counterintelligence and Security Agency ("DCSA") and the GSC.
The NSA would function as a Special Security Agreement ("SSA") equivalent for Foreign Ownership, Control, or Influence ("FOCI") mitigation purposes, thereby allowing VPI to retain its FCL at the SECRET level.
**Response to Concern 2 (Technology Transfer):**
We recommend implementing a comprehensive Technology Control Plan ("TCP") that would prohibit the transfer of any VPI technical data subject to ITAR or EAR controls to any non-U.S. person without prior U.S. government authorization. The TCP would cover VPI's full intellectual property portfolio, including all 47 granted patents, 12 pending applications, and 31 registered trade secrets.
VPI's existing DDTC registration (No. M-24817) and three active DSP-5 export licenses (for deliveries to the United Kingdom and Australia) would be maintained, with appropriate change-of-ownership amendments filed with DDTC and BIS as applicable. We would further propose that any cross-border R&D collaboration between VPI and HSAG entities be subject to advance U.S. government review and approval.
To address the specific sensitivity around HSAG's China operations, we recommend emphasizing the limited scope of Halcyon Semiconductor (Shanghai) Co., Ltd.'s business activities and HSAG's willingness to accept binding restrictions on any flow of VPI technology, data, or intellectual property to HSAG's China operations.
**Response to Concern 3 (Cybersecurity):**
We recommend committing to maintaining VPI's IT systems physically and logically separated from HSAG's global network, with no shared cloud infrastructure. VPI would commit to compliance with NIST SP 800-171 for the handling of CUI. Additional measures would include annual third-party penetration testing and mandatory cybersecurity incident reporting to DCSA within 72 hours. We further recommend engaging a qualified third-party compliance monitor to conduct periodic audits of cybersecurity compliance and report to the relevant CFIUS monitoring agencies.
**Response to Concern 4 (Supply Chain Continuity):**
We recommend that HSAG commit to the continued performance of all 14 active DoD contracts through their respective terms. For personnel continuity, we will propose that key VPI personnel — specifically Dr. Trevorrow, Ms. Sung-Avila, and Col. Hendrickson — remain employed by VPI for a minimum of 24 months post-closing, with any replacements subject to GSC and DCSA approval.
Additionally, HSAG would accept a pre-notification obligation requiring 30 days' advance notice to CFIUS before any material change to VPI's business, including divestitures, new foreign subcontracts, or changes to cleared personnel. A third-party compliance monitor would be engaged to conduct annual compliance audits and report findings to the CFIUS monitoring agencies.
**IV. EXPECTED PATH FORWARD — NSA NEGOTIATION TIMELINE**
We anticipate that CFIUS will circulate an initial draft NSA within the next two to three weeks — our estimate is early November 2023. NSA negotiations typically involve multiple rounds of meetings, draft exchanges, and redline discussions with representatives of Treasury, DoD, and DOE, together with counsel for both parties.
On the sellers' side, Harrison Whitfield at Wethersfield & Gale LLP — who holds an active SECRET clearance and specializes in government contracts and national security matters — will represent VPI's interests in the NSA negotiation process. Our team has been coordinating closely with Mr. Whitfield and his colleagues throughout this review, and we expect a collaborative approach to the negotiation.
Our realistic timeline estimate is as follows:
- NSA negotiations: late November through December 2023 - Target for NSA execution: January 2024 - CFIUS clearance (safe-harbor letter): shortly following NSA execution - Acquisition closing: early-to-mid February 2024
We believe this timeline is achievable if NSA negotiations proceed as expected.
**V. IMPACT ON TRANSACTION TIMELINE & BUDGET**
The investigation phase and NSA negotiation were anticipated in Calderwood & Harkness's original engagement planning and fee budget. The NSA negotiation phase was budgeted at $1.2 million within the overall $3.8 million CFIUS fee cap approved by HSAG. We do not, at this time, anticipate exceeding the fee cap.
The Stock Purchase Agreement executed on June 10, 2023 contains CFIUS-related closing conditions under SPA §7.1(c), and the current projected timeline remains comfortably within the SPA's outside date.
We recommend that HSAG begin internal planning for post-closing NSA compliance infrastructure. Specifically, HSAG should begin identifying potential HSAG designees for the reconstituted VPI board and candidates for the Security Board Member positions (U.S. citizens who are clearance-eligible, ideally with prior government or defense industry experience). HSAG should also budget for a third-party compliance monitor, which we estimate at approximately $1.0–$1.5 million per annum based on industry benchmarks for semiconductor-sector NSAs.
**VI. RECOMMENDED NEXT STEPS / ACTION ITEMS**
• Calderwood & Harkness is preparing a detailed internal legal assessment memorandum analyzing each concern and our full recommended responses. This memorandum will be circulated to you by Monday, October 23.
• We will schedule a call with Dr. Ehrhardt, Ms. Brückner, and Mr. Lohse early in the coming week to discuss the concerns and our recommended strategy in detail. Peggy Ashworth and David Caruso will participate.
• We will coordinate with Wethersfield & Gale (Harrison Whitfield) on a joint approach to the anticipated draft NSA.
• HSAG management should begin identifying potential Security Board Member candidates (U.S. citizens, clearance-eligible) and potential HSAG board designees for the reconstituted VPI board.
• **Important reminder:** No public disclosure of the CFIUS concerns should be made. We remind all recipients of the strict confidentiality obligations applicable to the CFIUS process under 50 U.S.C. § 4565 and Section 14.2 of the Stock Purchase Agreement. Please do not discuss the substance of this communication outside the recipient group without prior consultation with our team.
**VII. CLOSING**
We want to reiterate that Calderwood & Harkness views this as a manageable — and expected — stage of the CFIUS process. The receipt of preliminary national security concerns and progression to NSA negotiation is the anticipated pathway for a transaction of this nature and complexity. Based on our experience with comparable semiconductor-sector transactions and our benchmarking analysis of 12 recent National Security Agreements executed between 2019 and 2023, we are confident that a workable NSA can be negotiated that addresses CFIUS's concerns while preserving the strategic value of the acquisition for HSAG.
We are available to discuss at any time, including over the weekend. Please do not hesitate to reach out by phone or email.
With best regards,
**Beatrice Holloway** Partner, Mergers & Acquisitions Calderwood & Harkness LLP 399 Park Avenue, 31st Floor New York, NY 10022 Tel: +1 (212) 558-7240 Email: bholloway@calderwoodharkness.com
**Margaret "Peggy" Ashworth** Of Counsel, National Security & CFIUS Calderwood & Harkness LLP 1750 K Street NW, Suite 800 Washington, DC 20006 Tel: +1 (202) 662-4318 Email: mashworth@calderwoodharkness.com
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