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CALDERWOOD & HARKNESS LLP Attorneys at Law
1750 K Street NW, Suite 800 Washington, DC 20006 Telephone: (202) 555-7100 Facsimile: (202) 555-7199 www.calderwoodharkness.com
January 30, 2024
MEMORANDUM
Matter No.: 1032-00004
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I. EXECUTIVE SUMMARY
This memorandum constitutes the final comprehensive summary of the engagement of Calderwood & Harkness LLP ("C&H" or the "Firm") on behalf of Halcyon Semiconductor Aktiengesellschaft ("HSAG") in connection with the review by the Committee on Foreign Investment in the United States ("CFIUS") of HSAG's proposed acquisition of one hundred percent (100%) of the outstanding equity of Marlowe Asset Management Photonics Inc. ("VPI"). The engagement was opened on June 12, 2023, and is being formally closed as of the date of this memorandum, January 30, 2024.
We are pleased to report a successful outcome. On January 26, 2024, CFIUS issued a safe-harbor letter confirming that the Committee had concluded its review and investigation of the proposed transaction and determined that it does not present unresolved national security concerns, subject to compliance with the terms of the National Security Agreement designated NSA-2024-0019, which was executed on January 19, 2024. As a result, all CFIUS-related closing conditions under Section 7.1(c) of the Stock Purchase Agreement dated June 10, 2023 (the "SPA") have been satisfied or are in the process of being satisfied. The closing of the transaction is now targeted for February 9, 2024.
This memorandum is intended to serve multiple purposes for HSAG's records and for the guidance of HSAG's management and legal team going forward:
(a) a complete record of the CFIUS process from pre-filing consultation through clearance, documenting each phase, milestone, and material development;
(b) a comprehensive summary of all obligations and compliance requirements imposed by the National Security Agreement (NSA-2024-0019), including governance, technology controls, cybersecurity, personnel, and monitoring provisions;
(c) a recommended internal compliance infrastructure roadmap to ensure HSAG and VPI are prepared to meet their ongoing obligations under the NSA from the date of closing forward; and
(d) formal confirmation that the C&H engagement for CFIUS filing and mitigation representation is hereby closed.
The C&H engagement team for this matter consisted of the following professionals:
• Beatrice Holloway, Partner — Responsible Partner, Mergers & Acquisitions
• James Prentice, Partner — Billing Partner
• Margaret "Peggy" Ashworth, Of Counsel — CFIUS Lead, National Security & CFIUS Practice
• Lt. Col. (Ret.) David Caruso, Senior Counsel — Government Contracts & Export Controls
• Omar Siddiqui, Associate — Lead Associate, intellectual Property
• Christy Bauer, Associate — Working Associate, intellectual Property
• Priya Venkataraman, Associate — International Trade & Sanctions
• Kenneth Morales, Associate — Corporate / M&A
The remainder of this memorandum sets forth a detailed description of the transaction, the CFIUS process, the NSA terms, post-closing regulatory actions, intellectual property considerations, compliance recommendations, a calendar of upcoming obligations, and a financial reconciliation of the engagement.
II. TRANSACTION OVERVIEW
A. The Parties
1. The Acquiror
The acquiror is Halcyon Semiconductor Aktiengesellschaft ("HSAG"), an Aktiengesellschaft organized and existing under the laws of the Federal Republic of Germany. HSAG is publicly traded on the Frankfurt Stock Exchange under the ticker symbol XETRA: HLC. Its principal executive offices are located at Industriestraße 44, 01099 Dresden, Saxony, Germany. HSAG is registered in the German commercial register of the Amtsgericht Dresden under registration number HRB 28416, and its Legal Entity Identifier (LEI) is 5299007KXQ2M4GHILZ38.
As of June 1, 2023 — the reference date used for purposes of the CFIUS filing — HSAG had a market capitalization of approximately €14.8 billion. For the fiscal year ended December 31, 2022, HSAG reported trailing twelve-month revenues of approximately €6.12 billion and EBITDA of approximately €1.37 billion. HSAG is a leading European semiconductor manufacturer, with design and fabrication facilities across Germany, the Netherlands, and Singapore, as well as design centers in the United States, Israel, and China. HSAG's product portfolio spans power semiconductors, automotive-grade microcontrollers, sensor ICs, and specialty Westmark Enterprises.
2. The Acquisition Vehicle
HSAG formed a wholly owned acquisition subsidiary, Halcyon US Holdings Inc., a C-corporation organized under the laws of the State of Delaware, for purposes of effecting the acquisition. Halcyon US Holdings Inc. was incorporated on June 5, 2023, and maintains its registered agent at 160 Greentree Drive, Suite 101, Dover, Delaware 19904. Its Employer Identification Number is 93-2841067. Halcyon US Holdings Inc. is an indirect, wholly owned subsidiary of HSAG, held through HSAG's existing U.S. holding structure.
3. Existing U.S. Subsidiary
HSAG's existing U.S. operating subsidiary is Halcyon US Inc., a Delaware corporation headquartered at 11501 Alterra Parkway, Suite 300, Austin, Texas 78758 (EIN 81-3056429). Halcyon US Inc. operates as a fabless design center with approximately 320 employees focused on power management IC design for commercial and automotive applications. Halcyon US Inc. does not perform any classified work and does not hold a facility security clearance. The existence and operations of Halcyon US Inc. were disclosed in full in the CFIUS notice and the NSA.
4. The Target
The target company is Marlowe Asset Management Photonics Inc. ("VPI"), a C-corporation organized under the laws of the State of Delaware, originally incorporated on February 14, 2009. VPI is headquartered at 7400 Ridgeline Parkway, Colorado Springs, Colorado 80919. VPI also operates a 45,000-square-foot gallium-nitride-on-silicon-carbide (GaN-on-SiC) fabrication facility located at 9200 Innovation Boulevard, Albuquerque, New Mexico 87113 (the "Albuquerque Fab"). The Albuquerque Fab holds a Facility Security Clearance ("FCL") at the SECRET level and is assigned CAGE Code 7VK92. VPI's Employer Identification Number is 26-4371885, and its Data Universal Numbering System (DUNS) number is 07-812-4493.
VPI designs and manufactures advanced gallium-nitride (GaN) power amplifier chips and modules used in defense radar systems, satellite communications, electronic warfare systems, and commercial 5G infrastructure. VPI is recognized as a critical supplier to the U.S. Department of Defense and is, for certain product lines, a sole-source or limited-source provider.
For the fiscal year ended December 31, 2022, VPI reported revenues of $287.4 million and EBITDA of $61.2 million. VPI employs 486 individuals, of whom 212 hold active U.S. government security clearances at various levels.
VPI holds fourteen (14) active contracts with the U.S. Department of Defense and the Department of Homeland Security, consisting of a mix of prime contracts and subcontracts. The aggregate remaining contract backlog as of the filing date was approximately $193 million. VPI's principal government customers include the United States Army Program Executive Office for intelligence, Electronic Warfare & Sensors ("PEO IEW&S"); the Air Force Research Laboratory ("AFRL"); the Missile Defense Agency ("MDA"); the Department of Homeland Security, Science and Technology Directorate ("DHS S&T"); and, through a subcontract to Ironclad Defense Systems Inc., the United States Navy, Naval Sea Systems Command ("NAVSEA").
VPI is registered with the Directorate of Defense Trade Controls ("DDTC") of the U.S. Department of State pursuant to the International Traffic in Arms Regulations ("ITAR") and has maintained its registration (Registration No. M-24817) since 2011. VPI's products include ITAR-controlled defense articles classified under United States Munitions List ("USML") Category XI(a)(3), as well as dual-use items classified under the Export Administration Regulations ("EAR") at Export Control Classification Numbers ("ECCNs") 3A001, 3A991, and 3E001. VPI currently holds three (3) active DSP-5 export licenses authorizing the export of certain products to the United Kingdom and Australia, both NATO and Five Eyes allies.
VPI's intellectual property portfolio consists of 47 granted U.S. utility patents, 12 pending patent applications, and 31 registered internal trade secrets. A significant portion of the patent portfolio — 23 of the 47 granted patents — was developed under government-funded contracts and is therefore subject to the government's rights under the Bayh-Dole Act (35 U.S.C. §§ 200–212), including potential march-in rights under 35 U.S.C. § 203, and to the provisions of DFARS 252.227-7038 concerning patent rights and data rights in government-funded inventions.
B. Transaction Structure and Economics
The transaction is structured as a 100% stock acquisition of VPI by Halcyon US Holdings Inc. on a cash-free, debt-free basis. The key financial terms are as follows:
Purchase Price. The base purchase price is $1,420,000,000 (one billion four hundred twenty million U.S. dollars), subject to customary adjustments for normalized net working capital against a target of $34.6 million. The consideration is payable entirely in cash at closing.
Earnout. In addition to the base purchase price, the SPA provides for contingent earnout payments of up to $85 million, payable in two tranches: (i) up to $50 million based on the achievement of specified government-contract revenue milestones during calendar year 2024, and (ii) up to $35 million based on the achievement of specified government-contract revenue milestones during calendar year 2025. The maximum aggregate consideration payable under the SPA, including the earnout, is therefore $1,505,000,000 (one billion five hundred five million U.S. dollars).
Escrow. An escrow holdback of $71 million — representing 5% of the base purchase price — will be deposited at closing with Pinnacle Trust Company, N.A. (escrow officer Lisa Trujillo) and held for a period of 18 months following the closing date. The escrow fund will serve as security for the sellers' indemnification obligations under Article IX of the SPA.
Representations and Warranties Insurance. HSAG has procured a representations and warranties insurance policy from Graystone Specialty Insurance Company (Policy No. GSI-RW-2023-04821). The policy provides coverage with a limit of $142 million (representing 10% of the base purchase price), subject to a retention of $14.2 million (representing 1% of the base purchase price). The premium for the policy is $4,970,000 (representing 3.5% of the policy limit). The policy was brokered by Ashford Gallagher & Co. (contact: Patricia Noonan).
Implied Valuation Multiples. Based on VPI's FY2022 financial results, the base purchase price implies an enterprise value-to-revenue multiple of approximately 4.94x and an enterprise value-to-EBITDA multiple of approximately 23.2x. These multiples are consistent with premiums observed in recent transactions involving U.S.-based compound semiconductor companies with significant defense exposure and sole-source positions, reflecting both VPI's strong competitive positioning and the strategic premium inherent in HSAG's entry into the GaN power amplifier market.
Financing. The acquisition is being financed through a combination of third-party debt and HSAG equity. The debt component consists of a $900 million senior secured term loan facility, with Meridian National Bank acting as administrative agent and Atlas Commercial Lending AG and Pacific Basin Credit Corp. serving as co-lead arrangers. The term loan bears interest at Secured Overnight Financing Rate (SOFR) plus 275 basis points, has a five-year term, and amortizes at a rate of 1% per annum. The equity component consists of a $520 million contribution from HSAG, funded through a combination of balance sheet cash and a draw of approximately €300 million on HSAG's existing revolving credit facility with Rheinische Handelsbank AG.
Stock Purchase Agreement. The SPA was executed on June 10, 2023, by and among Halcyon US Holdings Inc. (as purchaser), the shareholders of VPI (as sellers), and HSAG (solely for purposes of certain guarantee and indemnification obligations).
Targeted Closing Date. Following the receipt of CFIUS clearance on January 26, 2024, the closing of the transaction is now targeted for February 9, 2024, subject to the satisfaction or waiver of any remaining closing conditions under the SPA.
C. CFIUS Jurisdictional Basis
The proposed acquisition constitutes a "covered transaction" within the meaning of 31 C.F.R. § 800.213 of the CFIUS regulations. Specifically, the transaction involves the acquisition of a "TID U.S. business" — that is, a U.S. business that produces, designs, tests, manufactures, fabricates, or develops one or more "critical technologies" — by a "foreign person." VPI is a TID U.S. business because it designs and manufactures GaN semiconductor products that are classified as critical technologies under the CFIUS regulations, including items controlled under ECCN 3A001 of the Commerce Control List (dual-use advanced semiconductor devices) and defense articles classified under USML Category XI(a)(3) of the ITAR (military electronics).
HSAG, as an Aktiengesellschaft organized under German law, constitutes a "foreign person" for purposes of the CFIUS regulations. Accordingly, the acquisition of VPI by HSAG through Halcyon US Holdings Inc. is subject to CFIUS review.
Moreover, a mandatory declaration was triggered under the CFIUS pilot program and the final regulations implementing the Foreign Investment Risk Review Modernization Act of 2018 ("FIRRMA"), because VPI's critical technology products — specifically, items classified under ECCN 3A001 and ITAR Category XI(a)(3) — require U.S. government authorization (i.e., an export license or other authorization) for export, reexport, or transfer (in-country) to HSAG's home jurisdiction of Germany, or to the nationals of Germany, under the applicable export control regulations. The mandatory filing obligation therefore applied.
Notwithstanding the availability of a short-form mandatory declaration under 31 C.F.R. § 800.401(a), we recommended — in our initial engagement assessment dated June 12, 2023 — that HSAG file a full voluntary joint notice under 31 C.F.R. § 800.501. This recommendation was based on the significant complexity of VPI's classified programs, the number of active DoD contracts, the breadth of the national security equities involved, and our assessment that a short-form declaration would almost certainly result in CFIUS requesting a full notice in any event. Filing a full notice at the outset was the most efficient approach and avoided the delay that would have resulted from a two-step process. HSAG and VPI adopted this recommendation.
III. CHRONOLOGICAL SUMMARY OF THE CFIUS PROCESS
The following section provides a detailed chronological account of each phase of the CFIUS review process, from the opening of the engagement through the issuance of the safe-harbor letter.
A. Engagement Opening and Pre-Filing Phase (June 12 – July 13, 2023)
June 12, 2023 — Engagement Opening. Calderwood & Harkness LLP was formally engaged by HSAG to represent the company in connection with the CFIUS review of the proposed acquisition of VPI. The engagement letter was executed by Beatrice Holloway on behalf of the Firm and by Stefan Lohse on behalf of HSAG. Pursuant to the engagement letter, the fee cap for the CFIUS phase of the representation was set at $3,800,000, exclusive of disbursements. A retainer of $250,000 was received from HSAG and applied against the initial monthly billings.
June 15, 2023 — Pre-Filing Consultation Request. In accordance with CFIUS practice, Peggy Ashworth submitted a pre-filing consultation request letter to the U.S. Department of the Treasury, Office of Investment Security ("OIS"). The purpose of the pre-filing consultation was to introduce the transaction to Treasury and the other CFIUS member agencies, provide a preliminary summary of the parties and the national security considerations, and solicit initial feedback that would inform the preparation of the formal notice.
June 19, 2023 — Pre-Filing Consultation. The pre-filing consultation was held at Treasury OIS in Washington, D.C. The C&H team, led by Peggy Ashworth and accompanied by David Caruso, delivered a 22-slide briefing presentation to representatives of the CFIUS staff, including officials from the Department of the Treasury, the Department of Defense, the Department of Energy, and the Department of Homeland Security. The presentation covered the strategic rationale for the transaction, HSAG's corporate structure and business operations (including its existing U.S. presence through Halcyon US Inc.), VPI's business and government contracts, and proposed post-closing governance measures.
During the consultation, Treasury representatives raised several preliminary questions and areas of focus, which we assessed as indicating the likely direction of CFIUS's review. These included:
(i) HSAG's operations in China, specifically through its subsidiary Halcyon Semiconductor (Shanghai) Co., Ltd., which reported revenues of approximately $81.4 million (representing approximately 1.3% of HSAG's total revenues) for FY2022;
(ii) the cybersecurity posture of both HSAG and VPI, including VPI's compliance with NIST SP 800-171 and the planned approach to IT systems integration or segregation post-closing; and
(iii) the proposed post-closing governance structure for VPI, including board composition, management continuity, and mechanisms to protect classified programs and ITAR-controlled technology from unauthorized foreign access.
June 20, 2023 — Engagement Expansion. Based on the scope of the issues identified during the pre-filing consultation, the engagement letter was amended to expand the scope of the representation to include intellectual property diligence and export-control analysis. Omar Siddiqui and Christy Bauer were added to the engagement team to lead the IP workstream.
June 20, 2023 — Pre-Filing Debrief. A detailed pre-filing debrief memorandum was transmitted to Stefan Lohse summarizing the feedback received from Treasury, identifying the key areas likely to be the focus of CFIUS's review, and outlining the workstreams required to prepare the formal notice.
June – July 2023 — Notice Preparation. Over the ensuing four weeks, the C&H team undertook the substantial work of preparing the voluntary joint notice and its accompanying exhibits. This effort required extensive coordination with Wethersfield & Gale LLP ("W&G"), counsel to VPI and the selling shareholders. The principal contacts at W&G were Harrison Whitfield (partner) and Sandra Niehaus (associate). W&G was responsible for coordinating VPI's portion of the notice and gathering information from VPI's management team.
The information-gathering process involved detailed interactions with VPI's senior management team, including Dr. Nathan Trevorrow (Chief Executive Officer), Marissa Sung-Avila (President and Chief Operating Officer), Colonel (Ret.) Bryce Hendrickson (Vice President, Government Programs and Facility Security Officer), and Derek Wainsborough (Vice President, Engineering). These individuals provided critical information regarding VPI's classified programs, security clearance roster, government contracts, export-controlled products, IT infrastructure, and intellectual property portfolio. All information was provided subject to appropriate non-disclosure protections and in compliance with the terms of the parties' mutual non-disclosure agreement.
The notice and its exhibits underwent multiple rounds of internal review and revision at C&H, as well as iterative review and comment cycles with W&G and with HSAG's in-house legal and corporate development teams.
B. Voluntary Joint Notice Filing (July 14, 2023)
On July 14, 2023, the voluntary joint notice was filed with CFIUS under 31 C.F.R. § 800.501. The notice consisted of approximately 85 pages of narrative text and was accompanied by seven exhibits, each containing detailed supporting information.
The notice was jointly submitted on behalf of HSAG and VPI, consistent with CFIUS's strong preference for joint filings in the context of negotiated transactions. The required certifications were executed pursuant to 31 C.F.R. § 800.502 by Dr. Maximilian Ehrhardt on behalf of HSAG and by Dr. Nathan Trevorrow on behalf of VPI. Each certification affirmed the completeness and accuracy of the information submitted.
The exhibits submitted with the notice were as follows:
Exhibit A — Transaction Documents. Copies of the Stock Purchase Agreement (executed June 10, 2023), ancillary transaction agreements, and the organizational documents of Halcyon US Holdings Inc.
Exhibit B — VPI Business Description. A comprehensive description of VPI's business operations, products, customers, end-use applications, facilities, employees, and regulatory status, including its DDTC registration, EAR classifications, facility security clearance, and classified program descriptions (to the extent describable at an unclassified level).
Exhibit C — HSAG Business Description. A comprehensive description of HSAG's worldwide business operations, corporate history, products, customers, subsidiaries, and affiliates, including detailed information regarding HSAG's Chinese subsidiary and operations, as well as its existing U.S. operations through Halcyon US Inc.
Exhibit D — Organizational Charts. Pre-closing and post-closing corporate organizational charts showing the complete ownership chain from HSAG through its intermediate holding entities to Halcyon US Holdings Inc. and, following closing, to VPI.
Exhibit E — Regulated Products. A detailed schedule of VPI's ITAR-controlled and EAR-controlled products, including USML categories, ECCNs, product descriptions, and end-use applications.
Exhibit F — Government Contracts Summary. A summary of VPI's fourteen (14) active government contracts, including contract numbers, contracting agencies, descriptions of goods and services, contract types, periods of performance, obligated and remaining backlog amounts, and classification levels.
Exhibit G — Cleared Personnel Summary. A summary of VPI's 212 employees holding active U.S. government security clearances, organized by clearance level (SECRET, TOP SECRET, TS/SCI) and functional area, with appropriate redactions for personally identifiable information.
C. 45-Day Review Period (July 21 – September 3, 2023)
July 21, 2023 — Filing Accepted; Review Commenced. CFIUS formally accepted the filing and commenced the initial 45-day review period as provided under 50 U.S.C. § 4565(b)(1)(E). The assigned case number was CFIUS-023-07-3841. The 45-day review period was set to expire on September 3, 2023, subject to any tolling.
It was communicated to us that the Department of Defense and the Department of Energy had been designated as co-lead agencies for the review, which was consistent with our expectations given VPI's defense contract portfolio and the DOE's interest in GaN semiconductor technology for national security applications, including certain DOE-funded research programs related to directed-energy systems and advanced radar.
August 4, 2023 — First Request for Information. CFIUS issued its first formal Request for Information ("RFI"), consisting of 34 detailed questions. The RFI reflected the Committee's focus on several key areas, including:
• HSAG's relationships with German and European Union government entities, including any subsidies, grants, or investment-screening obligations under the EU Foreign Subsidies Regulation or the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung);
• HSAG's cybersecurity practices across its global operations, including certifications, incident history, and the proposed approach to integrating or segregating VPI's IT systems post-closing;
• HSAG's existing technology transfer protocols, both intra-company and with third parties, and the mechanisms by which HSAG would prevent unauthorized access to VPI's controlled technical data;
• HSAG's exposure to the Chinese market, including the operations and personnel of Halcyon Semiconductor (Shanghai) Co., Ltd., any Chinese government relationships or obligations, and any history of Chinese government investment-screening inquiries; and
• the proposed post-closing governance structure for VPI, including board composition, management roles, decision-making authority over classified programs, and the reporting relationship between VPI and HSAG.
August 18, 2023 — First Supplemental Response. C&H filed a comprehensive response to the first RFI on behalf of HSAG and VPI. The response included detailed narrative answers to each of the 34 questions and was accompanied by supplemental exhibits addressing two key areas:
(i) HSAG Cybersecurity Program. A supplemental exhibit describing HSAG's enterprise-wide cybersecurity program, including its ISO 27001 certification (issued by Pemberton Consulting Group), data protection practices under the EU General Data Protection Regulation (GDPR), incident response procedures, and third-party audit history.
(ii) HSAG China Operations. A supplemental exhibit providing a detailed description of the operations of Halcyon Semiconductor (Shanghai) Co., Ltd., confirming that the Shanghai entity's activities were limited to commercial power semiconductor sales and application engineering support for Chinese automotive OEMs, and that no GaN technology, defense-related products, or classified information was present at or accessible from the Shanghai facility.
September 3, 2023 — Review Period Expired. The initial 45-day review period expired on September 3, 2023, without CFIUS issuing a clearance determination. While the expiration of the review period without clearance was not unexpected — given the complexity and sensitivity of the transaction — it confirmed our pre-filing assessment that the case would proceed to a full 45-day investigation.
D. 45-Day Investigation Period (September 4 – October 18, 2023)
September 4, 2023 — Investigation Commenced. CFIUS initiated the 45-day investigation period as provided under 50 U.S.C. § 4565(b)(2)(A). The commencement of the investigation was communicated to the parties and, in turn, advised by C&H to Stefan Lohse in a letter dated September 5, 2023. We noted in that letter that the transition to an investigation was a standard procedural step for transactions of this nature involving classified programs and critical technology, and that it did not in itself indicate a negative outcome.
September 22, 2023 — Second Request for Information. CFIUS issued a second RFI consisting of 22 follow-up questions. This RFI was more targeted than the first and reflected the specific concerns of the DoD and DOE lead agencies. The questions focused on:
• VPI intellectual property transfer risks, including the mechanisms by which VPI's proprietary GaN process recipes, design databases, and manufacturing know-how would be protected from unauthorized access by non-U.S. persons within the HSAG corporate family;
• VPI supply chain dependencies, with particular attention to the sourcing of silicon carbide (SiC) substrates, epitaxial materials, and advanced packaging components, and whether any critical inputs were sourced from non-allied nations;
• HSAG's relationships with non-allied foreign governments, including any joint ventures, technology partnerships, licensing arrangements, or other commercial relationships with entities in or controlled by non-allied nations; and
• personnel continuity for VPI's cleared employees, including the expected impact of the acquisition on employee retention, the mechanisms for preserving institutional knowledge within VPI's classified programs, and the approach to replacing key personnel if departures occurred.
October 6, 2023 — Second Supplemental Response. C&H filed a comprehensive response to the second RFI. The response included a detailed VPI supply chain map prepared in coordination with VPI management, confirming that all critical inputs — including SiC substrates, metal-organic chemical vapor deposition (MOCVD) precursors, photomask sets, and advanced packaging materials — were sourced from suppliers in the United States, Japan, the United Kingdom, and other allied nations. No non-allied source dependencies were identified.
October 18, 2023 — Investigation Period Concluded. The 45-day investigation period reached its effective conclusion on or about October 18, 2023. We note that the statutory clock was tolled during periods when RFI responses were outstanding, as is standard CFIUS practice. The effective conclusion of the investigation period aligned with CFIUS's communication of its preliminary national security concerns, as described in the following section.
E. Communication of Preliminary National Security Concerns (October 20, 2023)
On October 20, 2023, CFIUS communicated to the parties through counsel its preliminary national security concerns regarding the proposed transaction. As is customary, these concerns were communicated informally (by telephone, followed by written summary) and were framed as areas that the Committee believed would need to be addressed through mitigation measures — specifically, through a National Security Agreement — in order for the Committee to conclude that the transaction did not present unresolved national security risks.
CFIUS identified four preliminary national security concerns:
Concern 1 — Foreign Access to Classified Defense Programs. CFIUS expressed concern regarding the risk that HSAG, as a foreign acquiror, could gain direct or indirect access to VPI's classified defense programs and classified information. VPI holds a Facility Security Clearance at the SECRET level (CAGE Code 7VK92) and employs 212 individuals with active U.S. government security clearances. VPI performs classified work under prime and subcontracts with the U.S. Army (PEO IEW&S), the Air Force Research Laboratory (AFRL), the Missile Defense Agency (MDA), the U.S. Navy (NAVSEA, through the Ironclad Defense Systems subcontract), and the Department of Homeland Security (S&T).
Concern 2 — Potential Transfer of ITAR/EAR-Controlled Technology. CFIUS was concerned about the risk of unauthorized transfer of ITAR-controlled defense articles (USML Category XI(a)(3)) and EAR-controlled dual-use items (ECCNs 3A001, 3A991, 3E001) to non-U.S. persons, including HSAG employees and affiliates in Germany and other countries, without the required U.S. government export authorizations. The concern extended to the transfer of controlled technical data, manufacturing know-how, and design information.
Concern 3 — Cybersecurity Risks. CFIUS identified cybersecurity risks arising from the potential integration of VPI's IT systems with HSAG's global IT infrastructure, which could create pathways for unauthorized electronic access to VPI's controlled technical data, classified information, and proprietary trade secrets by foreign actors.
Concern 4 — Continuity of Critical DoD Supply Chain. CFIUS expressed concern about ensuring the continued availability of VPI's products to the U.S. Department of Defense, particularly in light of VPI's role as a sole-source or limited-source supplier for certain GaN high-electron-mobility transistor (HEMT) modules and transmit/receive (T/R) components used in defense radar and missile defense systems. The Committee sought assurance that the acquisition would not disrupt VPI's defense production capabilities, personnel expertise, or commitment to fulfilling its existing and future government contracts.
On October 21, 2023, a board-level summary of the CFIUS concerns was provided to Dr. Maximilian Ehrhardt and Katarina Brückner via secure email, together with our preliminary assessment of each concern and recommended response strategies.
On October 23, 2023, C&H prepared and circulated internally a comprehensive assessment memorandum analyzing each of the four identified concerns in detail and formulating specific mitigation proposals that HSAG could offer in the context of an NSA negotiation. This memorandum served as the foundation for the negotiating positions and drafting instructions that guided the NSA negotiation process.
F. NSA Negotiation (November 3, 2023 – January 19, 2024)
The negotiation of the National Security Agreement was the most intensive and consequential phase of the engagement. The negotiations spanned approximately eleven weeks and involved multiple negotiation sessions, three full buyer's redline submissions, and extensive informal communications among the parties and CFIUS staff.
November 3, 2023 — Initial Draft NSA Circulated. CFIUS circulated its initial draft of the National Security Agreement, consisting of a 47-page framework document with six annexes. The initial draft set forth the Committee's proposed mitigation measures, many of which reflected the preliminary concerns communicated on October 20, 2023. As is typical, the initial draft was aggressive in its scope and requirements, and contained a number of provisions that were either commercially impractical or disproportionate to the underlying risks.
November 9, 2023 — First Negotiation Session and Buyer's Counterproposal. The first formal NSA negotiation session was held. C&H, on behalf of HSAG, submitted a comprehensive first counterproposal in redline format to the CFIUS draft. The principal issues identified during this session and in the counterproposal included:
• VPI board composition and the number, qualifications, and selection process for Security Board Members;
• the scope and terms of the Technology Control Plan (TCP), including the definition of "controlled technical data" and the permissible scope of information sharing between VPI and HSAG for legitimate business purposes;
• the scope, independence, selection, and authority of the third-party compliance monitor;
• the allocation of compliance costs, including monitor fees and cybersecurity audit costs;
• personnel continuity requirements and the duration of key-person retention obligations;
• cybersecurity standards, audit requirements, and incident-reporting timelines;
• penalty provisions, including the per-violation daily cap and the availability of equitable remedies; and
• the term of the NSA and the availability of sunset or periodic review provisions.
November 13, 2023 — Follow-Up Negotiation Session. A follow-up negotiation session was held to discuss several technical issues arising from the first redline exchange, including the operational details of the TCP and the cybersecurity annex.
November 15, 2023 — Status Update. A status update letter was provided to Stefan Lohse summarizing the progress of the NSA negotiations and identifying the remaining areas of disagreement.
November 22, 2023 — Second Negotiation Session and Second Redline. The second principal negotiation session was held. HSAG submitted its second buyer's redline of the NSA. At this session, HSAG made concessions on certain points in order to advance the negotiations toward resolution. Specifically, HSAG agreed to accelerated cybersecurity incident-reporting timelines (72 hours rather than the five business days initially proposed) and strengthened personnel continuity provisions (24-month retention period for three key executives rather than the 12-month period initially proposed). HSAG maintained its positions on the allocation of monitor costs (arguing that the U.S. government should share the cost, though this position was ultimately conceded) and on the cap for civil penalties.
December 8, 2023 — Third Negotiation Session; Monitor Selection Approved; Near-Final Redline. The third negotiation session addressed the remaining open issues. Two significant developments occurred during this session:
First, CFIUS approved the selection of Whitmore Compliance Group LLC as the third-party compliance monitor. The principal of Whitmore Compliance Group is Gerald Whitmore, a former supervisory special agent in the FBI's Counterintelligence Division who holds an active TS/SCI security clearance. Whitmore Compliance Group is located at 1300 Crystal Drive, Suite 710, Arlington, Virginia 22202. The monitor's qualifications, experience, and independence were deemed satisfactory by all CFIUS member agencies.
Second, HSAG submitted its third and near-final buyer's redline of the NSA, incorporating the concessions made during the November 22 session and proposing final compromises on the remaining open issues.
December 10, 2023 — Monitor Cost Communication. David Caruso communicated to Stefan Lohse the agreed-upon monitor cost allocation and budget impact. The annual fee for the Whitmore Compliance Group engagement was set at $1,200,000, payable in quarterly installments of $300,000. The fee is subject to adjustment for changes in the Consumer Price Index ("CPI"). The full cost of the monitor engagement is to be borne by HSAG.
December 15, 2023 — Final NSA Negotiation Session. The final negotiation session was held. All outstanding issues were resolved, including final language on the penalty provision, the scope of the pre-notification obligation, and certain definitional matters in the annexes.
January 19, 2024 — NSA Execution. The final National Security Agreement, designated NSA-2024-0019, was executed by all parties: HSAG, Halcyon US Holdings Inc., VPI, and the United States of America, acting through the Department of the Treasury, the Department of Defense, and the Department of Energy.
G. Clearance and Engagement Closure
January 26, 2024 — Safe-Harbor Letter Issued. CFIUS issued a safe-harbor letter under 50 U.S.C. § 4565(b)(1)(D), formally confirming that the Committee had concluded its review and investigation of the transaction identified as Case No. CFIUS-023-07-3841 and had determined that the transaction, as mitigated by the National Security Agreement (NSA-2024-0019), does not present unresolved national security concerns. The issuance of the safe-harbor letter provides HSAG with the statutory protection against future Presidential action to unwind or modify the transaction on national security grounds, provided that the representations made in the notice were accurate and complete and that the parties comply with the terms of the NSA.
January 26, 2024 — Clearance Confirmation Letter. On the same date, C&H transmitted a clearance confirmation letter to Stefan Lohse, advising that CFIUS clearance had been obtained and that the CFIUS-related closing condition under SPA § 7.1(c) had been satisfied.
January 30, 2024 — Engagement Closure. This memorandum constitutes the formal closure of Calderwood & Harkness LLP's CFIUS engagement.
February 9, 2024 — Targeted Acquisition Closing. The closing of the acquisition is now targeted for February 9, 2024.
IV. SUMMARY OF KEY NSA MITIGATION TERMS (NSA-2024-0019)
The following section summarizes the principal terms and obligations imposed by the National Security Agreement. This summary is intended to serve as a reference guide for HSAG management and as the basis for the compliance infrastructure recommendations set forth in Section VII below. It is not intended to replace or supersede the terms of the NSA itself, and in all cases the definitive text of the NSA controls.
A. Board Governance and Government Security Committee
The NSA requires that the VPI board of directors be reconstituted following closing to consist of five (5) members: three (3) "Security Board Members" and two (2) HSAG designees.
Security Board Members. The three Security Board Members must be United States citizens who hold, or are eligible to obtain, security clearances at the TOP SECRET/SCI level. One of the three Security Board Members must be designated as the independent "Security Director" — an individual who is not currently and has not previously been employed by either VPI or HSAG and who is approved by CFIUS as having the requisite qualifications, experience, and independence to fulfill the role.
The proposed and approved Security Board Members are:
(i) Colonel (Ret.) Bryce Hendrickson — current VPI Vice President, Government Programs and Facility Security Officer; holds an active TOP SECRET/SCI clearance;
(ii) Adrienne Delacroix — nominee; currently holds a SECRET clearance and is expected to obtain eligibility for TS/SCI; and
(iii) Independent Security Director — to be named; subject to CFIUS approval prior to closing.
HSAG Designees. The two HSAG designees on the VPI board may not hold or access classified information and may not participate in discussions or decisions involving classified programs, ITAR-controlled technical data, or other matters within the exclusive purview of the Government Security Committee.
Government Security Committee. The NSA mandates the establishment of a Government Security Committee ("GSC") composed of the three Security Board Members. The GSC has exclusive authority over all matters relating to VPI's classified programs, ITAR-controlled activities, personnel security, facility security, and compliance with the National Industrial Security Program (NISP). The HSAG designees have no authority over, and no access to information regarding, matters within the GSC's jurisdiction. The GSC Charter is codified in NSA Annex C and establishes detailed procedures for GSC meetings, decision-making, record-keeping, and reporting to the CFIUS monitoring agencies.
B. Facility Security Clearance and FOCI Mitigation
VPI will retain its existing Facility Security Clearance at the SECRET level (CAGE Code 7VK92) following the closing of the transaction. The NSA itself functions as a Special Security Agreement ("SSA") equivalent under the National Industrial Security Program Operating Manual (NISPOM), and accordingly no separate Foreign Ownership, Control, or Influence ("FOCI") mitigation plan is required beyond the NSA. The NSA has been structured in coordination with, and will be monitored by, the Defense Counterintelligence and Security Agency ("DCSA") as the cognizant security agency.
Colonel (Ret.) Bryce Hendrickson will be retained as VPI's Facility Security Officer ("FSO") and will continue to manage VPI's industrial security program in compliance with the NISPOM and the terms of the NSA.
C. Technology Control Plan (TCP)
The Technology Control Plan is codified in NSA Annex B and constitutes one of the most operationally significant components of the NSA. The TCP establishes the procedures and safeguards governing the handling, storage, and dissemination of VPI's controlled technical data and technology.
The TCP prohibits the transfer of VPI technical data — including ITAR-controlled defense articles, EAR-controlled dual-use items, and associated technical data — to any "non-U.S. person" (as defined in the ITAR and EAR) without prior authorization from the appropriate U.S. government agency (i.e., DDTC for ITAR-controlled items, BIS for EAR-controlled items). This prohibition extends to HSAG employees and affiliates who are non-U.S. persons.
The TCP also establishes carefully circumscribed procedures for the sharing of limited, non-controlled information between VPI and HSAG for legitimate business purposes — such as financial reporting, corporate governance, and high-level business planning — while safeguarding controlled technical data from unauthorized access. The TCP defines categories of permissible information sharing, establishes review and approval procedures (including GSC oversight for any borderline cases), and requires documentation and record-keeping for all information transfers.
The TCP integrates with VPI's existing export compliance program, which operates under DDTC Registration No. M-24817 and manages the classification, licensing, and record-keeping requirements applicable to VPI's ITAR-controlled (USML Category XI(a)(3)) and EAR-controlled (ECCNs 3A001, 3A991, 3E001) products.
D. Visitation and Access Restrictions
The NSA imposes detailed restrictions on the ability of HSAG personnel to visit or access VPI facilities, with graduated requirements depending on the security classification of the facility area.
Classified Facilities — Albuquerque Fab. HSAG personnel may not access any classified areas within VPI's Albuquerque fabrication facility — specifically, clean room Sections C-7 through C-12, which house the classified production lines and related equipment — without prior approval from both DCSA and the GSC. Such approval is expected to be granted only in exceptional circumstances and subject to strict conditions.
Unclassified Facilities — Colorado Springs Headquarters. HSAG personnel may access VPI's unclassified headquarters facility in Colorado Springs with advance notice and under escort by authorized VPI personnel. Access to unclassified areas does not require DCSA or GSC approval but must be conducted in accordance with the facility access procedures set forth in NSA Annex F.
Detailed Procedures. NSA Annex F sets forth detailed facility access procedures, including visitor pre-registration requirements, government-issued identification verification, visitor log maintenance, prohibited items lists (no personal electronic devices in classified areas, no cameras, no recording devices), and escort protocols.
E. Cybersecurity Requirements
The NSA's cybersecurity requirements are codified in NSA Annex D and reflect CFIUS's significant concerns regarding the protection of VPI's controlled technical data and classified information from cyber threats, particularly those that could arise from integration with HSAG's global IT infrastructure.
The principal cybersecurity requirements include:
NIST SP 800-171 Compliance. VPI must maintain compliance with the National Institute of Standards and Technology Special Publication 800-171 (Protecting Controlled Unclassified Information in Nonfederal Systems and Organizations) at all times. Compliance must be documented through a current System Security Plan and Plan of Action & Milestones.
Annual Penetration Testing. VPI must undergo annual third-party penetration testing of its IT systems. The penetration testing firm must be approved by the GSC and must not be affiliated with HSAG. Test results and remediation plans must be provided to DCSA and the CFIUS monitoring agencies.
Incident Reporting. Any cybersecurity incident — including any suspected or confirmed unauthorized access to, or exfiltration of, controlled technical data or classified information — must be reported to DCSA within 72 hours of discovery. Incident reports must include a description of the incident, an assessment of the scope of compromise, and a remediation plan.
IT Systems Segregation. VPI's IT systems must be physically and logically separated from HSAG's global IT network. No shared cloud infrastructure, email systems, file servers, remote access tools, or other shared IT resources are permitted. VPI must maintain its own independent IT environment, administered by VPI personnel under GSC oversight.
F. Third-Party Compliance Monitor
The NSA provides for the appointment of an independent third-party compliance monitor to verify HSAG's and VPI's ongoing compliance with the NSA's terms.
Monitor Selection. As noted in Section III.F above, CFIUS approved the selection of Whitmore Compliance Group LLC as the third-party monitor on December 8, 2023. The principal of the firm is Gerald Whitmore, a former supervisory special agent in the FBI's Counterintelligence Division who holds an active TOP SECRET/SCI security clearance. The firm's offices are located at 1300 Crystal Drive, Suite 710, Arlington, Virginia 22202.
Monitor Responsibilities. The monitor is responsible for conducting annual compliance audits of HSAG's and VPI's adherence to all NSA terms, including the TCP, cybersecurity requirements, governance provisions, personnel continuity requirements, and access restrictions. Audit reports are submitted directly to the CFIUS monitoring agencies — specifically, DCSA, Treasury, DoD, and DOE — and are not subject to pre-review or approval by HSAG or VPI. The template for annual compliance reports is set forth in NSA Annex E.
Monitor Agreement. A separate engagement agreement was executed between HSAG and Whitmore Compliance Group LLC concurrently with the execution of the NSA. The engagement agreement governs the terms of the monitor's engagement, including the scope of audit activities, access rights, confidentiality obligations, and compensation.
Fees. The annual fee for the monitor engagement is $1,200,000, payable in quarterly installments of $300,000 each. The fee is subject to annual adjustment based on changes in the Consumer Price Index (CPI). The full cost of the monitor engagement is borne entirely by HSAG. These fees are in addition to VPI's own internal compliance costs and any costs associated with third-party cybersecurity audits.
G. Personnel Continuity
The NSA requires that the following key VPI personnel remain employed by VPI for a minimum period of 24 months following the closing of the acquisition:
(i) Dr. Nathan Trevorrow, Chief Executive Officer — holds TOP SECRET/SCI clearance;
(ii) Marissa Sung-Avila, President and Chief Operating Officer — holds SECRET clearance; and
(iii) Colonel (Ret.) Bryce Hendrickson, Vice President, Government Programs and Facility Security Officer — holds TOP SECRET/SCI clearance.
Any replacement of these key personnel — whether due to voluntary departure, termination, retirement, or incapacity — must be approved by the GSC and DCSA prior to the appointment of a successor. Proposed successors must meet the same qualification and clearance requirements as the departing individual.
H. Pre-Notification of Material Changes
The NSA requires HSAG to provide written notice to CFIUS at least 30 days before effecting any "material change" to VPI's business. The definition of "material change" encompasses, without limitation:
• divestitures of VPI assets, business lines, or facilities;
• entry into new subcontract relationships with foreign entities;
• changes to VPI's cleared personnel (other than routine hiring and departures that do not affect key personnel);
• material changes to VPI's product lines, customer base, or technology roadmap;
• changes to VPI's corporate structure, ownership, or governance not otherwise contemplated by the NSA; and
• any other action that could materially affect VPI's ability to perform its government contracts or comply with the terms of the NSA.
The 30-day pre-notification period is intended to allow CFIUS sufficient time to evaluate the proposed change and, if necessary, require modifications or impose additional conditions.
I. Penalty Provisions
The NSA contains significant enforcement provisions. Under NSA § 12.3, a violation of any provision of the NSA may result in the imposition of civil penalties of up to $250,000 per violation per day for each day that the violation continues. Penalties are assessed by the U.S. government and are not subject to a cap or aggregate limit.
In addition to civil monetary penalties, the NSA reserves to the U.S. government the right to seek injunctive relief in federal court to compel compliance with the NSA, as well as the right to pursue mandated divestiture of VPI if HSAG's violations of the NSA are sufficiently serious or persistent as to render mitigation inadequate to address the underlying national security concerns. The availability of the divestiture remedy reflects the significant national security interests at stake and underscores the importance of rigorous compliance.
V. EXPORT CONTROL AND GOVERNMENT CONTRACTS POST-CLOSING ACTIONS
The following regulatory actions must be completed promptly following the closing of the acquisition. While certain of these actions fall outside the scope of the CFIUS engagement per se, they are closely related to the national security considerations addressed in the NSA and are included here for completeness.
A. DDTC Registration
VPI must file a change-of-ownership notification with the Directorate of Defense Trade Controls ("DDTC") of the U.S. Department of State under ITAR § 122.4(a), reflecting the acquisition of VPI's equity by Halcyon US Holdings Inc., an indirect subsidiary of HSAG. The notification should be filed promptly following closing and should include updated ownership information, officer and director changes resulting from the board reconstitution, and confirmation of VPI's continued DDTC registration status. VPI's existing DDTC Registration No. M-24817 is expected to be maintained without interruption.
B. DSP-5 Export License Amendments
VPI currently holds three (3) active DSP-5 export licenses authorizing the export of certain ITAR-controlled products to the United Kingdom and Australia. Following closing, these licenses must be amended to reflect the change in VPI's ownership. Amendment filings should be initiated promptly post-closing, as continued exports under existing licenses without notification of the ownership change could raise compliance concerns. We note that the destination countries (UK and Australia) are both close allies and members of the Five Eyes intelligence-sharing arrangement, which should facilitate DDTC's review of the amendment applications.