PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
CALDERWOOD & HARKNESS LLP
399 Park Avenue, 31st Floor New York, NY 10022 Telephone: (212) 548-7100 Facsimile: (212) 548-7199
Washington, DC Office: 1750 K Street NW, Suite 800 Washington, DC 20006 Telephone: (202) 463-3200 Facsimile: (202) 463-3299
June 12, 2023
VIA EMAIL AND OVERNIGHT COURIER
Stefan Lohse, LL.M. Chefjustitiar / General Counsel Halcyon Semiconductor Aktiengesellschaft Industriestraße 44 01099 Dresden, Saxony, Germany
Re: Acquisition of Marlowe Asset Management Photonics Inc. by Halcyon Semiconductor AG — CFIUS Filing and National Security Review: Engagement Confirmation and Initial Briefing
Dear Stefan:
I. Introduction & Purpose of Letter
We write to thank you and the entire Halcyon team for retaining Calderwood & Harkness LLP in connection with the review by the Committee on Foreign Investment in the United States ("CFIUS") of Halcyon Semiconductor AG's ("HSAG") proposed acquisition of one hundred percent (100%) of the outstanding equity of Marlowe Asset Management Photonics Inc. ("VPI"). We appreciate the confidence that you, Dr. Ehrhardt, and Katarina Brückner have placed in our firm, and we are committed to guiding HSAG through the CFIUS process efficiently and effectively.
As you are aware, the Stock Purchase Agreement (the "SPA") was executed on June 10, 2023, between Halcyon US Holdings Inc., a Delaware corporation formed on June 5, 2023, as the designated acquisition vehicle and wholly owned subsidiary of HSAG, on the one hand, and the shareholders of VPI, on the other. The SPA provides for the acquisition of all of VPI's outstanding equity for a purchase price of $1.42 billion on a cash-free, debt-free basis (with a normalized net working capital target of $34.6 million), payable in all-cash consideration at closing. In addition, the SPA contemplates additional earnout consideration of up to $85 million contingent upon the achievement of specified post-closing milestones, yielding a maximum aggregate consideration of $1.505 billion.
Calderwood & Harkness is already serving as HSAG's mergers and acquisitions and intellectual property counsel on the broader transaction. The M&A engagement team is led by Beatrice Holloway as Responsible Partner and James Prentice as Billing Partner, with Omar Siddiqui and Christy Bauer advising on intellectual property matters. This letter confirms the expansion of our engagement to cover all aspects of the CFIUS filing, review, investigation (if applicable), and the negotiation of any mitigation agreement that CFIUS may require as a condition of clearance. This expanded scope of engagement has been formalized in the engagement letter executed today, a copy of which is enclosed with this letter.
The purpose of this letter is to provide HSAG with the following:
(1) an initial legal briefing on CFIUS jurisdiction and the basis for its authority to review this transaction;
(2) a summary of our recommended filing strategy;
(3) an identification of the key national security risk factors that we anticipate CFIUS will focus on during its review;
(4) an outline of the anticipated timeline and phases of the CFIUS process;
(5) an introduction of the Calderwood & Harkness attorneys who will comprise the CFIUS engagement team; and
(6) a confirmation of the engagement terms applicable to the CFIUS phase of our representation.
We recognize that not all members of the HSAG leadership team may be familiar with the CFIUS process in detail, and this letter is designed to serve as both a legal briefing and a practical roadmap for the months ahead. We encourage you to share this letter with Dr. Ehrhardt and Katarina Brückner, subject to the confidentiality and privilege considerations discussed in Section IX below.
II. CFIUS Jurisdiction Analysis
A. Overview of CFIUS Authority
CFIUS is an interagency committee of the United States government, chaired by the U.S. Department of the Treasury, that is authorized to review certain transactions involving foreign investment in U.S. businesses for their potential implications for U.S. national security. CFIUS comprises representatives from nine federal departments and agencies, including the Departments of Defense, State, Commerce, Energy, and Homeland Security, among others. The intelligence community, through the Office of the Director of National intelligence ("ODNI"), provides CFIUS with a classified threat assessment for each transaction under review.
The governing statute for CFIUS is Section 721 of the Defense Production Act of 1950, as amended, codified at 50 U.S.C. § 4565. This statute was most recently and significantly amended by the Foreign Investment Risk Review Modernization Act of 2018 ("FIRRMA"), which expanded CFIUS's jurisdiction, introduced the concept of mandatory declarations for certain categories of transactions, and broadened the definition of transactions subject to CFIUS review to include certain non-controlling investments in sensitive U.S. businesses. FIRRMA was signed into law on August 13, 2018, and its implementing regulations took effect on February 13, 2020.
The implementing regulations for CFIUS are found in Title 31 of the Code of Federal Regulations. Part 800 governs "covered transactions," which include mergers, acquisitions, and takeovers that could result in foreign control of a U.S. business. Part 802, which addresses certain real estate transactions by foreign persons near sensitive U.S. government facilities, is not applicable here. For purposes of this transaction, our analysis is governed by 31 C.F.R. Part 800.
CFIUS possesses broad authority to review transactions, impose conditions on clearance (through mitigation agreements), and, in exceptional cases, recommend that the President of the United States block or unwind a transaction on national security grounds. The President's authority to act on a CFIUS recommendation is set forth in 50 U.S.C. § 4565(d) and is not subject to judicial review. However, presidential blocks remain exceedingly rare — there have been fewer than ten in CFIUS's history — and we do not consider a presidential block to be a realistic risk in this transaction, as discussed further below.
B. Why This Transaction Is a "Covered Transaction"
The proposed acquisition of VPI by HSAG constitutes a "covered transaction" within the meaning of 31 C.F.R. § 800.210 for the following reasons:
HSAG is a "foreign person." Under 31 C.F.R. § 800.224, a "foreign person" is defined as any foreign national, foreign government, or entity organized under the laws of a foreign state, or any entity over which control is exercised or exercisable by a foreign person. HSAG is a German Aktiengesellschaft, publicly traded on the Frankfurt Stock Exchange under the ticker symbol XETRA: HLC. As a corporation organized under the laws of the Federal Republic of Germany, HSAG is unambiguously a "foreign person" for purposes of Part 800.
VPI is a "U.S. business." Under 31 C.F.R. § 800.252, a "U.S. business" means any entity, irrespective of the nationality of the persons that control it, engaged in interstate commerce in the United States. VPI is a Delaware C-corporation, incorporated on February 14, 2009, with its principal operations conducted at facilities in Colorado Springs, Colorado and Albuquerque, New Mexico. VPI designs, fabricates, and sells advanced gallium nitride ("GaN") power amplifier chips, photonic integrated circuits, and related semiconductor devices for both commercial and defense applications. VPI is clearly a "U.S. business" within the meaning of Part 800.
The transaction results in foreign "control." Under 31 C.F.R. § 800.213, "control" means the power, direct or indirect, whether exercised or not exercised, to determine, direct, or decide important matters affecting an entity. The acquisition of 100% of VPI's outstanding equity by Halcyon US Holdings Inc. — a wholly owned subsidiary of HSAG — will result in HSAG exercising complete control over VPI's operations, governance, management, and strategic direction. This clearly satisfies the "control" element of a covered transaction.
VPI qualifies as a "TID U.S. business." This is a critically important classification. Under 31 C.F.R. § 800.248, a "TID U.S. business" is a U.S. business that produces, designs, tests, manufactures, fabricates, or develops one or more "critical technologies," operates or owns "critical infrastructure," or maintains or collects "sensitive personal data" of U.S. citizens. VPI qualifies as a TID U.S. business on multiple grounds:
Critical Technologies. VPI produces items that are subject to U.S. export control regulations and that qualify as "critical technologies" under 31 C.F.R. § 800.215:
• VPI designs and fabricates GaN power amplifier chips that are classified as defense articles under the International Traffic in Arms Regulations ("ITAR"), specifically under Category XI(a)(3) of the United States Munitions List ("USML"). These chips are incorporated into U.S. defense radar systems, including the AN/TPS-80 Ground/Air Task-Oriented Radar ("G/ATOR").
• VPI also produces advanced semiconductor devices classified under the Export Administration Regulations ("EAR") under Export Control Classification Number ("ECCN") 3A001, which covers certain types of advanced semiconductor devices, including monolithic microwave integrated circuits ("MMICs") and compound semiconductor substrates.
• VPI holds active contracts with, and delivers products to, the U.S. Department of Defense and the U.S. defense industrial base under both ITAR and EAR authorizations.
Classified Programs and Facility Security. VPI maintains a Facility Security Clearance ("FCL") at the SECRET level, issued by the Defense Counterintelligence and Security Agency ("DCSA"), under CAGE Code 7VK92. VPI's Albuquerque fabrication facility processes classified work under multiple Department of Defense contracts. Two hundred and twelve (212) of VPI's 486 total employees hold active U.S. government personnel security clearances at various levels, including several employees holding clearances at the TOP SECRET / Sensitive Compartmented Information ("TS/SCI") level.
DDTC Registration. VPI has been registered with the U.S. Department of State's Directorate of Defense Trade Controls ("DDTC") since 2011, under Registration Number M-24817, as a manufacturer and exporter of defense articles subject to the ITAR.
In sum, the proposed acquisition of VPI by HSAG satisfies every element of a "covered transaction" under Part 800, and VPI's status as a TID U.S. business raises the transaction to the highest level of CFIUS scrutiny.
C. Mandatory vs. Voluntary Filing
The distinction between mandatory and voluntary CFIUS filings is significant in this context. Under 31 C.F.R. § 800.401, a mandatory declaration is required for any covered transaction involving a foreign person's acquisition of a substantial interest in a TID U.S. business that produces "critical technologies" requiring a U.S. regulatory authorization (such as an export license under the ITAR or EAR) for export, re-export, transfer (in-country), or retransfer to the foreign person or to any entity in which the foreign person holds a direct or indirect interest.
Because VPI's products include ITAR-controlled defense articles under USML Category XI(a)(3) and EAR-controlled items under ECCN 3A001 for which export licenses would be required for shipment to Germany (and, critically, to China, where HSAG maintains operations through its subsidiary Halcyon Semiconductor (Shanghai) Co., Ltd.), a mandatory declaration is triggered under § 800.401. Failure to file a mandatory declaration may result in civil penalties of up to $250,000 per violation or the value of the transaction, whichever is greater.
Notwithstanding the mandatory declaration requirement, we strongly recommend that HSAG file a full voluntary joint notice under 31 C.F.R. § 800.501 rather than a short-form mandatory declaration under § 800.401(a). Our rationale is as follows:
(i) Inadequacy of the Declaration Process. A mandatory declaration is a short-form filing (typically five pages) that initiates a compressed 30-day assessment period. Given the complexity of VPI's classified programs, the breadth of its ITAR/EAR-controlled portfolio, its facility security clearance, and the anticipated national security concerns, we believe it is virtually certain that CFIUS would conclude the 30-day assessment period by requesting the parties to file a full voluntary notice. Proceeding directly to a full notice avoids this intermediate step and the associated delay of approximately six to eight weeks.
(ii) CFIUS's Authority to Escalate. Even after receiving a mandatory declaration, CFIUS retains full authority under 31 C.F.R. § 800.407 to request the parties to file a full notice. In our experience, CFIUS routinely exercises this authority for transactions involving classified programs, ITAR-controlled technology, and facility security clearances. Filing a declaration first would therefore likely result in the same outcome — a full notice — but with added procedural delay.
(iii) Good Faith and Cooperation. Filing a full voluntary notice from the outset signals to CFIUS that HSAG is approaching the review process in good faith, with full transparency, and with a cooperative posture. This is particularly important given the heightened sensitivity of semiconductor transactions in the current geopolitical environment. A proactive filing posture can meaningfully influence the tone and pace of the review.
(iv) Statutory Safe Harbor. A full voluntary notice, once cleared by CFIUS (whether with or without conditions), provides the parties with a statutory "safe harbor" under 50 U.S.C. § 4565(b)(1)(D). This safe harbor protects the completed transaction from future CFIUS review, absent a material misstatement or omission in the notice or a material breach of any mitigation agreement. A short-form declaration does not provide the same level of protection. The safe harbor is a valuable legal protection for HSAG, and we consider it essential to secure it through the full-notice process.
Accordingly, we will proceed with the preparation and filing of a full voluntary joint notice, which will satisfy both the mandatory filing obligation and the voluntary notice requirements simultaneously.
III. CFIUS Process Overview & Anticipated Timeline
A. Overview of the CFIUS Review Process
The CFIUS review process consists of three principal phases, each of which is described below:
Phase 1: Pre-Filing Consultation. Before formally submitting a joint voluntary notice, it is standard practice — and strongly recommended by Treasury — for the parties to engage in an informal pre-filing consultation with Treasury's Office of Investment Security ("OIS"). The pre-filing consultation is not mandatory, but it is virtually universal for complex transactions. During this phase, counsel for the buyer and seller present the transaction to OIS staff, preview the key national security issues, and solicit informal feedback on the likely areas of focus, the expected timeline, and any issues that should be addressed in the notice before formal submission. The pre-filing consultation also allows the parties to identify any informational gaps that, if left unaddressed, could lead to RFIs or delays during the formal review period. In our experience, a well-prepared pre-filing consultation can shorten the overall review timeline by several weeks and significantly reduce the volume of formal Requests for Information during the review phase.
Phase 2: 45-Day Review Period. The formal CFIUS review commences when CFIUS formally "accepts" the joint voluntary notice. Acceptance typically occurs approximately five to ten business days after filing, following an initial completeness check by Treasury OIS staff. The 45-day review period is the initial phase of CFIUS's formal analysis. During this period, CFIUS member agencies review the notice, conduct their own independent analyses, and may issue Requests for Information ("RFIs") seeking additional information or documentation from the parties. The intelligence community, through ODNI, prepares a classified threat assessment during this period. At the conclusion of the 45-day review, CFIUS may take one of three actions:
(a) Clear the transaction. CFIUS may conclude that the transaction does not raise national security concerns warranting further action and issue a "no action" letter clearing the transaction. In our assessment, this outcome is unlikely for this transaction given the severity and breadth of the national security issues presented.
(b) Initiate an investigation. CFIUS may determine that the transaction raises national security concerns that warrant further analysis and proceed to a 45-day investigation phase. We consider this outcome highly likely for this transaction.
(c) Request withdrawal and refiling. In some cases, CFIUS may informally request that the parties withdraw and refile the notice — typically because the notice is incomplete or because circumstances have changed since filing. This is a relatively uncommon outcome and can usually be avoided through careful pre-filing preparation.
Phase 3: 45-Day Investigation Period. If CFIUS initiates an investigation, an additional 45-day period commences during which CFIUS conducts a deeper analysis of the national security implications of the transaction. During this phase, CFIUS member agencies finalize their assessments, the parties may receive additional RFIs, and — critically — CFIUS may begin formal discussions with the parties regarding the terms of a mitigation agreement. At the conclusion of the investigation period, CFIUS may:
(a) Clear the transaction. CFIUS may conclude its investigation and determine that no further action is warranted.
(b) Clear the transaction subject to a mitigation agreement. This is the most common outcome for transactions involving classified programs, ITAR-controlled technology, and facility security clearances. CFIUS will negotiate a mitigation agreement — typically referred to as a National Security Agreement ("NSA") — that imposes binding obligations on the parties to address the identified national security concerns. The NSA is a legally binding contract between the parties and the U.S. government, enforceable through civil penalties and, in severe cases, mandated divestiture. We consider this the most probable outcome for this transaction.
(c) Refer the matter to the President. In rare cases where the national security concerns cannot be adequately mitigated, CFIUS may send a report to the President recommending that the transaction be blocked or, if already completed, unwound. The President has 15 days to act on CFIUS's recommendation. As noted above, presidential blocks are exceedingly rare — fewer than ten in CFIUS's history — and are typically reserved for transactions involving entities from adversary nations or transactions presenting acute and unmitigable national security risks. We do not consider a presidential referral to be a realistic risk in this transaction.
B. Anticipated Timeline
Based on our experience with comparable semiconductor-sector CFIUS reviews and our preliminary assessment of the complexity of this transaction, we estimate a total CFIUS timeline of approximately four to seven months. The following is our best estimate of the key milestones:
We note that the SPA contains a closing condition requiring CFIUS clearance at Section 7.1(c). The SPA's outside date for consummation of the transaction must accommodate the CFIUS timeline set forth above. We recommend reviewing the outside date provision with the M&A team to confirm that adequate time has been allocated. If the current outside date does not extend through at least Q1 2024, we should discuss the possibility of negotiating an extension provision with VPI's shareholders and their counsel.
C. CFIUS Co-Lead Agencies
For each CFIUS review, Treasury assigns one or more "co-lead agencies" from among the CFIUS member departments and agencies. The co-lead agencies have primary responsibility for the substantive national security analysis and typically take the lead in negotiating mitigation measures.
For this transaction, based on VPI's business profile, we expect the following agencies to serve as co-leads alongside Treasury:
• Department of Defense ("DoD"). Given VPI's 14 active DoD contracts (prime and subcontract) with an aggregate backlog of $193 million, its facility security clearance, its 212 cleared employees, and the incorporation of its products into critical defense platforms, DoD will almost certainly serve as a co-lead agency. Within DoD, the Office of the Under Secretary of Defense for Acquisition and Sustainment, in coordination with the Defense Counterintelligence and Security Agency ("DCSA"), will likely take the lead on military-specific issues.
• Department of Energy ("DOE"). VPI's dual-use semiconductor activities, particularly its advanced GaN-on-SiC fabrication capabilities and its work on technologies with potential applications in missile defense and satellite communications, may implicate DOE equities. DOE has increasingly been involved as a co-lead or interested agency in semiconductor-sector CFIUS reviews.
In addition, DCSA will be heavily involved in the review due to VPI's facility security clearance. DCSA is the agency responsible for administering the National Industrial Security Program ("NISP") and overseeing Foreign Ownership, Control, or Influence ("FOCI") mitigation for cleared contractor facilities. VPI currently employs 212 cleared personnel out of a total workforce of 486, a ratio that underscores the centrality of classified work to VPI's operations. DCSA will evaluate HSAG's suitability as a foreign owner of a cleared facility and will play a key role in shaping any FOCI mitigation requirements that are incorporated into the NSA.
IV. Key National Security Risk Factors
Based on our preliminary review of VPI's business, HSAG's corporate structure and global operations, and our experience with comparable CFIUS reviews, we have identified seven principal risk factors that we expect CFIUS to focus on during its review and investigation. We discuss each in turn below.
A. Foreign Access to Classified Defense Programs
This is likely to be the single most significant national security concern in the review. VPI holds a Facility Security Clearance at the SECRET level, issued by DCSA under CAGE Code 7VK92. VPI's fabrication facility located at 9200 Innovation Boulevard, Albuquerque, New Mexico 87113 — a 45,000-square-foot GaN-on-SiC fabrication facility — processes classified work under multiple Department of Defense contracts. Two hundred and twelve (212) of VPI's 486 employees hold active U.S. government personnel security clearances at various levels. Of particular note, the following senior VPI personnel hold clearances at the TS/SCI level:
• Dr. Nathan Trevorrow, Chief Executive Officer
• Col. (Ret.) Bryce Hendrickson, Vice President, Government Programs, and Facility Security Officer ("FSO")
VPI currently maintains fourteen (14) active DoD contracts (a combination of prime contracts and subcontracts) with an aggregate backlog of approximately $193 million. These include contracts with the following entities and programs:
• U.S. Army Program Executive Office, intelligence, Electronic Warfare & Sensors ("PEO IEW&S")
• Air Force Research Laboratory ("AFRL")
• Missile Defense Agency ("MDA")
• A subcontract to Ironclad Defense Systems Inc. under a U.S. Navy Naval Sea Systems Command ("NAVSEA") prime contract
The central concern is that HSAG, as a German-owned entity, could — directly or indirectly — gain access to classified information or exert influence over classified programs conducted at VPI's facilities. While Germany is a NATO ally and a close partner of the United States in defense and intelligence matters, CFIUS has historically applied rigorous scrutiny to any foreign acquisition of a cleared contractor, regardless of the acquiror's nationality. The fact that HSAG is publicly traded on the Frankfurt Stock Exchange introduces additional considerations, as CFIUS will assess the risk that HSAG's own shareholder base could include entities from countries of concern.
B. ITAR/EAR-Controlled Technology Transfer
VPI's product portfolio includes items subject to both the ITAR and the EAR. Specifically:
• ITAR Category XI(a)(3): VPI's GaN power amplifier chips used in defense radar applications are classified as defense articles under USML Category XI(a)(3).
• EAR ECCN 3A001: VPI's advanced semiconductor devices, including MMICs and compound semiconductor substrates, are classified under ECCN 3A001, which controls certain categories of semiconductor devices for national security and anti-terrorism reasons.
• EAR ECCN 3A991 and 3E001: Additional VPI products and technology are classified under ECCNs 3A991 (certain semiconductor devices not controlled under 3A001) and 3E001 (technology for the development or production of items controlled under ECCNs 3A001 through 3A999).
VPI currently holds three (3) active DSP-5 export licenses issued by DDTC, authorizing the export of ITAR-controlled defense articles to end-users in the United Kingdom and Australia. VPI has been registered with DDTC under Registration Number M-24817 since 2011.
The risk that CFIUS will focus on is the potential for post-acquisition technology transfer from VPI to HSAG's non-U.S. entities. This concern is particularly acute with respect to HSAG's existing operations in Germany (where certain controlled items might require export licenses even for NATO allies) and, most critically, with respect to HSAG's China subsidiary — Halcyon Semiconductor (Shanghai) Co., Ltd. The existence of the Shanghai subsidiary will receive intense scrutiny from CFIUS, as the U.S. government has adopted an increasingly restrictive posture toward the transfer of advanced semiconductor technology to China. We should be prepared to address this issue comprehensively in the notice and during any pre-filing consultation.
C. Cybersecurity and IT Integration Risks
The integration of VPI's information technology systems with HSAG's global IT network presents significant national security risks that CFIUS will examine carefully. VPI's IT infrastructure supports both classified and unclassified operations, and its systems contain substantial volumes of Controlled Unclassified Information ("CUI") subject to the safeguarding requirements of 32 C.F.R. Part 2002 and DFARS 252.204-7012.
CFIUS will be concerned about the risk that integration of VPI's IT environment with HSAG's global network could create pathways — whether intentional or inadvertent — for unauthorized access to CUI, technical data subject to ITAR/EAR controls, or classified information. CFIUS will scrutinize HSAG's cybersecurity posture, data protection practices, incident response capabilities, and the architecture of any proposed IT integration. The involvement of HSAG's Shanghai subsidiary in HSAG's global IT infrastructure will be an area of particular focus, as CFIUS will assess whether network connectivity to China-based systems could create vulnerabilities that could be exploited by state-sponsored or other threat actors.
D. Supply Chain Continuity for Critical Defense Components
VPI is a key supplier of GaN power amplifier chips for critical U.S. defense platforms, including defense radar systems (notably the AN/TPS-80 G/ATOR), satellite communications systems, and missile defense systems. VPI's products are incorporated into platforms that are essential to the operational readiness of the U.S. armed forces.
CFIUS will be concerned about the potential for disruption of VPI's supply chain or the diversion of VPI's production capacity away from U.S. defense customers in favor of HSAG's commercial or international customers. Any reduction in VPI's ability to supply defense-critical components on time and in the required quantities could have direct implications for U.S. national defense. CFIUS may also evaluate whether HSAG's acquisition could result in the consolidation of a critical supply chain node under foreign ownership, reducing supply chain resilience.
E. Foreign Ownership, Control, or Influence (FOCI)
HSAG's acquisition of VPI will create a FOCI situation for VPI's facility security clearance under the National Industrial Security Program Operating Manual ("NISPOM"), 32 C.F.R. Part 117. Under the NISPOM, a cleared contractor that is subject to FOCI must implement a FOCI mitigation instrument acceptable to DCSA in order to retain its facility security clearance.
FOCI mitigation instruments range in restrictiveness from Board Resolutions (least restrictive) to Proxy Agreements and Voting Trust Agreements (most restrictive). Given the level of VPI's clearance (SECRET), the volume of classified work performed at VPI's facilities, and the number of cleared personnel, we expect that DCSA will require a relatively stringent form of FOCI mitigation, most likely a Special Security Agreement ("SSA") or an equivalent arrangement. In practice, when CFIUS is involved, the terms of the NSA typically subsume and incorporate the FOCI mitigation requirements, so that a single instrument — the NSA — serves as both the CFIUS mitigation agreement and the FOCI mitigation instrument.
F. Personnel and Institutional Knowledge
CFIUS and the co-lead agencies will be concerned about the risk that key cleared personnel could depart VPI following the closing of the acquisition. The departure of individuals such as Dr. Nathan Trevorrow (CEO), Dr. Maria Sung-Avila (VP Engineering), or Col. (Ret.) Bryce Hendrickson (VP Government Programs / FSO) could significantly disrupt the continuity of VPI's classified programs and its relationships with DoD customers. These individuals possess highly specialized technical knowledge, institutional relationships with government program offices, and security clearances that cannot be quickly or easily replaced.
CFIUS may therefore require, as a condition of clearance, that HSAG make binding commitments to retain key cleared personnel for a specified period following closing. Such retention commitments are a standard feature of NSAs in defense-sector transactions.
G. Government Contract Continuity
The change of ownership of VPI will trigger requirements under the Federal Acquisition Regulation ("FAR") and the Defense Federal Acquisition Regulation Supplement ("DFARS"). Specifically:
• FAR 42.12 — Novation. When a contractor's assets or equity are transferred to a successor entity, the U.S. government contracting officer must execute a novation agreement recognizing the successor as the contractor under existing government contracts. Novation requires the contracting officer's approval, and the contracting officer will consider factors including the successor's financial capability, technical competence, and eligibility (including foreign ownership considerations).
• DFARS 252.209-7002 — Disclosure of Foreign Ownership. This clause requires contractors to disclose foreign ownership, control, or influence to the contracting officer. HSAG's acquisition of VPI will trigger disclosure obligations under this clause for each of VPI's active DoD contracts.
The government contract novation process will run in parallel with the CFIUS review and must be coordinated carefully. Lt. Col. (Ret.) David Caruso on our team will take the lead on government contract novation and DFARS compliance matters.
V. Recommended Mitigation Framework
Based on our review of recent semiconductor-sector NSA precedents — including several transactions in which we represented the acquiring party — and our preliminary assessment of VPI's business, we anticipate that CFIUS will require a comprehensive National Security Agreement as a condition of clearing this transaction. The following is our initial assessment of the types of mitigation measures that the NSA is likely to contain. This framework is preliminary and will be refined as we learn more about CFIUS's specific concerns during the pre-filing consultation and review phases.
A. Board Governance and Government Security Committee
We expect that CFIUS will require the reconstitution of VPI's board of directors to include one or more "Security Board Members" — independent directors who are U.S. citizens holding, or eligible to hold, personnel security clearances at the TS/SCI level. Security Board Members are typically nominated by VPI and approved by CFIUS before appointment.
In addition, the NSA will almost certainly require the establishment of a Government Security Committee ("GSC") of the VPI board. The GSC would have exclusive authority over all matters relating to VPI's classified programs, ITAR-controlled work, personnel security, facility security, and compliance with U.S. government contracts. The GSC would be composed entirely of Security Board Members and would operate independently of HSAG's management.
HSAG would be permitted to appoint a limited number of board designees to VPI's board to protect its legitimate ownership interests (e.g., financial oversight, commercial strategy for unclassified product lines). However, HSAG's board designees would not have access to classified information, ITAR-controlled technical data, or the deliberations of the GSC.
B. Technology Control Plan (TCP)
The NSA will require VPI to implement a Technology Control Plan ("TCP") that establishes clear rules governing the flow of technical information between VPI and HSAG. The TCP will prohibit the transfer of ITAR-controlled technical data, EAR-controlled technology, and other controlled information from VPI to any non-U.S. person — including HSAG's German and Chinese personnel and entities — without prior authorization from the U.S. government (i.e., a valid ITAR license or EAR license, as applicable).
The TCP will include a detailed delineation of permissible versus prohibited information flows. Generally, VPI will be permitted to share certain categories of uncontrolled business information with HSAG (e.g., high-level financial results, commercial customer information for uncontrolled product lines), but any information that constitutes or contains ITAR-controlled technical data, EAR-controlled technology, classified information, or CUI will be strictly segregated.
C. Facility and Data Segregation
CFIUS will require physical and logical separation of VPI's IT systems from HSAG's global network. This means that VPI's IT infrastructure — including email systems, engineering databases, file servers, and classified network segments — must be maintained on standalone systems that are not connected to, or accessible from, HSAG's enterprise network.
In addition, the NSA will impose restrictions on HSAG personnel access to certain areas of VPI's facilities, particularly the classified areas of the Albuquerque fabrication facility. Only VPI employees with appropriate security clearances and need-to-know authorization will be permitted to access classified work areas. HSAG personnel, including board designees who are not Security Board Members, will be excluded from these areas.
D. Third-Party Compliance Monitor
The NSA will require VPI to engage an independent third-party compliance monitor to conduct periodic audits of VPI's compliance with the terms of the NSA. The compliance monitor is typically a specialized firm or individual approved by CFIUS and retained at the acquiror's expense. The monitor's responsibilities will include conducting annual (or more frequent) compliance audits, reviewing VPI's implementation of the TCP and data segregation requirements, and submitting written compliance reports directly to CFIUS monitoring agencies — in this case, most likely DCSA.
The costs associated with the third-party compliance monitor can be significant — typically ranging from $500,000 to $1.5 million per year, depending on the scope and frequency of audits. These costs are customarily borne by the acquiror and should be factored into HSAG's financial model for the transaction.
E. Personnel Continuity Requirements
As discussed in Section IV.F above, the NSA may include binding commitments by HSAG to retain key VPI personnel for a specified period following closing. These commitments may take the form of minimum employment periods (e.g., two to three years post-closing), enhanced compensation or retention packages, or restrictions on the involuntary termination of specified individuals without prior notice to CFIUS.
F. Cybersecurity. The NSA will include cybersecurity requirements tailored to VPI's handling of CUI and classified information. At a minimum, we expect the following requirements:
• Maintenance of compliance with NIST Special Publication 800-171 (Protecting Controlled Unclassified Information in Nonfederal Systems and Organizations), which establishes the cybersecurity standards applicable to DoD contractors handling CUI.
• Periodic penetration testing of VPI's IT systems by an independent cybersecurity firm, with results reported to the compliance monitor and CFIUS monitoring agencies.
• Prompt incident reporting — VPI would be required to notify CFIUS monitoring agencies within a specified timeframe (typically 24 to 72 hours) of any cybersecurity incident affecting its IT systems, particularly any incident involving unauthorized access to CUI or classified information.
G. Pre-Notification and Penalty Provisions
Finally, the NSA will include provisions requiring VPI and HSAG to notify CFIUS before making material changes to VPI's business, operations, governance, or ownership structure. Material changes would include, among other things, changes to VPI's board composition, the appointment of new senior officers, the closure or relocation of VPI facilities, the termination of government contracts, or any subsequent acquisition of VPI by a third party.
The NSA will also contain robust penalty provisions for non-compliance. Penalties may include civil monetary penalties (which can be substantial), injunctive relief, and — in the most severe cases — mandated divestiture of VPI. These penalty provisions provide the U.S. government with meaningful enforcement tools and underscore the seriousness with which CFIUS expects compliance with NSA obligations.
VI. CFIUS Engagement Team
We are pleased to confirm the following Calderwood & Harkness attorneys who have been assigned to the CFIUS and related workstreams for this engagement. This team brings deep experience in CFIUS filings, national security reviews, government contracts, export controls, and semiconductor-sector transactions.
A. Lead CFIUS / National Security Counsel
Margaret "Peggy" Ashworth — Of Counsel, National Security & CFIUS Practice, Washington, DC Office (1750 K Street NW, Suite 800, Washington, DC 20006). Peggy will serve as the day-to-day lead on all aspects of the CFIUS filing, review, investigation, and NSA negotiation. Peggy is one of the most experienced CFIUS practitioners in private practice, having led more than forty CFIUS filings over the past fifteen years, including numerous filings in the defense and semiconductor sectors. Prior to joining Calderwood & Harkness, Peggy served in the U.S. government in a senior national security capacity, from which she holds an inactive SECRET security clearance. Her government experience provides her with invaluable insight into CFIUS's internal processes, priorities, and decision-making framework. Peggy maintains strong working relationships with senior staff at Treasury OIS, DoD, and DCSA, which will facilitate productive engagement with CFIUS throughout the review process.
B. Government Contracts & Export Controls
Lt. Col. (Ret.) David Caruso — Senior Counsel, Government Contracts & Export Controls, Washington, DC Office. David will lead all government contracts and export control aspects of the CFIUS engagement, including ITAR/EAR compliance analysis, government contract novation under FAR 42.12, DFARS foreign ownership disclosure, and coordination with DCSA on facility security clearance and FOCI mitigation matters. David is a retired U.S. Army officer who holds an inactive SECRET security clearance from his prior military service. He has extensive experience advising foreign acquirors of U.S. defense contractors on the intersection of CFIUS, government contracts, and industrial security requirements.
C. International Trade & Sanctions
Priya Venkataraman — Associate, International Trade & Sanctions, Washington, DC Office. Priya will support the export control classification analysis for VPI's product portfolio, including the review and confirmation of USML and CCL classifications, analysis of VPI's active DSP-5 export licenses and the effect of the change of ownership on those licenses, and DDTC registration matters. Priya will also assist with the preparation of the export control sections of the joint voluntary notice.
D. Corporate / M&A Support
Kenneth Morales — Associate, Corporate/M&A, New York Office. Kenneth will assist with the corporate and transactional aspects of the CFIUS filing, including drafting portions of the joint voluntary notice related to the transaction structure, HSAG's corporate organization, and the acquisition vehicle. Kenneth will also serve as the primary point of coordination between the CFIUS team and the M&A deal team to ensure consistency across all workstreams.
E. Continuing M&A and IP Team
The following attorneys will continue in their roles on the broader transaction and will participate in CFIUS-related matters as needed:
• Beatrice Holloway — Responsible Partner, Mergers & Acquisitions, New York Office. Beatrice is the overall engagement partner and will participate in key CFIUS strategy decisions and client communications.
• James Prentice — Billing Partner, Mergers & Acquisitions, New York Office. James serves as the billing partner for all phases of the engagement, including the CFIUS phase.
• Omar Siddiqui — Lead Associate, intellectual Property, Washington, DC Office. Omar will support the IP dimensions of the CFIUS analysis, including the identification of government-funded inventions subject to march-in rights, the analysis of VPI's patent portfolio for national security sensitivities, and the assessment of IP transfer restrictions that may be incorporated into the NSA.
• Christy Bauer — Working Associate, intellectual Property, Washington, DC Office. Christy will assist on ITAR/EAR classification review for VPI's IP portfolio and support freedom-to-operate analysis related to VPI's defense programs.
F. Seller's Counsel Coordination
VPI is separately represented by Wethersfield & Gale LLP, located at 2000 Pennsylvania Avenue NW, Suite 600, Washington, DC 20006. The lead partners at Wethersfield & Gale are Harrison Whitfield (Government Contracts & National Security) and Sandra Niehaus (M&A), supported by senior associate Tobias Kwan.
Because the joint voluntary notice must be filed jointly by buyer and seller under 31 C.F.R. § 800.501, close coordination between Calderwood & Harkness and Wethersfield & Gale will be essential throughout the filing and review process. Peggy Ashworth will serve as the primary point of contact with Harrison Whitfield at Wethersfield & Gale, and the two firms will coordinate on the division of preparation responsibilities, the exchange of drafts, and the formulation of joint responses to CFIUS RFIs.
VII. Engagement Terms
A. Scope. The scope of the CFIUS engagement encompasses the following activities:
(a) pre-filing consultation with Treasury OIS, including preparation of the pre-filing briefing deck and attendance at the pre-filing meeting;
(b) preparation and filing of the voluntary joint notice under 31 C.F.R. Part 800, including all required exhibits, certifications, and supporting documentation;
(c) response to CFIUS Requests for Information during the review and investigation phases;
(d) negotiation of any mitigation agreement (National Security Agreement) that CFIUS may require as a condition of clearance, including coordination with DCSA on FOCI mitigation;
(e) completion of all CFIUS-related closing conditions under the SPA; and
(f) related export control, government contracts, and facility security clearance advisory work necessary to support the CFIUS process, including ITAR/EAR classification analysis, DSP-5 license continuation, DDTC registration, FAR 42.12 novation, and DFARS 252.209-7002 disclosure.
The engagement for intellectual property and export control due diligence is being formalized separately under Engagement Letter Amendment No. 1, which will be circulated shortly and is expected to be dated June 20, 2023.
B. Fee Arrangement
The following hourly rates apply to attorneys assigned to the CFIUS engagement:
We have agreed on a fee cap of $3.8 million for the CFIUS phase of the engagement. This cap is exclusive of disbursements, which include CFIUS filing fees, travel expenses, document production costs, courier charges, and other out-of-pocket expenses. Disbursements will be billed at cost.
Our estimated total fees across all phases of the engagement (M&A, IP, and CFIUS/trade combined) are approximately $5.2 million. This estimate is based on our current understanding of the scope and complexity of the transaction and may be revised as circumstances develop.
The billing partner for all phases of the engagement is James Prentice.
C. Retainer and Billing
A retainer of $250,000 has been received from HSAG and will be held in our client trust account. The retainer will be drawn against monthly billings as invoices are issued and will be replenished to the original amount upon request.
Invoices will be prepared on a monthly billing cycle and will itemize all attorney time and disbursements incurred during the preceding month. Payment is due within thirty (30) days of the date of each invoice.
VIII. Immediate Next Steps
We recommend the following immediate action items to maintain momentum on the CFIUS process and position the parties for a timely filing. We have assigned target dates for each action item:
1. Pre-Filing Consultation Request (Target: June 15, 2023). Peggy Ashworth will send a formal request letter to Treasury OIS requesting an informal pre-filing consultation meeting. We are targeting the week of June 19, 2023, for the meeting. The request letter will provide Treasury with a high-level overview of the transaction, the parties, and the key national security issues, and will identify the CFIUS counsel for both buyer and seller.
2. Information Gathering (Target: June 16, 2023). Calderwood & Harkness will circulate comprehensive information request lists to both HSAG and VPI (through its counsel at Wethersfield & Gale) identifying the data, documents, and information needed to prepare the joint voluntary notice. Our information requests will focus on the following areas in particular:
(a) HSAG's complete corporate structure, ownership, and any relationships with foreign government entities;
(b) HSAG's China operations, specifically the organizational structure, activities, personnel, and IT connectivity of Halcyon Semiconductor (Shanghai) Co., Ltd.;
(c) VPI's classified programs, government contracts (including contract numbers, contracting offices, and program descriptions), cleared personnel (including clearance levels and access authorizations), ITAR/EAR classifications for all products and technology, and facility security arrangements; and
(d) VPI's intellectual property portfolio, including any government-funded inventions, patents with national security implications, and IP subject to export control restrictions.
3. Pre-Filing Briefing Deck (Target: June 19–23, 2023). We will prepare a slide presentation for the Treasury pre-filing consultation meeting, summarizing the transaction, the parties, VPI's business and national security profile, HSAG's background and allied-nation status, and HSAG's proposed mitigation framework. The briefing deck will be designed to provide Treasury OIS with a clear and comprehensive overview of the transaction in advance of the formal notice filing.
4. Seller's Counsel Coordination (Target: June 16, 2023). Peggy Ashworth will contact Harrison Whitfield at Wethersfield & Gale to establish a regular communication cadence, coordinate the division of responsibilities for the joint filing, and exchange initial drafts and outlines for the notice.
5. Notice Preparation (Target: Draft by July 7, 2023; Filing by July 14, 2023). We will begin drafting the joint voluntary notice immediately upon receipt of the information identified in Item 2 above. Our target is to complete a draft notice for internal review by early July 2023, with filing targeted for July 14, 2023. The notice will be a comprehensive document, typically ranging from 75 to 150 pages (excluding exhibits), and will address the full scope of information required by 31 C.F.R. § 800.501.
6. German Counsel Coordination (Ongoing). We understand that HSAG has retained Schilling Frey Rechtsanwälte in Berlin (lead partner: Prof. Dr. Ulrich Schilling) for German regulatory filings and any EU foreign investment screening requirements that may apply to this transaction. Several EU member states, including Germany, have adopted foreign direct investment screening mechanisms that may require parallel filings. We will coordinate with Prof. Dr. Schilling's team to ensure that the U.S. and European filing processes are aligned and that information shared with European authorities is consistent with the representations made in the CFIUS notice.
IX. Confidentiality and Privilege Reminder
We wish to underscore the importance of maintaining the confidentiality and privilege of all communications relating to the CFIUS process.
All communications between Calderwood & Harkness and HSAG relating to the CFIUS filing, review, investigation, and mitigation negotiation are protected by the attorney-client privilege and the work product doctrine. These protections are essential to the CFIUS process, as they allow for candid assessment of national security risks and strategic considerations without fear of disclosure. We ask that all CFIUS-related communications be marked "Privileged & Confidential — Attorney-Client Communication" and that access be limited to those individuals who have a need to know.
CFIUS filings are themselves confidential under 50 U.S.C. § 4565(c), which prohibits the disclosure of information filed with or provided to CFIUS, except as specifically authorized by law. Unauthorized disclosure of CFIUS filings or the pendency of a CFIUS review can result in civil penalties and can also damage the parties' credibility with CFIUS. Accordingly, we ask that HSAG refrain from disclosing the CFIUS filing or the substance of CFIUS communications to any third party — including HSAG's broader management team, shareholders, analysts, or media — without prior consultation with us.
We recommend that internal distribution of CFIUS-related materials within HSAG be limited to the following individuals unless otherwise agreed:
• Dr. Maximilian Ehrhardt, Chief Executive Officer
• Katarina Brückner, Chief Financial Officer
• Stefan Lohse, General Counsel
If additional HSAG personnel need to be brought into CFIUS-related discussions (e.g., HSAG's Chief Technology Officer or Head of Corporate Development), please consult with us in advance so that we can assess any implications and establish appropriate information barriers if necessary.
X. Closing
Stefan, we are confident in our ability to navigate the CFIUS process successfully and to achieve a favorable outcome for HSAG. While the national security issues presented by this transaction are significant and will require careful management, we believe that several important factors weigh in HSAG's favor.
First, HSAG is headquartered in Germany, a NATO ally and EU member state with a long history of defense cooperation with the United States. CFIUS has historically been more favorably disposed toward acquisitions by allied-nation entities than toward acquisitions by entities from non-allied or adversary nations. Second, HSAG has demonstrated its willingness to accept meaningful mitigation measures — including board governance restrictions, a Technology Control Plan, facility and data segregation, and a third-party compliance monitor — which significantly reduces the likelihood that CFIUS would conclude that the national security concerns are unmitigable. Third, recent semiconductor-sector precedents confirm that CFIUS is prepared to approve transactions of this type, provided that robust and enforceable mitigation is in place.
Based on these factors, we believe the most likely outcome is clearance of the transaction subject to the execution of a National Security Agreement, not a block or presidential review. While the process will require sustained effort over the coming months, we are well-positioned to manage it efficiently and to protect HSAG's interests at every stage.
We would welcome the opportunity to discuss this briefing with you, Dr. Ehrhardt, and Katarina Brückner at your earliest convenience. Please let us know a time that works for a call, and Peggy Ashworth and David Caruso will join from our Washington, DC office. We believe it would be productive to hold this initial strategy discussion before the pre-filing consultation with Treasury OIS, which is targeted for the week of June 19, 2023 — the first critical milestone in the CFIUS process.
We look forward to working with you on this important matter and remain at your disposal for any questions in the interim.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Beatrice Holloway Responsible Partner, Mergers & Acquisitions 399 Park Avenue, 31st Floor New York, NY 10022 Direct: (212) 548-7142
Email: b.holloway@calderwoodharkness.com
cc: Dr. Maximilian Ehrhardt, Chief Executive Officer, Halcyon Semiconductor AG cc: Katarina Brückner, Chief Financial Officer, Halcyon Semiconductor AG cc: Margaret "Peggy" Ashworth, Of Counsel, Calderwood & Harkness LLP cc: Lt. Col. (Ret.) David Caruso, Senior Counsel, Calderwood & Harkness LLP cc: James Prentice, Billing Partner, Calderwood & Harkness LLP
Encl.: Executed Engagement Letter dated June 12, 2023