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PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION

CALDERWOOD & HARKNESS LLP

1750 K Street NW, Suite 800 Washington, DC 20006 Tel: (202) 551-7000

Fax: (202) 551-7001

399 Park Avenue, 31st Floor New York, NY 10022 Tel: (212) 848-6000

Fax: (212) 848-6001

www.calderwoodharkness.com

September 5, 2023

VIA EMAIL AND FEDEX

Stefan Lohse 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 Case No. CFIUS-023-07-3841 — Initiation of 45-Day Investigation Period

Dear Stefan,

I. Purpose of This Letter

The purpose of this letter is to advise Halcyon Semiconductor Aktiengesellschaft ("HSAG") that the Committee on Foreign Investment in the United States ("CFIUS" or the "Committee") has initiated a formal 45-day investigation of the proposed acquisition by HSAG of one hundred percent (100%) of the outstanding equity of Marlowe Asset Management Photonics Inc. ("VPI"), assigned CFIUS Case No. CFIUS-023-07-3841.

As you are aware, the initial 45-day review period commenced on July 21, 2023 — the date on which CFIUS formally accepted the voluntary joint notice filed on July 14, 2023 — and expired on September 4, 2023. On September 4, 2023, CFIUS communicated to the parties its determination to proceed to a formal investigation, indicating that the Committee was unable to conclude during the initial review period that the proposed transaction does not present national security concerns requiring further analysis. The 45-day investigation period therefore runs from September 4, 2023 through approximately October 18, 2023, subject to possible extension in limited statutory circumstances as described more fully below.

This letter sets forth a detailed explanation of the investigation process, an assessment of the likely outcomes, the implications of the investigation for the transaction timeline, and our recommended approach for HSAG going forward. We have organized this discussion to provide HSAG's management and board with a comprehensive understanding of the current procedural posture and the steps that will be necessary in the coming weeks.

II. Background and Procedural History to Date

Before turning to the substance of the investigation, it is useful to summarize the key procedural milestones in this matter to date, as context for the discussion that follows.

Stock Purchase Agreement. HSAG and VPI executed a definitive Stock Purchase Agreement (the "SPA") on June 10, 2023, providing for HSAG's acquisition of all of the outstanding capital stock of VPI for a purchase price of $1.42 billion in cash. The SPA contains customary closing conditions, including, as relevant here, a condition requiring CFIUS clearance of the transaction (SPA §7.1(c)).

Engagement of Counsel. Calderwood & Harkness LLP was engaged on June 12, 2023 to represent HSAG in connection with the CFIUS filing and all related national security regulatory matters arising from the proposed acquisition. Concurrently, VPI engaged Wethersfield & Gale LLP as its counsel for CFIUS purposes, with Harrison Whitfield serving as the lead partner on that representation.

Pre-Filing Consultation. On June 19, 2023, Calderwood & Harkness conducted a pre-filing consultation with the staff of the U.S. Department of the Treasury, Office of Investment Security, which serves as the chair of CFIUS. During that consultation, we provided an overview of the proposed transaction, the parties, and the nature of VPI's business, including its defense contracts, facility security clearance, and export-controlled technologies. The Treasury staff provided informal guidance regarding the information expected to be included in the formal notice.

Voluntary Joint Notice. On July 14, 2023, a voluntary joint notice was filed under 31 C.F.R. Part 800 jointly by HSAG (through Calderwood & Harkness as buyer's counsel) and VPI (through Wethersfield & Gale LLP, led by Harrison Whitfield). The filing comprised the completed notice form together with extensive supporting documentation, including corporate organizational charts, beneficial ownership disclosures, descriptions of VPI's government contracts and facility security clearance, technology descriptions, and information regarding HSAG's global operations and foreign government relationships.

Acceptance and Commencement of Review. CFIUS accepted the filing on July 21, 2023, thereby commencing the initial 45-day review period under the statute. The acceptance confirmation was transmitted to both buyer's and seller's counsel simultaneously.

First Request for Information. On August 4, 2023, CFIUS issued a first Request for Information ("RFI") containing thirty-four (34) individual questions and document requests. The RFI focused on several areas of apparent concern to the Committee, including: (i) HSAG's relationships with German and European Union governmental entities, including any government contracts, subsidies, or strategic partnerships; (ii) HSAG's cybersecurity practices and information technology infrastructure; (iii) technology transfer protocols between HSAG's global subsidiaries, including protocols for handling export-controlled technical data; and (iv) HSAG's exposure to the Chinese market, including the operations, revenues, personnel, and governmental relationships of Halcyon Semiconductor (Shanghai) Co., Ltd.

Supplemental Response. Calderwood & Harkness, in close coordination with Wethersfield & Gale, prepared and filed a comprehensive supplemental response on August 18, 2023, addressing each of the thirty-four questions in detail and providing all requested documentation. This response was the product of extensive internal collaboration with HSAG's management team, including significant input from Dr. Ehrhardt, Ms. Brückner, and your office.

Initiation of Investigation. On September 4, 2023, CFIUS notified the parties through formal correspondence to both buyer's and seller's counsel that the Committee has determined to proceed to a 45-day investigation. The notification stated that the initial review period has concluded without the Committee reaching a determination that the proposed transaction does not present national security concerns. This notification triggers the commencement of the investigation phase, which we address in detail in the following sections.

III. Explanation of the Investigation Process

A. Statutory and Regulatory Framework

The CFIUS process is governed by Section 721 of the Defense Production Act of 1950, as amended by the Foreign Investment Risk Review Modernization Act of 2018 ("FIRRMA"), codified at 50 U.S.C. § 4565, and the implementing regulations promulgated thereunder at 31 C.F.R. Part 800.

Under this statutory framework, when CFIUS receives a voluntary joint notice of a covered transaction, it conducts an initial review of up to 45 days to assess whether the transaction presents national security concerns. If the Committee is unable to resolve those concerns during the initial review period — or if it determines that the transaction is a "covered transaction" that requires further analysis — CFIUS is authorized to undertake an additional investigation period of up to 45 days. It is this investigation phase that has now been initiated in connection with the proposed acquisition.

The investigation is conducted by the full interagency CFIUS committee, which comprises representatives of nine federal departments and agencies, as well as several observer agencies and offices within the Executive Office of the President. In this particular case, we have been informed — consistent with our expectations — that the co-lead agencies for the review are the Department of Defense ("DoD") and the Department of Energy ("DOE"). The designation of DoD as a co-lead reflects VPI's substantial defense contract portfolio and its facility security clearance, while the designation of DOE reflects VPI's dual-use semiconductor activities, which include technologies relevant to DOE's national security mission areas, particularly in advanced photonics and gallium nitride (GaN) device fabrication. The Committee as a whole is chaired by the U.S. Department of the Treasury, which coordinates the interagency process and serves as the principal point of contact for the parties.

B. What Happens During the Investigation

During the investigation phase, CFIUS conducts a deeper and more comprehensive review of the national security implications of the proposed transaction. This process involves several parallel workstreams, which we describe here to provide HSAG with a full understanding of what to expect.

Additional Requests for Information. The Committee may — and in our experience almost certainly will — issue additional Requests for Information during the investigation phase. HSAG should expect at least one additional RFI, and possibly more, during this period. These requests are likely to be more targeted and specific than the initial review-phase RFI, reflecting the particular national security concerns that have been identified by the co-lead agencies during their review of the notice and supplemental materials.

Classified Assessments. The U.S. Intelligence Community, including the Office of the Director of National intelligence ("ODNI"), and the relevant defense and intelligence agencies conduct their own classified assessments of the national security implications of the transaction. These classified assessments are not shared with the parties and are not accessible to outside counsel. The substance of these assessments may, however, be reflected indirectly in the questions and concerns communicated by CFIUS to the parties during the investigation.

Agency Briefings and Meetings. Individual CFIUS member agencies may request briefings from, or meetings with, the parties. Such requests may come from the co-lead agencies (DoD and DOE) or from other agencies with relevant equities, such as the Department of Commerce (which administers the Export Administration Regulations) or the Department of State (which administers the International Traffic in Arms Regulations). These meetings may be conducted in person at the relevant agency's offices in Washington, D.C., or by secure video conference. Participation by HSAG management and VPI management may be requested on relatively short notice.

Proactive Mitigation. Importantly, the investigation phase is not exclusively adversarial. The parties may — and, as we discuss in Section VI below, we strongly recommend that HSAG should — proactively propose mitigation measures designed to address the national security concerns that CFIUS is likely to identify. Such proactive engagement can be instrumental in shaping the terms of any eventual mitigation arrangement to be more operationally workable for the acquiror.

Prevalence of Investigation in Comparable Transactions. We wish to emphasize that the initiation of an investigation is a common and, in certain categories of transactions, routine procedural step. Investigation is particularly common — indeed, we would characterize it as expected — in transactions that involve one or more of the following factors: (i) access to classified national security information; (ii) ITAR- or EAR-controlled technologies; (iii) critical defense or semiconductor supply chains; and (iv) a foreign acquiror. All four of these factors are present in this transaction. The initiation of an investigation should therefore not be viewed as an adverse finding or an indication that the transaction faces unusual obstacles to clearance.

C. Duration and Timeline

The investigation period runs for 45 days from the date of initiation. Because the investigation was initiated on September 4, 2023, it is expected to conclude on or about October 18, 2023.

Under FIRRMA, CFIUS has the authority to extend the investigation period by up to an additional 15 calendar days in "extraordinary circumstances." This extension authority is invoked rarely and typically only in the most complex cases involving novel or particularly sensitive national security issues. While we do not currently anticipate that an extension will be necessary in this case, we note it as a possibility for completeness.

Additionally, the statutory clock may be effectively paused if CFIUS withdraws and refiles the notice on the parties' behalf. This is a procedural mechanism that the Committee has occasionally used in complex cases to gain additional time for analysis or mitigation negotiations beyond the investigation period. CFIUS has not indicated that it intends to take such action in this case, and we have no current reason to believe it will do so. We will, of course, advise HSAG immediately if any such development occurs.

IV. Possible Outcomes of the Investigation

The investigation phase may result in one of several outcomes, which we discuss in order of likelihood based on our analysis of this transaction and our experience in comparable semiconductor-sector CFIUS proceedings.

A. Clearance Without Conditions

CFIUS may conclude, following the investigation, that the proposed transaction does not present unresolved national security concerns, and may issue a clearance letter — known formally as a "safe-harbor letter" under 50 U.S.C. § 4565(b)(1)(D) — permitting the parties to proceed to closing without conditions.

We wish to provide a candid assessment of this outcome. Given the nature of VPI's business and the specific characteristics of this transaction, unconditional clearance is, in our professional judgment, unlikely. VPI maintains classified contracts with the Department of Defense with an aggregate backlog of approximately $193 million across fourteen (14) active contracts. VPI produces and develops defense articles classified under Category XI(a)(3) of the United States Munitions List ("USML") under the International Traffic in Arms Regulations ("ITAR"), as well as dual-use components classified under Export Control Classification Number ("ECCN") 3A001 under the Export Administration Regulations ("EAR"). VPI holds a Facility Security Clearance ("FCL") at the SECRET level, assigned CAGE Code 7VK92, under the National Industrial Security Program ("NISP"), and employs 212 individuals holding active personnel security clearances at various levels. The combination of these factors makes it highly improbable that CFIUS would conclude its analysis without identifying national security concerns that require some form of mitigation.

B. Clearance with Mitigation (National Security Agreement)

Based on our analysis and extensive experience in semiconductor-sector CFIUS reviews, we believe that the most probable outcome of the investigation is clearance conditioned upon the negotiation and execution of a National Security Agreement (commonly referred to as an "NSA" or, in some contexts, a "Security Control Agreement" or "Special Security Agreement").

An NSA is a legally binding agreement entered into among the acquiror (HSAG), the target company (VPI), and the U.S. government (typically represented by the monitoring agencies — here, likely DoD and DOE, with Treasury acting in its coordinating capacity). The agreement imposes ongoing, post-closing obligations on the acquiror and the target that are specifically designed to mitigate identified national security risks associated with the transaction while permitting the acquisition to proceed.

Based on our review of precedent NSAs in comparable semiconductor and defense-sector transactions, as well as our assessment of the specific national security equities implicated by VPI's business, we anticipate that an NSA in this matter would likely contain provisions addressing the following areas:

Board Governance Requirements. CFIUS will almost certainly require the reconstitution of VPI's board of directors to include U.S.-citizen independent directors ("Security Board Members") who hold or are able to obtain security clearances at the appropriate level. In addition, the NSA would likely require the establishment of a Government Security Committee ("GSC"), comprised of the Security Board Members, with exclusive decision-making authority over all matters relating to VPI's classified programs, personnel security, and facility security clearance. The GSC would function as a firewall between VPI's classified operations and HSAG's non-U.S. management structure.

Technology Control Plan. The NSA would require the development and implementation of a comprehensive Technology Control Plan ("TCP"), which would impose restrictions on the transfer of ITAR- and EAR-controlled technical data and defense articles to non-U.S. persons — including HSAG's own personnel — without prior authorization from the relevant U.S. government agencies (the Directorate of Defense Trade Controls at the Department of State for ITAR-controlled items, and the Bureau of Industry and Security at the Department of Commerce for EAR-controlled items). The TCP would establish detailed protocols governing the handling, storage, transmission, and destruction of controlled technical data, and would define categories of information that may and may not be shared with HSAG.

Facility Access Restrictions. The NSA would impose limitations on the ability of HSAG's personnel — and, in particular, non-U.S. nationals — to access VPI's classified and controlled facilities. In this case, these restrictions would apply principally to VPI's 45,000-square-foot GaN-on-SiC fabrication facility located at 9200 Innovation Boulevard, Albuquerque, New Mexico, and specifically to clean room Sections C-7 through C-12, which are used for the fabrication of classified and ITAR-controlled photonic devices. Physical access controls, escort requirements, and visitor management protocols would be specified in the NSA and the associated TCP.

Cybersecurity Requirements. The NSA would mandate that VPI maintain cybersecurity practices in compliance with specified frameworks, which in recent NSAs have typically included compliance with NIST Special Publication 800-171 (Protecting Controlled Unclassified Information in Nonfederal Systems and Organizations) and, increasingly, alignment with CMMC 2.0 requirements. Critically, the NSA would require the segregation of VPI's information technology systems and networks from HSAG's global corporate network, ensuring that controlled unclassified information ("CUI"), ITAR-controlled technical data, and classified information stored on VPI's systems are not accessible from HSAG's systems.

Third-Party Compliance Monitor. CFIUS would almost certainly require the appointment of an independent third-party compliance monitor, approved by the monitoring agencies, to conduct periodic (typically annual) compliance audits and report the results directly to the U.S. government. The compliance monitor reviews VPI's adherence to the terms of the NSA, the TCP, and all related security protocols. The cost of the third-party monitor is customarily borne by the acquiror. Based on precedent in comparable transactions, we estimate these costs at approximately $1.2 million per annum.

Personnel Continuity Provisions. The NSA would likely require that certain key VPI personnel remain in their positions for a specified period following the closing of the acquisition, to ensure continuity in the management of classified programs and the maintenance of VPI's facility security clearance. Based on our assessment of VPI's organizational structure, the individuals most likely to be subject to such requirements include Dr. Nathan Trevorrow (Chief Executive Officer), Marissa Sung-Avila (President and Chief Operating Officer), and Col. (Ret.) Bryce Hendrickson (Facility Security Officer). The required retention period in recent NSAs has typically ranged from two to five years, depending on the individual's role and the sensitivity of the programs under their supervision.

Penalty Provisions. The NSA would include provisions for the imposition of civil penalties for violations of its terms. Under current regulatory guidance, penalties may be assessed in amounts of up to $250,000 per violation per day. In extreme cases of material or persistent noncompliance, the U.S. government retains the authority to mandate divestiture of the target company.

For your reference, we have previously provided HSAG with our Comparative NSA Precedent Analysis, which surveys twelve (12) recent semiconductor-sector NSAs executed between 2019 and 2023. That analysis provides detailed comparisons of the governance, technology control, cybersecurity, monitoring, and penalty provisions in each of those precedent agreements, and we commend it to you as a reference in the discussions ahead.

We note that this outcome is consistent with the analysis set forth in our initial CFIUS Risk Assessment & Mitigation Strategy Memorandum, in which we identified conditional clearance subject to an NSA as the most probable outcome and began developing a mitigation framework in anticipation of precisely this contingency. We have continued to refine that framework in light of the questions and focus areas identified in the August 4, 2023 RFI.

C. Presidential Review and Potential Block

If CFIUS concludes that the national security concerns presented by the proposed transaction cannot be adequately resolved through mitigation measures, the Committee may refer the transaction to the President of the United States for a final determination. Under 50 U.S.C. § 4565(d), the President has the authority to take any action, including blocking or ordering the unwinding of the transaction, if the President finds credible evidence that the transaction threatens to impair the national security.

A presidential block is an extraordinary remedy. Historically, only a small handful of transactions have been blocked by presidential order, and such action has generally been reserved for transactions in which the acquiror has significant ties to a foreign government that poses strategic concerns to the United States, and in which no feasible mitigation measures can address the identified risks.

In our assessment, a presidential block is highly unlikely in this case. HSAG is a publicly traded company incorporated in the Federal Republic of Germany, a NATO ally and close defense partner of the United States, with no direct or indirect ownership or control by the German government or any other foreign government. The national security concerns presented by this transaction — while substantive and requiring careful attention — are amenable to well-established mitigation structures (the NSA and SSA frameworks) that have been successfully employed in numerous prior semiconductor-sector transactions involving foreign acquirors from allied nations. We see no basis on the present record to anticipate a referral to the President.

D. Withdrawal and Refiling

The parties retain the right under the statute and regulations to withdraw the voluntary joint notice at any time and to refile at a later date. Withdrawal and refiling restarts the statutory clock — meaning that a new 45-day review period would commence upon acceptance of the refiled notice — and is sometimes used as a strategic tool to allow additional time for the negotiation of mitigation terms or to permit the parties to address CFIUS concerns before the investigation period expires.

We do not recommend withdrawal and refiling at this time. The investigation process is proceeding in an orderly fashion, and we believe the current timeline provides adequate time for productive engagement with CFIUS. However, this remains an available option if, at any point during the investigation, it becomes apparent that additional time would be beneficial to the parties — for example, if NSA negotiations are not yet complete when the investigation period draws to a close. We will continue to monitor the situation and will advise you promptly if our recommendation on this point changes.

V. Implications for Transaction Timeline

The initiation of the CFIUS investigation has direct implications for the anticipated closing timeline of the acquisition, which we summarize here.

As you are aware, the SPA provides that CFIUS clearance is a condition to the obligation of the parties to consummate the closing of the transaction (SPA §7.1(c)). Accordingly, closing cannot occur until CFIUS has either issued a clearance letter (with or without conditions) or the applicable waiting period has expired without CFIUS taking action.

The investigation period is expected to conclude on or about October 18, 2023. However, if — as we anticipate — CFIUS communicates preliminary national security concerns during the investigation and proposes the negotiation of a National Security Agreement, the CFIUS process will extend beyond the conclusion of the investigation period. The investigation period establishes the timeline for CFIUS's assessment of the transaction; the negotiation and execution of an NSA constitute a separate process that typically follows the Committee's formal identification of concerns and its determination that mitigation is the appropriate resolution.

Based on our experience with NSA negotiations in semiconductor-sector transactions, the period from CFIUS's initial communication of its proposed mitigation terms to the execution of a final, agreed-upon NSA typically requires eight to twelve weeks. This timeframe can vary depending on the complexity of the mitigation provisions, the number of agencies with equities in the negotiation, and the responsiveness of the parties.

Taking into account the investigation timeline and a reasonable estimate for NSA negotiation, our current best estimate for the completion of the full CFIUS process — from the current date through the execution of an NSA and the issuance of a final clearance letter — is Q4 2023 through early Q1 2024. We believe this timeline is consistent with the outside date provisions contained in the SPA and should not, based on our current assessment, require an amendment to the agreement's drop-dead date. We will, of course, continue to monitor the situation and will advise HSAG promptly if our estimate changes in any material respect.

We also wish to note that Wethersfield & Gale, representing VPI, has been fully informed of the initiation of the investigation. Harrison Whitfield has confirmed that VPI's management is aligned with a cooperative and proactive approach to the CFIUS process and is prepared to work collaboratively with HSAG and its counsel to facilitate a timely resolution.

VI. Recommended Approach and Next Steps

In light of the foregoing, we recommend that HSAG take the following steps in the coming weeks to position itself for a successful outcome in the CFIUS investigation.

A. Preparation for Additional Information Requests

As noted above, HSAG should anticipate receiving at least one additional Request for Information from CFIUS during the investigation phase, and should be prepared to respond promptly and thoroughly. Based on our assessment of the questions and feedback received during the review phase, we anticipate that the investigation-phase RFIs will focus on the following areas:

(1) VPI intellectual Property Transfer Risks. VPI holds a substantial portfolio of intellectual property in the fields of gallium nitride photonics, silicon carbide substrate engineering, and related semiconductor technologies. This portfolio includes forty-seven (47) granted U.S. patents and twelve (12) pending U.S. patent applications. Of particular significance, twenty-three (23) of the granted patents were funded in whole or in part by the U.S. government and are therefore subject to march-in rights under 35 U.S.C. § 203 (the Bayh-Dole Act). CFIUS is likely to probe the mechanisms by which HSAG intends to access and utilize VPI's intellectual property post-closing, and the controls that would be in place to prevent unauthorized transfer of controlled technology to non-U.S. persons.

(2) Supply Chain Dependencies. CFIUS is expected to examine the supply chain dependencies associated with VPI's GaN-on-SiC fabrication process, including the sourcing of raw materials, substrates, and critical fabrication equipment. The Committee may seek assurances regarding the continuity and security of the supply chain under HSAG's ownership, particularly with respect to single-source dependencies and any suppliers located in countries of concern.

(3) HSAG's Relationships with Non-Allied Foreign Governments. CFIUS will almost certainly return to the question of HSAG's China subsidiary — Halcyon Semiconductor (Shanghai) Co., Ltd. — which was disclosed in the supplemental materials filed on August 18, 2023. The Shanghai subsidiary generated $81.4 million in revenue in HSAG's most recent fiscal year, representing approximately 1.3% of HSAG's total consolidated revenue. While this is a relatively modest share of HSAG's overall business, CFIUS is likely to probe the nature and extent of the subsidiary's operations, its interactions with Chinese governmental entities, the presence of any Chinese Communist Party committees or other governmental influence mechanisms within the subsidiary, and the risk that VPI's technologies or information could be accessed through the HSAG-Shanghai connection.

(4) Post-Closing Personnel Continuity. CFIUS will likely seek detailed information regarding HSAG's plans for VPI's workforce post-closing, with particular focus on the 212 employees holding active security clearances and the continuity of key management personnel.

To ensure that HSAG is able to respond to RFIs quickly and comprehensively, Lt. Col. (Ret.) David Caruso and Priya Venkataraman of our national security practice are currently preparing anticipated Q&A materials on government contracts, facility security, and export control matters. These materials will be circulated to HSAG for review and input as soon as they are available.

We respectfully request that HSAG management ensure that key personnel — including Dr. Ehrhardt, Ms. Brückner, and relevant business unit leaders with knowledge of the topics identified above — remain available for potential in-person or virtual briefings with CFIUS agency staff on relatively short notice. The agencies may request such briefings at any time during the investigation period, and the ability to respond promptly and knowledgeably to such requests is an important signal of good faith and cooperation.

B. Proactive Mitigation Proposals

We strongly recommend that HSAG proactively engage with CFIUS to propose mitigation measures before CFIUS formally communicates its national security concerns and presents its own proposed mitigation terms. In our experience, proactive engagement offers several significant advantages.

First, proactive engagement signals good faith and a genuine willingness to address the U.S. government's national security interests, which can positively influence the tone and trajectory of the Committee's deliberations. Second, by putting forward a well-developed mitigation proposal early in the investigation, HSAG has the opportunity to shape the terms of any eventual NSA in ways that are more operationally workable and less burdensome than the terms that CFIUS might propose independently. CFIUS's initial proposals are typically conservative and reflect worst-case assumptions; a proactive acquiror proposal can demonstrate that meaningful mitigation is achievable with less intrusive measures.

We have been developing a comprehensive mitigation framework, as outlined in our earlier CFIUS Risk Assessment & Mitigation Strategy Memorandum, which includes proposed approaches to board restructuring, Technology Control Plan design, facility access protocols, and cybersecurity measures. We are prepared to finalize this framework for submission to CFIUS at the appropriate time during the investigation and would like to discuss the details of this proposal with Dr. Ehrhardt, Ms. Brückner, and you at the earliest opportunity.

In addition, we recommend coordination with Schilling Frey Rechtsanwälte — specifically Prof. Dr. Ulrich Schilling — regarding any implications that the anticipated NSA terms may have under German corporate governance law for HSAG as a publicly traded Aktiengesellschaft. Certain NSA provisions, such as the appointment of independent Security Board Members at the VPI subsidiary level and limitations on the flow of information from VPI to HSAG's management board (Vorstand) and supervisory board (Aufsichtsrat), may raise questions under the Aktiengesetz that should be identified and addressed proactively.

C. Internal Preparations

We further recommend that HSAG commence internal planning for compliance with the mitigation obligations that are likely to be imposed under an NSA. While these preparations are necessarily precautionary — and do not presuppose the final terms of any agreement — they will position HSAG to implement mitigation measures promptly if and when required, which is itself a favorable signal to CFIUS. Specifically, we recommend attention to the following:

(1) Board Designee Identification. HSAG should begin identifying potential candidates for designation to VPI's reconstituted board of directors, including at least two (2) positions that would be filled by HSAG-designated directors (as distinguished from the independent Security Board Members required by CFIUS). HSAG's designees should be individuals with appropriate experience in defense or semiconductor industries and, ideally, should hold or be eligible to hold U.S. security clearances.

(2) Budget Planning for Compliance Monitor. HSAG should incorporate the estimated cost of the third-party compliance monitor into its budget planning for the acquisition. Based on precedent in comparable transactions, we estimate these costs at approximately $1.2 million per annum, though the actual amount will depend on the scope of the monitor's mandate and the complexity of VPI's operations.

(3) IT Architecture Planning. HSAG's information technology team should begin assessing the architecture required to achieve full segregation of VPI's IT systems and networks from HSAG's global corporate network. This is likely to be one of the most technically complex and costly aspects of NSA compliance, and early planning will be essential to achieving segregation within the timeframes that CFIUS will likely require.

(4) Personnel Access Protocols. HSAG should assess which of its personnel would need to interact with VPI's operations post-closing — for operational, financial, or strategic purposes — and begin developing protocols for managing access restrictions applicable to non-U.S. persons and individuals without appropriate security clearances.

D. Coordination with VPI and Seller's Counsel

Continued close coordination between HSAG's counsel and VPI's counsel will be essential throughout the investigation phase. Consistent and complete responses to CFIUS inquiries are critical to the Committee's assessment, and any inconsistencies between the parties' submissions could raise concerns and delay the process.

We will continue to work in close collaboration with Harrison Whitfield and Tobias Kwan of Wethersfield & Gale LLP on all aspects of the CFIUS proceeding. On the VPI side, Col. (Ret.) Bryce Hendrickson, VPI's Facility Security Officer, who holds a TS/SCI security clearance, will play a particularly critical role in providing information to CFIUS regarding VPI's classified programs, facility security clearance, and NISP compliance. Dr. Nathan Trevorrow and Marissa Sung-Avila should also remain available for direct engagement with CFIUS agencies as needed.

E. Confidentiality

We wish to remind HSAG that all communications with CFIUS, including the content of the parties' notice, supplemental filings, RFIs, and CFIUS's responses, are confidential and subject to statutory restrictions on disclosure under 50 U.S.C. § 4565(c). These restrictions apply to all parties to the transaction, their officers, directors, employees, and advisors.

HSAG should not make any public statements regarding the CFIUS process, the investigation, the substance of any communications with the Committee, or the status of CFIUS clearance, without prior coordination with and approval by Calderwood & Harkness. This restriction applies to all forms of public communication, including press releases, investor presentations, analyst calls, and social media.

We recognize that HSAG, as a publicly traded company listed on the Frankfurt Stock Exchange and traded on XETRA, may be subject to disclosure obligations under applicable German and European securities regulations. Any required public disclosures — including ad hoc disclosures under the Market Abuse Regulation (EU) No. 596/2014 — should be reviewed by both Calderwood & Harkness and Schilling Frey Rechtsanwälte before release, to ensure compliance with both U.S. and German/EU law and to avoid any inadvertent violation of the CFIUS confidentiality provisions.

VII. Fee and Budget Update

For your information and that of HSAG's financial management, we provide the following update on the matter budget.

The engagement remains within the phased budget previously agreed upon by the parties:

Fees are being applied against the $250,000 retainer previously provided by HSAG. Monthly invoices are being issued and directed to the attention of Billing Partner James Prentice at Calderwood & Harkness LLP. The overall CFIUS engagement fee cap of $3,800,000 (exclusive of disbursements) remains in effect.

Should the NSA negotiation process prove extended or particularly complex — for example, if multiple agencies insist on customized provisions or if the scope of the Technology Control Plan requires extensive technical analysis — we will provide HSAG with an updated budget estimate at the earliest practicable time. Based on our current assessment, however, we anticipate remaining within the agreed fee cap.

VIII. Conclusion and Availability

In closing, we wish to reassure HSAG that the initiation of a CFIUS investigation is a standard and expected procedural step in a transaction of this nature. This is particularly so for a transaction involving a target company that maintains classified defense programs, produces ITAR- and EAR-controlled technologies, holds a facility security clearance under the NISP, and is being acquired by a foreign purchaser. The vast majority of notified transactions involving these characteristics proceed through the investigation phase, and the initiation of an investigation is not indicative of an adverse outcome.

To be clear: the Committee's decision to investigate does not constitute an adverse finding, a negative determination, or a judgment that the transaction poses unacceptable national security risks. It simply means that CFIUS requires additional time to complete its analysis and, in all likelihood, to negotiate appropriate mitigation measures through the NSA framework.

We remain confident that this transaction is well-suited for resolution through a National Security Agreement. The concerns implicated by VPI's business, while substantial, are of a type that has been successfully mitigated in numerous prior transactions in the semiconductor and defense sectors, including several in which members of our team have directly participated. HSAG's profile as a publicly traded company from an allied NATO nation, with no government ownership and a strong record of regulatory compliance, further supports a constructive outcome.

We would welcome the opportunity to schedule a call or video conference with Dr. Ehrhardt, Ms. Brückner, and you to discuss the investigation, the anticipated timeline, and the recommended next steps in further detail at HSAG's earliest convenience. Given the time-sensitive nature of the investigation period, we would suggest scheduling this discussion within the next five to seven business days, if possible.

Peggy Ashworth and David Caruso are available at our Washington, D.C. office at 1750 K Street NW, Suite 800. Beatrice Holloway is available at the New York office at 399 Park Avenue, 31st Floor. Please do not hesitate to contact either of us directly at the numbers and email addresses provided below.

We appreciate your confidence in Calderwood & Harkness, and we look forward to continuing to work with you and HSAG's management team to bring this matter to a successful conclusion.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Beatrice Holloway Partner, Mergers & Acquisitions Tel: (212) 848-6127

Email: bholloway@calderwoodharkness.com

By: ________

Margaret "Peggy" Ashworth Of Counsel, National Security & CFIUS Tel: (202) 551-7044

Email: mashworth@calderwoodharkness.com

cc: Dr. Maximilian Ehrhardt, Chief Executive Officer, Halcyon Semiconductor AG cc: Katarina Brückner, Chief Financial Officer, Halcyon Semiconductor AG cc: Prof. Dr. Ulrich Schilling, Schilling Frey Rechtsanwälte (German counsel to HSAG) cc: James Prentice, Calderwood & Harkness LLP (Billing Partner)

Enclosures: None (all referenced documents previously provided)

Phase	Budget	Status
Pre-filing consultation phase	$420,000	Completed — at budget
Notice preparation phase	$680,000	Completed — at budget
Review/investigation phase	$1,100,000	Currently in progress

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
CALDERWOOD & HARKNESS LLP
1750 K Street NW, Suite 800 Washington, DC 20006 Tel: (202) 551-7000
Fax: (202) 551-7001
399 Park Avenue, 31st Floor New York, NY 10022 Tel: (212) 848-6000
Fax: (212) 848-6001
www.calderwoodharkness.com
September 5, 2023
VIA EMAIL AND FEDEX
Stefan Lohse 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 Case No. CFIUS-023-07-3841 — Initiation of 45-Day Investigation Period
Dear Stefan,
I. Purpose of This Letter
The purpose of this letter is to advise Halcyon Semiconductor Aktiengesellschaft ("HSAG") that the Committee on Foreign Investment in the United States ("CFIUS" or the "Committee") has initiated a formal 45-day investigation of the proposed acquisition by HSAG of one hundred percent (100%) of the outstanding equity of Marlowe Asset Management Photonics Inc. ("VPI"), assigned CFIUS Case No. CFIUS-023-07-3841.
As you are aware, the initial 45-day review period commenced on July 21, 2023 — the date on which CFIUS formally accepted the voluntary joint notice filed on July 14, 2023 — and expired on September 4, 2023. On September 4, 2023, CFIUS communicated to the parties its determination to proceed to a formal investigation, indicating that the Committee was unable to conclude during the initial review period that the proposed transaction does not present national security concerns requiring further analysis. The 45-day investigation period therefore runs from September 4, 2023 through approximately October 18, 2023, subject to possible extension in limited statutory circumstances as described more fully below.
This letter sets forth a detailed explanation of the investigation process, an assessment of the likely outcomes, the implications of the investigation for the transaction timeline, and our recommended approach for HSAG going forward. We have organized this discussion to provide HSAG's management and board with a comprehensive understanding of the current procedural posture and the steps that will be necessary in the coming weeks.
II. Background and Procedural History to Date
Before turning to the substance of the investigation, it is useful to summarize the key procedural milestones in this matter to date, as context for the discussion that follows.
Stock Purchase Agreement. HSAG and VPI executed a definitive Stock Purchase Agreement (the "SPA") on June 10, 2023, providing for HSAG's acquisition of all of the outstanding capital stock of VPI for a purchase price of $1.42 billion in cash. The SPA contains customary closing conditions, including, as relevant here, a condition requiring CFIUS clearance of the transaction (SPA §7.1(c)).
Engagement of Counsel. Calderwood & Harkness LLP was engaged on June 12, 2023 to represent HSAG in connection with the CFIUS filing and all related national security regulatory matters arising from the proposed acquisition. Concurrently, VPI engaged Wethersfield & Gale LLP as its counsel for CFIUS purposes, with Harrison Whitfield serving as the lead partner on that representation.
Pre-Filing Consultation. On June 19, 2023, Calderwood & Harkness conducted a pre-filing consultation with the staff of the U.S. Department of the Treasury, Office of Investment Security, which serves as the chair of CFIUS. During that consultation, we provided an overview of the proposed transaction, the parties, and the nature of VPI's business, including its defense contracts, facility security clearance, and export-controlled technologies. The Treasury staff provided informal guidance regarding the information expected to be included in the formal notice.
Voluntary Joint Notice. On July 14, 2023, a voluntary joint notice was filed under 31 C.F.R. Part 800 jointly by HSAG (through Calderwood & Harkness as buyer's counsel) and VPI (through Wethersfield & Gale LLP, led by Harrison Whitfield). The filing comprised the completed notice form together with extensive supporting documentation, including corporate organizational charts, beneficial ownership disclosures, descriptions of VPI's government contracts and facility security clearance, technology descriptions, and information regarding HSAG's global operations and foreign government relationships.
Acceptance and Commencement of Review. CFIUS accepted the filing on July 21, 2023, thereby commencing the initial 45-day review period under the statute. The acceptance confirmation was transmitted to both buyer's and seller's counsel simultaneously.
First Request for Information. On August 4, 2023, CFIUS issued a first Request for Information ("RFI") containing thirty-four (34) individual questions and document requests. The RFI focused on several areas of apparent concern to the Committee, including: (i) HSAG's relationships with German and European Union governmental entities, including any government contracts, subsidies, or strategic partnerships; (ii) HSAG's cybersecurity practices and information technology infrastructure; (iii) technology transfer protocols between HSAG's global subsidiaries, including protocols for handling export-controlled technical data; and (iv) HSAG's exposure to the Chinese market, including the operations, revenues, personnel, and governmental relationships of Halcyon Semiconductor (Shanghai) Co., Ltd.
Supplemental Response. Calderwood & Harkness, in close coordination with Wethersfield & Gale, prepared and filed a comprehensive supplemental response on August 18, 2023, addressing each of the thirty-four questions in detail and providing all requested documentation. This response was the product of extensive internal collaboration with HSAG's management team, including significant input from Dr. Ehrhardt, Ms. Brückner, and your office.
Initiation of Investigation. On September 4, 2023, CFIUS notified the parties through formal correspondence to both buyer's and seller's counsel that the Committee has determined to proceed to a 45-day investigation. The notification stated that the initial review period has concluded without the Committee reaching a determination that the proposed transaction does not present national security concerns. This notification triggers the commencement of the investigation phase, which we address in detail in the following sections.
III. Explanation of the Investigation Process
A. Statutory and Regulatory Framework
The CFIUS process is governed by Section 721 of the Defense Production Act of 1950, as amended by the Foreign Investment Risk Review Modernization Act of 2018 ("FIRRMA"), codified at 50 U.S.C. § 4565, and the implementing regulations promulgated thereunder at 31 C.F.R. Part 800.
Under this statutory framework, when CFIUS receives a voluntary joint notice of a covered transaction, it conducts an initial review of up to 45 days to assess whether the transaction presents national security concerns. If the Committee is unable to resolve those concerns during the initial review period — or if it determines that the transaction is a "covered transaction" that requires further analysis — CFIUS is authorized to undertake an additional investigation period of up to 45 days. It is this investigation phase that has now been initiated in connection with the proposed acquisition.
The investigation is conducted by the full interagency CFIUS committee, which comprises representatives of nine federal departments and agencies, as well as several observer agencies and offices within the Executive Office of the President. In this particular case, we have been informed — consistent with our expectations — that the co-lead agencies for the review are the Department of Defense ("DoD") and the Department of Energy ("DOE"). The designation of DoD as a co-lead reflects VPI's substantial defense contract portfolio and its facility security clearance, while the designation of DOE reflects VPI's dual-use semiconductor activities, which include technologies relevant to DOE's national security mission areas, particularly in advanced photonics and gallium nitride (GaN) device fabrication. The Committee as a whole is chaired by the U.S. Department of the Treasury, which coordinates the interagency process and serves as the principal point of contact for the parties.
B. What Happens During the Investigation
During the investigation phase, CFIUS conducts a deeper and more comprehensive review of the national security implications of the proposed transaction. This process involves several parallel workstreams, which we describe here to provide HSAG with a full understanding of what to expect.
Additional Requests for Information. The Committee may — and in our experience almost certainly will — issue additional Requests for Information during the investigation phase. HSAG should expect at least one additional RFI, and possibly more, during this period. These requests are likely to be more targeted and specific than the initial review-phase RFI, reflecting the particular national security concerns that have been identified by the co-lead agencies during their review of the notice and supplemental materials.
Classified Assessments. The U.S. Intelligence Community, including the Office of the Director of National intelligence ("ODNI"), and the relevant defense and intelligence agencies conduct their own classified assessments of the national security implications of the transaction. These classified assessments are not shared with the parties and are not accessible to outside counsel. The substance of these assessments may, however, be reflected indirectly in the questions and concerns communicated by CFIUS to the parties during the investigation.
Agency Briefings and Meetings. Individual CFIUS member agencies may request briefings from, or meetings with, the parties. Such requests may come from the co-lead agencies (DoD and DOE) or from other agencies with relevant equities, such as the Department of Commerce (which administers the Export Administration Regulations) or the Department of State (which administers the International Traffic in Arms Regulations). These meetings may be conducted in person at the relevant agency's offices in Washington, D.C., or by secure video conference. Participation by HSAG management and VPI management may be requested on relatively short notice.
Proactive Mitigation. Importantly, the investigation phase is not exclusively adversarial. The parties may — and, as we discuss in Section VI below, we strongly recommend that HSAG should — proactively propose mitigation measures designed to address the national security concerns that CFIUS is likely to identify. Such proactive engagement can be instrumental in shaping the terms of any eventual mitigation arrangement to be more operationally workable for the acquiror.
Prevalence of Investigation in Comparable Transactions. We wish to emphasize that the initiation of an investigation is a common and, in certain categories of transactions, routine procedural step. Investigation is particularly common — indeed, we would characterize it as expected — in transactions that involve one or more of the following factors: (i) access to classified national security information; (ii) ITAR- or EAR-controlled technologies; (iii) critical defense or semiconductor supply chains; and (iv) a foreign acquiror. All four of these factors are present in this transaction. The initiation of an investigation should therefore not be viewed as an adverse finding or an indication that the transaction faces unusual obstacles to clearance.
C. Duration and Timeline
The investigation period runs for 45 days from the date of initiation. Because the investigation was initiated on September 4, 2023, it is expected to conclude on or about October 18, 2023.
Under FIRRMA, CFIUS has the authority to extend the investigation period by up to an additional 15 calendar days in "extraordinary circumstances." This extension authority is invoked rarely and typically only in the most complex cases involving novel or particularly sensitive national security issues. While we do not currently anticipate that an extension will be necessary in this case, we note it as a possibility for completeness.
Additionally, the statutory clock may be effectively paused if CFIUS withdraws and refiles the notice on the parties' behalf. This is a procedural mechanism that the Committee has occasionally used in complex cases to gain additional time for analysis or mitigation negotiations beyond the investigation period. CFIUS has not indicated that it intends to take such action in this case, and we have no current reason to believe it will do so. We will, of course, advise HSAG immediately if any such development occurs.
IV. Possible Outcomes of the Investigation
The investigation phase may result in one of several outcomes, which we discuss in order of likelihood based on our analysis of this transaction and our experience in comparable semiconductor-sector CFIUS proceedings.
A. Clearance Without Conditions
CFIUS may conclude, following the investigation, that the proposed transaction does not present unresolved national security concerns, and may issue a clearance letter — known formally as a "safe-harbor letter" under 50 U.S.C. § 4565(b)(1)(D) — permitting the parties to proceed to closing without conditions.
We wish to provide a candid assessment of this outcome. Given the nature of VPI's business and the specific characteristics of this transaction, unconditional clearance is, in our professional judgment, unlikely. VPI maintains classified contracts with the Department of Defense with an aggregate backlog of approximately $193 million across fourteen (14) active contracts. VPI produces and develops defense articles classified under Category XI(a)(3) of the United States Munitions List ("USML") under the International Traffic in Arms Regulations ("ITAR"), as well as dual-use components classified under Export Control Classification Number ("ECCN") 3A001 under the Export Administration Regulations ("EAR"). VPI holds a Facility Security Clearance ("FCL") at the SECRET level, assigned CAGE Code 7VK92, under the National Industrial Security Program ("NISP"), and employs 212 individuals holding active personnel security clearances at various levels. The combination of these factors makes it highly improbable that CFIUS would conclude its analysis without identifying national security concerns that require some form of mitigation.
B. Clearance with Mitigation (National Security Agreement)
Based on our analysis and extensive experience in semiconductor-sector CFIUS reviews, we believe that the most probable outcome of the investigation is clearance conditioned upon the negotiation and execution of a National Security Agreement (commonly referred to as an "NSA" or, in some contexts, a "Security Control Agreement" or "Special Security Agreement").
An NSA is a legally binding agreement entered into among the acquiror (HSAG), the target company (VPI), and the U.S. government (typically represented by the monitoring agencies — here, likely DoD and DOE, with Treasury acting in its coordinating capacity). The agreement imposes ongoing, post-closing obligations on the acquiror and the target that are specifically designed to mitigate identified national security risks associated with the transaction while permitting the acquisition to proceed.
Based on our review of precedent NSAs in comparable semiconductor and defense-sector transactions, as well as our assessment of the specific national security equities implicated by VPI's business, we anticipate that an NSA in this matter would likely contain provisions addressing the following areas:
Board Governance Requirements. CFIUS will almost certainly require the reconstitution of VPI's board of directors to include U.S.-citizen independent directors ("Security Board Members") who hold or are able to obtain security clearances at the appropriate level. In addition, the NSA would likely require the establishment of a Government Security Committee ("GSC"), comprised of the Security Board Members, with exclusive decision-making authority over all matters relating to VPI's classified programs, personnel security, and facility security clearance. The GSC would function as a firewall between VPI's classified operations and HSAG's non-U.S. management structure.
Technology Control Plan. The NSA would require the development and implementation of a comprehensive Technology Control Plan ("TCP"), which would impose restrictions on the transfer of ITAR- and EAR-controlled technical data and defense articles to non-U.S. persons — including HSAG's own personnel — without prior authorization from the relevant U.S. government agencies (the Directorate of Defense Trade Controls at the Department of State for ITAR-controlled items, and the Bureau of Industry and Security at the Department of Commerce for EAR-controlled items). The TCP would establish detailed protocols governing the handling, storage, transmission, and destruction of controlled technical data, and would define categories of information that may and may not be shared with HSAG.
Facility Access Restrictions. The NSA would impose limitations on the ability of HSAG's personnel — and, in particular, non-U.S. nationals — to access VPI's classified and controlled facilities. In this case, these restrictions would apply principally to VPI's 45,000-square-foot GaN-on-SiC fabrication facility located at 9200 Innovation Boulevard, Albuquerque, New Mexico, and specifically to clean room Sections C-7 through C-12, which are used for the fabrication of classified and ITAR-controlled photonic devices. Physical access controls, escort requirements, and visitor management protocols would be specified in the NSA and the associated TCP.
Cybersecurity Requirements. The NSA would mandate that VPI maintain cybersecurity practices in compliance with specified frameworks, which in recent NSAs have typically included compliance with NIST Special Publication 800-171 (Protecting Controlled Unclassified Information in Nonfederal Systems and Organizations) and, increasingly, alignment with CMMC 2.0 requirements. Critically, the NSA would require the segregation of VPI's information technology systems and networks from HSAG's global corporate network, ensuring that controlled unclassified information ("CUI"), ITAR-controlled technical data, and classified information stored on VPI's systems are not accessible from HSAG's systems.
Third-Party Compliance Monitor. CFIUS would almost certainly require the appointment of an independent third-party compliance monitor, approved by the monitoring agencies, to conduct periodic (typically annual) compliance audits and report the results directly to the U.S. government. The compliance monitor reviews VPI's adherence to the terms of the NSA, the TCP, and all related security protocols. The cost of the third-party monitor is customarily borne by the acquiror. Based on precedent in comparable transactions, we estimate these costs at approximately $1.2 million per annum.
Personnel Continuity Provisions. The NSA would likely require that certain key VPI personnel remain in their positions for a specified period following the closing of the acquisition, to ensure continuity in the management of classified programs and the maintenance of VPI's facility security clearance. Based on our assessment of VPI's organizational structure, the individuals most likely to be subject to such requirements include Dr. Nathan Trevorrow (Chief Executive Officer), Marissa Sung-Avila (President and Chief Operating Officer), and Col. (Ret.) Bryce Hendrickson (Facility Security Officer). The required retention period in recent NSAs has typically ranged from two to five years, depending on the individual's role and the sensitivity of the programs under their supervision.
Penalty Provisions. The NSA would include provisions for the imposition of civil penalties for violations of its terms. Under current regulatory guidance, penalties may be assessed in amounts of up to $250,000 per violation per day. In extreme cases of material or persistent noncompliance, the U.S. government retains the authority to mandate divestiture of the target company.
For your reference, we have previously provided HSAG with our Comparative NSA Precedent Analysis, which surveys twelve (12) recent semiconductor-sector NSAs executed between 2019 and 2023. That analysis provides detailed comparisons of the governance, technology control, cybersecurity, monitoring, and penalty provisions in each of those precedent agreements, and we commend it to you as a reference in the discussions ahead.
We note that this outcome is consistent with the analysis set forth in our initial CFIUS Risk Assessment & Mitigation Strategy Memorandum, in which we identified conditional clearance subject to an NSA as the most probable outcome and began developing a mitigation framework in anticipation of precisely this contingency. We have continued to refine that framework in light of the questions and focus areas identified in the August 4, 2023 RFI.
C. Presidential Review and Potential Block
If CFIUS concludes that the national security concerns presented by the proposed transaction cannot be adequately resolved through mitigation measures, the Committee may refer the transaction to the President of the United States for a final determination. Under 50 U.S.C. § 4565(d), the President has the authority to take any action, including blocking or ordering the unwinding of the transaction, if the President finds credible evidence that the transaction threatens to impair the national security.
A presidential block is an extraordinary remedy. Historically, only a small handful of transactions have been blocked by presidential order, and such action has generally been reserved for transactions in which the acquiror has significant ties to a foreign government that poses strategic concerns to the United States, and in which no feasible mitigation measures can address the identified risks.
In our assessment, a presidential block is highly unlikely in this case. HSAG is a publicly traded company incorporated in the Federal Republic of Germany, a NATO ally and close defense partner of the United States, with no direct or indirect ownership or control by the German government or any other foreign government. The national security concerns presented by this transaction — while substantive and requiring careful attention — are amenable to well-established mitigation structures (the NSA and SSA frameworks) that have been successfully employed in numerous prior semiconductor-sector transactions involving foreign acquirors from allied nations. We see no basis on the present record to anticipate a referral to the President.
D. Withdrawal and Refiling
The parties retain the right under the statute and regulations to withdraw the voluntary joint notice at any time and to refile at a later date. Withdrawal and refiling restarts the statutory clock — meaning that a new 45-day review period would commence upon acceptance of the refiled notice — and is sometimes used as a strategic tool to allow additional time for the negotiation of mitigation terms or to permit the parties to address CFIUS concerns before the investigation period expires.
We do not recommend withdrawal and refiling at this time. The investigation process is proceeding in an orderly fashion, and we believe the current timeline provides adequate time for productive engagement with CFIUS. However, this remains an available option if, at any point during the investigation, it becomes apparent that additional time would be beneficial to the parties — for example, if NSA negotiations are not yet complete when the investigation period draws to a close. We will continue to monitor the situation and will advise you promptly if our recommendation on this point changes.
V. Implications for Transaction Timeline
The initiation of the CFIUS investigation has direct implications for the anticipated closing timeline of the acquisition, which we summarize here.
As you are aware, the SPA provides that CFIUS clearance is a condition to the obligation of the parties to consummate the closing of the transaction (SPA §7.1(c)). Accordingly, closing cannot occur until CFIUS has either issued a clearance letter (with or without conditions) or the applicable waiting period has expired without CFIUS taking action.
The investigation period is expected to conclude on or about October 18, 2023. However, if — as we anticipate — CFIUS communicates preliminary national security concerns during the investigation and proposes the negotiation of a National Security Agreement, the CFIUS process will extend beyond the conclusion of the investigation period. The investigation period establishes the timeline for CFIUS's assessment of the transaction; the negotiation and execution of an NSA constitute a separate process that typically follows the Committee's formal identification of concerns and its determination that mitigation is the appropriate resolution.
Based on our experience with NSA negotiations in semiconductor-sector transactions, the period from CFIUS's initial communication of its proposed mitigation terms to the execution of a final, agreed-upon NSA typically requires eight to twelve weeks. This timeframe can vary depending on the complexity of the mitigation provisions, the number of agencies with equities in the negotiation, and the responsiveness of the parties.
Taking into account the investigation timeline and a reasonable estimate for NSA negotiation, our current best estimate for the completion of the full CFIUS process — from the current date through the execution of an NSA and the issuance of a final clearance letter — is Q4 2023 through early Q1 2024. We believe this timeline is consistent with the outside date provisions contained in the SPA and should not, based on our current assessment, require an amendment to the agreement's drop-dead date. We will, of course, continue to monitor the situation and will advise HSAG promptly if our estimate changes in any material respect.
We also wish to note that Wethersfield & Gale, representing VPI, has been fully informed of the initiation of the investigation. Harrison Whitfield has confirmed that VPI's management is aligned with a cooperative and proactive approach to the CFIUS process and is prepared to work collaboratively with HSAG and its counsel to facilitate a timely resolution.
VI. Recommended Approach and Next Steps
In light of the foregoing, we recommend that HSAG take the following steps in the coming weeks to position itself for a successful outcome in the CFIUS investigation.
A. Preparation for Additional Information Requests
As noted above, HSAG should anticipate receiving at least one additional Request for Information from CFIUS during the investigation phase, and should be prepared to respond promptly and thoroughly. Based on our assessment of the questions and feedback received during the review phase, we anticipate that the investigation-phase RFIs will focus on the following areas:
(1) VPI intellectual Property Transfer Risks. VPI holds a substantial portfolio of intellectual property in the fields of gallium nitride photonics, silicon carbide substrate engineering, and related semiconductor technologies. This portfolio includes forty-seven (47) granted U.S. patents and twelve (12) pending U.S. patent applications. Of particular significance, twenty-three (23) of the granted patents were funded in whole or in part by the U.S. government and are therefore subject to march-in rights under 35 U.S.C. § 203 (the Bayh-Dole Act). CFIUS is likely to probe the mechanisms by which HSAG intends to access and utilize VPI's intellectual property post-closing, and the controls that would be in place to prevent unauthorized transfer of controlled technology to non-U.S. persons.
(2) Supply Chain Dependencies. CFIUS is expected to examine the supply chain dependencies associated with VPI's GaN-on-SiC fabrication process, including the sourcing of raw materials, substrates, and critical fabrication equipment. The Committee may seek assurances regarding the continuity and security of the supply chain under HSAG's ownership, particularly with respect to single-source dependencies and any suppliers located in countries of concern.
(3) HSAG's Relationships with Non-Allied Foreign Governments. CFIUS will almost certainly return to the question of HSAG's China subsidiary — Halcyon Semiconductor (Shanghai) Co., Ltd. — which was disclosed in the supplemental materials filed on August 18, 2023. The Shanghai subsidiary generated $81.4 million in revenue in HSAG's most recent fiscal year, representing approximately 1.3% of HSAG's total consolidated revenue. While this is a relatively modest share of HSAG's overall business, CFIUS is likely to probe the nature and extent of the subsidiary's operations, its interactions with Chinese governmental entities, the presence of any Chinese Communist Party committees or other governmental influence mechanisms within the subsidiary, and the risk that VPI's technologies or information could be accessed through the HSAG-Shanghai connection.
(4) Post-Closing Personnel Continuity. CFIUS will likely seek detailed information regarding HSAG's plans for VPI's workforce post-closing, with particular focus on the 212 employees holding active security clearances and the continuity of key management personnel.
To ensure that HSAG is able to respond to RFIs quickly and comprehensively, Lt. Col. (Ret.) David Caruso and Priya Venkataraman of our national security practice are currently preparing anticipated Q&A materials on government contracts, facility security, and export control matters. These materials will be circulated to HSAG for review and input as soon as they are available.
We respectfully request that HSAG management ensure that key personnel — including Dr. Ehrhardt, Ms. Brückner, and relevant business unit leaders with knowledge of the topics identified above — remain available for potential in-person or virtual briefings with CFIUS agency staff on relatively short notice. The agencies may request such briefings at any time during the investigation period, and the ability to respond promptly and knowledgeably to such requests is an important signal of good faith and cooperation.
B. Proactive Mitigation Proposals
We strongly recommend that HSAG proactively engage with CFIUS to propose mitigation measures before CFIUS formally communicates its national security concerns and presents its own proposed mitigation terms. In our experience, proactive engagement offers several significant advantages.
First, proactive engagement signals good faith and a genuine willingness to address the U.S. government's national security interests, which can positively influence the tone and trajectory of the Committee's deliberations. Second, by putting forward a well-developed mitigation proposal early in the investigation, HSAG has the opportunity to shape the terms of any eventual NSA in ways that are more operationally workable and less burdensome than the terms that CFIUS might propose independently. CFIUS's initial proposals are typically conservative and reflect worst-case assumptions; a proactive acquiror proposal can demonstrate that meaningful mitigation is achievable with less intrusive measures.
We have been developing a comprehensive mitigation framework, as outlined in our earlier CFIUS Risk Assessment & Mitigation Strategy Memorandum, which includes proposed approaches to board restructuring, Technology Control Plan design, facility access protocols, and cybersecurity measures. We are prepared to finalize this framework for submission to CFIUS at the appropriate time during the investigation and would like to discuss the details of this proposal with Dr. Ehrhardt, Ms. Brückner, and you at the earliest opportunity.
In addition, we recommend coordination with Schilling Frey Rechtsanwälte — specifically Prof. Dr. Ulrich Schilling — regarding any implications that the anticipated NSA terms may have under German corporate governance law for HSAG as a publicly traded Aktiengesellschaft. Certain NSA provisions, such as the appointment of independent Security Board Members at the VPI subsidiary level and limitations on the flow of information from VPI to HSAG's management board (Vorstand) and supervisory board (Aufsichtsrat), may raise questions under the Aktiengesetz that should be identified and addressed proactively.
C. Internal Preparations
We further recommend that HSAG commence internal planning for compliance with the mitigation obligations that are likely to be imposed under an NSA. While these preparations are necessarily precautionary — and do not presuppose the final terms of any agreement — they will position HSAG to implement mitigation measures promptly if and when required, which is itself a favorable signal to CFIUS. Specifically, we recommend attention to the following:
(1) Board Designee Identification. HSAG should begin identifying potential candidates for designation to VPI's reconstituted board of directors, including at least two (2) positions that would be filled by HSAG-designated directors (as distinguished from the independent Security Board Members required by CFIUS). HSAG's designees should be individuals with appropriate experience in defense or semiconductor industries and, ideally, should hold or be eligible to hold U.S. security clearances.
(2) Budget Planning for Compliance Monitor. HSAG should incorporate the estimated cost of the third-party compliance monitor into its budget planning for the acquisition. Based on precedent in comparable transactions, we estimate these costs at approximately $1.2 million per annum, though the actual amount will depend on the scope of the monitor's mandate and the complexity of VPI's operations.
(3) IT Architecture Planning. HSAG's information technology team should begin assessing the architecture required to achieve full segregation of VPI's IT systems and networks from HSAG's global corporate network. This is likely to be one of the most technically complex and costly aspects of NSA compliance, and early planning will be essential to achieving segregation within the timeframes that CFIUS will likely require.
(4) Personnel Access Protocols. HSAG should assess which of its personnel would need to interact with VPI's operations post-closing — for operational, financial, or strategic purposes — and begin developing protocols for managing access restrictions applicable to non-U.S. persons and individuals without appropriate security clearances.
D. Coordination with VPI and Seller's Counsel
Continued close coordination between HSAG's counsel and VPI's counsel will be essential throughout the investigation phase. Consistent and complete responses to CFIUS inquiries are critical to the Committee's assessment, and any inconsistencies between the parties' submissions could raise concerns and delay the process.
We will continue to work in close collaboration with Harrison Whitfield and Tobias Kwan of Wethersfield & Gale LLP on all aspects of the CFIUS proceeding. On the VPI side, Col. (Ret.) Bryce Hendrickson, VPI's Facility Security Officer, who holds a TS/SCI security clearance, will play a particularly critical role in providing information to CFIUS regarding VPI's classified programs, facility security clearance, and NISP compliance. Dr. Nathan Trevorrow and Marissa Sung-Avila should also remain available for direct engagement with CFIUS agencies as needed.
E. Confidentiality
We wish to remind HSAG that all communications with CFIUS, including the content of the parties' notice, supplemental filings, RFIs, and CFIUS's responses, are confidential and subject to statutory restrictions on disclosure under 50 U.S.C. § 4565(c). These restrictions apply to all parties to the transaction, their officers, directors, employees, and advisors.
HSAG should not make any public statements regarding the CFIUS process, the investigation, the substance of any communications with the Committee, or the status of CFIUS clearance, without prior coordination with and approval by Calderwood & Harkness. This restriction applies to all forms of public communication, including press releases, investor presentations, analyst calls, and social media.
We recognize that HSAG, as a publicly traded company listed on the Frankfurt Stock Exchange and traded on XETRA, may be subject to disclosure obligations under applicable German and European securities regulations. Any required public disclosures — including ad hoc disclosures under the Market Abuse Regulation (EU) No. 596/2014 — should be reviewed by both Calderwood & Harkness and Schilling Frey Rechtsanwälte before release, to ensure compliance with both U.S. and German/EU law and to avoid any inadvertent violation of the CFIUS confidentiality provisions.
VII. Fee and Budget Update
For your information and that of HSAG's financial management, we provide the following update on the matter budget.
The engagement remains within the phased budget previously agreed upon by the parties:
Fees are being applied against the $250,000 retainer previously provided by HSAG. Monthly invoices are being issued and directed to the attention of Billing Partner James Prentice at Calderwood & Harkness LLP. The overall CFIUS engagement fee cap of $3,800,000 (exclusive of disbursements) remains in effect.
Should the NSA negotiation process prove extended or particularly complex — for example, if multiple agencies insist on customized provisions or if the scope of the Technology Control Plan requires extensive technical analysis — we will provide HSAG with an updated budget estimate at the earliest practicable time. Based on our current assessment, however, we anticipate remaining within the agreed fee cap.
VIII. Conclusion and Availability
In closing, we wish to reassure HSAG that the initiation of a CFIUS investigation is a standard and expected procedural step in a transaction of this nature. This is particularly so for a transaction involving a target company that maintains classified defense programs, produces ITAR- and EAR-controlled technologies, holds a facility security clearance under the NISP, and is being acquired by a foreign purchaser. The vast majority of notified transactions involving these characteristics proceed through the investigation phase, and the initiation of an investigation is not indicative of an adverse outcome.
To be clear: the Committee's decision to investigate does not constitute an adverse finding, a negative determination, or a judgment that the transaction poses unacceptable national security risks. It simply means that CFIUS requires additional time to complete its analysis and, in all likelihood, to negotiate appropriate mitigation measures through the NSA framework.
We remain confident that this transaction is well-suited for resolution through a National Security Agreement. The concerns implicated by VPI's business, while substantial, are of a type that has been successfully mitigated in numerous prior transactions in the semiconductor and defense sectors, including several in which members of our team have directly participated. HSAG's profile as a publicly traded company from an allied NATO nation, with no government ownership and a strong record of regulatory compliance, further supports a constructive outcome.
We would welcome the opportunity to schedule a call or video conference with Dr. Ehrhardt, Ms. Brückner, and you to discuss the investigation, the anticipated timeline, and the recommended next steps in further detail at HSAG's earliest convenience. Given the time-sensitive nature of the investigation period, we would suggest scheduling this discussion within the next five to seven business days, if possible.
Peggy Ashworth and David Caruso are available at our Washington, D.C. office at 1750 K Street NW, Suite 800. Beatrice Holloway is available at the New York office at 399 Park Avenue, 31st Floor. Please do not hesitate to contact either of us directly at the numbers and email addresses provided below.
We appreciate your confidence in Calderwood & Harkness, and we look forward to continuing to work with you and HSAG's management team to bring this matter to a successful conclusion.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Beatrice Holloway Partner, Mergers & Acquisitions Tel: (212) 848-6127
Email: bholloway@calderwoodharkness.com
By: ________
Margaret "Peggy" Ashworth Of Counsel, National Security & CFIUS Tel: (202) 551-7044
Email: mashworth@calderwoodharkness.com
cc: Dr. Maximilian Ehrhardt, Chief Executive Officer, Halcyon Semiconductor AG cc: Katarina Brückner, Chief Financial Officer, Halcyon Semiconductor AG cc: Prof. Dr. Ulrich Schilling, Schilling Frey Rechtsanwälte (German counsel to HSAG) cc: James Prentice, Calderwood & Harkness LLP (Billing Partner)
Enclosures: None (all referenced documents previously provided)
Phase | Budget | Status
Pre-filing consultation phase | $420,000 | Completed — at budget
Notice preparation phase | $680,000 | Completed — at budget
Review/investigation phase | $1,100,000 | Currently in progress

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