PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT / ATTORNEY-CLIENT COMMUNICATION
This memorandum is a privileged and confidential attorney-client communication and attorney work product prepared in anticipation of litigation and for the purpose of rendering legal advice. This document is not to be disclosed to any person or entity outside of the attorney-client relationship without the prior written consent of Calderwood & Harkness LLP. Inadvertent disclosure does not constitute a waiver of any applicable privilege.
MEMORANDUM
November 12, 2023
FROM: Margaret "Peggy" Ashworth, Of Counsel National Security & CFIUS Practice Calderwood & Harkness LLP 1750 K Street NW, Suite 800 Washington, DC 20006
Lt. Col. (Ret.) David Caruso, Senior Counsel Government Contracts & Export Controls Practice Calderwood & Harkness LLP 1750 K Street NW, Suite 800 Washington, DC 20006
TO: Stefan Lohse, General Counsel (Chefjustitiar) Halcyon Semiconductor Aktiengesellschaft
Beatrice Holloway, Responsible Partner Mergers & Acquisitions Practice Calderwood & Harkness LLP 399 Park Avenue, 31st Floor New York, NY 10022
CC: Kenneth Morales, Associate, Corporate/M&A Calderwood & Harkness LLP (New York)
Priya Venkataraman, Associate, International Trade & Sanctions Calderwood & Harkness LLP (Washington, DC)
RE: Board Governance Provisions — Draft National Security Agreement (NSA-2024-0019), CFIUS Case No. CFIUS-023-07-3841 — Halcyon Semiconductor AG Acquisition of Marlowe Asset Management Photonics Inc.
Matter No.: 1032-00004
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I. Executive Summary
This memorandum analyzes and advises on the board governance provisions contained in the initial draft National Security Agreement ("NSA" or "Agreement"), designated NSA-2024-0019, circulated by the Committee on Foreign Investment in the United States ("CFIUS") on November 3, 2023, in connection with Halcyon Semiconductor Aktiengesellschaft's ("HSAG") proposed acquisition of one hundred percent (100%) of the outstanding equity interests in Marlowe Asset Management Photonics Inc. ("VPI") for an aggregate purchase price of $1.42 billion (the "Transaction"). The board governance provisions represent one of the most consequential elements of the draft NSA, and their proper structuring will directly impact HSAG's ability to exercise meaningful commercial oversight of VPI following the closing of the Transaction while ensuring full compliance with U.S. national security requirements.
CFIUS Preliminary National Security Concerns. On October 20, 2023, CFIUS communicated four preliminary national security concerns arising from the Transaction. The board governance provisions addressed in this memorandum are central to mitigating Concern #1, which relates to the risk of foreign access to VPI's classified defense programs and associated sensitive technologies, and Concern #4, which addresses the continuity and reliability of VPI's position as a critical supplier within the Department of Defense supply chain for gallium nitride-based semiconductor components. The governance framework in the draft NSA is designed to ensure that VPI's classified operations, personnel security functions, and defense-related activities remain under the exclusive control of U.S. persons who hold appropriate security clearances and who are insulated from foreign ownership influence.
Transaction Structure. As a structural matter, HSAG (a publicly traded German Aktiengesellschaft listed on the Frankfurt Stock Exchange, XETRA ticker symbol: HLC, ISIN DE000HLC0019, most recent market capitalization approximately €8.7 billion) is acquiring VPI through its wholly owned Delaware acquisition vehicle, Halcyon US Holdings Inc. ("Halcyon US Holdings"), a Delaware corporation formed on June 5, 2023 (EIN 93-2841067), for the sole purpose of effectuating the Transaction. Halcyon US Holdings will serve as the direct parent entity of VPI post-closing and will be the signatory on the NSA alongside HSAG and VPI.
VPI Profile. VPI's profile presents several features that are directly relevant to the governance analysis. VPI is a Delaware C-corporation, incorporated on February 14, 2009, with its principal executive offices located at 7400 Ridgeline Parkway, Colorado Springs, Colorado 80919. VPI's primary fabrication facility (the "Albuquerque Fab") is located at 9200 Innovation Boulevard, Albuquerque, New Mexico 87113. The Albuquerque Fab is a state-of-the-art 45,000 square-foot gallium nitride on silicon carbide (GaN-on-SiC) fabrication facility. VPI holds a Facility Security Clearance ("FCL") at the SECRET level, assigned CAGE Code 7VK92, administered by the Defense Counterintelligence and Security Agency ("DCSA"). VPI currently employs 486 individuals, of whom 212 hold active U.S. government security clearances at various levels (approximately 43.6% of the total workforce). VPI maintains 14 active contracts with the Department of Defense and other U.S. government agencies, with an aggregate backlog of approximately $193 million. VPI's product portfolio includes items classified as defense articles under International Traffic in Arms Regulations ("ITAR") Category XI(a)(3) and dual-use components classified under Export Administration Regulations ("EAR") Export Control Classification Number ("ECCN") 3A001. VPI holds a portfolio of 47 U.S. patents, of which 23 were developed with U.S. government funding and are accordingly subject to government use rights under the Bayh-Dole Act and applicable contract clauses.
Summary of Recommendation. Based on our analysis of the draft NSA, precedent NSAs in the semiconductor sector, applicable legal authorities including the Defense Federal Acquisition Regulation Supplement ("DFARS"), the National Industrial Security Program Operating Manual ("NISPOM," 32 C.F.R. Part 117), and the Foreign Ownership, Control, or Influence ("FOCI") mitigation framework administered by DCSA, we recommend that HSAG accept the fundamental five-member board structure proposed in the draft NSA — comprising three Security Board Members and two HSAG Designees — as well as the Government Security Committee ("GSC") framework. This structure is consistent with established CFIUS precedent and is necessary to maintain VPI's FCL and FOCI mitigation compliance. However, we recommend that HSAG seek targeted but meaningful modifications to preserve its legitimate commercial oversight interests, particularly with respect to: (i) unclassified commercial operations at the Albuquerque Fab; (ii) financial reporting and transparency; (iii) capital allocation decisions affecting dual-use facilities and operations; and (iv) the delineation of authority between the GSC and the full board for "dual-character" decisions that implicate both security and commercial considerations.
Cross-References. This memorandum should be read in conjunction with the following related memoranda prepared by Calderwood & Harkness LLP in connection with the Transaction: (i) the NSA Negotiation Strategy Memorandum, dated November 6, 2023, identifying eight priority negotiation issues; (ii) the Technology Control Plan ("TCP") Requirements Memorandum, dated November 8, 2023; (iii) the Monitor Selection & Scope Memorandum, dated November 10, 2023; and (iv) the NSA Issues Matrix, circulated to the deal team on November 7, 2023 and updated on a rolling basis.
II. Current VPI Board Composition (Pre-Closing)
To provide context for the NSA's post-closing governance requirements, it is useful to summarize VPI's existing board composition and ownership structure. As of the date of this memorandum, VPI's board of directors consists of five members, as follows:
1. Dr. Nathan Trevorrow — Founder, Chief Executive Officer, and Chairman of the Board. Dr. Trevorrow co-founded VPI in 2009 and has served as its CEO and Board Chair since inception. He holds an active TS/SCI security clearance and is intimately involved in VPI's most sensitive classified programs, including programs conducted on behalf of the Missile Defense Agency. Dr. Trevorrow holds a Ph.D. in Electrical Engineering from the Georgia Institute of Technology and is a named inventor on 19 of VPI's 47 U.S. patents. His continued leadership of VPI is a central element of the NSA's personnel continuity provisions, as discussed further below.
2. Marissa Sung-Avila — President and Chief Operating Officer. Ms. Sung-Avila joined VPI in 2012 and has served as President and COO since 2018. She holds an active SECRET security clearance and oversees VPI's day-to-day operations at both the Colorado Springs headquarters and the Albuquerque Fab. Ms. Sung-Avila holds an M.B.A. from the Wharton School at the University of Pennsylvania and a B.S. in Materials Science from MIT. Like Dr. Trevorrow, she is identified as key personnel in the NSA's personnel continuity provisions.
3. Franklin Yee — Board member designated by Ridgecrest Ventures Fund III, L.P., which holds approximately 31.7% of VPI's outstanding equity. Mr. Yee is the Managing Partner of Ridgecrest Ventures Management LLC, the general partner and investment advisor to Ridgecrest Ventures Fund III, with offices at 3300 Sand Hill Road, Suite 220, Menlo Park, California 94025. Mr. Yee does not hold a security clearance and does not have access to VPI's classified information or classified facilities. His board role has been focused on financial oversight, capital allocation, and strategic direction for VPI's commercial product lines.
4. Olivia Hartmann — Board member designated by Cascadian Capital Partners Growth Fund II, L.P., which holds approximately 24.3% of VPI's outstanding equity. Ms. Hartmann is a Managing Director of Cascadian Capital Partners Management LLC, the general partner and investment advisor to Cascadian Capital Partners Growth Fund II, with offices at 1201 Third Avenue, Suite 4400, Seattle, Washington 98101. Like Mr. Yee, Ms. Hartmann does not hold a security clearance and does not participate in decisions relating to VPI's classified operations or defense programs. Her involvement has primarily focused on financial performance, growth strategy, and exit planning.
5. Adrienne Delacroix — Independent Director. Ms. Delacroix has served as an independent member of VPI's board since 2019. She holds an active SECRET security clearance and brings extensive experience in defense-sector corporate governance, having previously served on the boards of two other defense contractors and as a senior official at the Department of Homeland Security. Ms. Delacroix satisfies the independence requirements under the current VPI corporate governance guidelines and has no prior employment or business relationship with HSAG or its affiliates.
Clearance Summary. Under VPI's current board composition, three of the five directors hold active security clearances: Dr. Trevorrow (TS/SCI), Ms. Sung-Avila (SECRET), and Ms. Delacroix (SECRET). The two investor-designated directors (Mr. Yee and Ms. Hartmann) do not hold clearances and have operated under information barriers with respect to VPI's classified programs and ITAR-controlled activities throughout their tenure.
Post-Closing Board Transition. Upon closing of the Transaction, Ridgecrest Ventures Fund III, L.P. and Cascadian Capital Partners Growth Fund II, L.P. will each sell their respective equity interests in VPI to Halcyon US Holdings. Mr. Yee and Ms. Hartmann, as designees of the selling shareholders, will resign from VPI's board effective as of the closing date. Their departure necessitates the board reconstitution described in the following sections of this memorandum. The resignation of these directors has been addressed in the Stock Purchase Agreement (Section 2.4(b)) and the related board resignation letter forms attached thereto.
III. NSA-Required Post-Closing Board Reconstitution
A. Five-Member Board Structure
The draft NSA requires the full reconstitution of VPI's board of directors effective upon closing of the Transaction. As set forth in NSA Section 5.1, the reconstituted board must consist of exactly five (5) members, allocated as follows: three (3) "Security Board Members" and two (2) "HSAG Designees." This structure ensures that U.S.-person board members with appropriate security clearances constitute a majority of VPI's board at all times, consistent with the FOCI mitigation objectives of the NSA and the DCSA's requirements for maintenance of VPI's FCL.
The five-member board structure is consistent with NSA precedent in the semiconductor and defense technology sectors. Calderwood & Harkness's Comparative NSA Precedent Analysis, which surveyed twelve (12) recent NSAs executed between 2019 and 2023 in connection with acquisitions of U.S. semiconductor and defense electronics companies by foreign acquirers, found that board sizes in comparable transactions ranged from five to seven members. In all twelve surveyed NSAs, Security Board Members (or their equivalent) constituted a majority of the board. The three-to-two split proposed in the draft NSA represents the most common configuration in the surveyed precedents for a five-member board structure.
B. Security Board Member Qualifications
NSA Section 5.2 establishes the qualifications that each Security Board Member must satisfy. Each Security Board Member must:
1. Be a citizen of the United States of America, whether by birth or through naturalization;
2. Hold, or be eligible to obtain within a reasonable time following appointment, a security clearance at the TOP SECRET / SENSITIVE COMPARTMENTED INFORMATION (TS/SCI) level granted by the U.S. government;
3. Not be, and not have been within the preceding twelve (12) months, an officer, director, employee, consultant, or agent of HSAG or any non-U.S. affiliate, subsidiary, or parent entity of HSAG, including but not limited to Halcyon Semiconductor GmbH (Munich), Halcyon Asia-Pacific Pte. Ltd. (Singapore), and Halcyon Semiconductor K.K. (Tokyo);
4. Have no financial interest in HSAG or any non-U.S. affiliate of HSAG, other than arm's-length compensation received for board service at VPI, which compensation must be disclosed to the CFIUS monitoring agencies; and
5. Be approved by CFIUS — specifically by the Department of Defense ("DoD") and the Department of Energy ("DOE"), acting as the co-lead agencies for this Transaction — prior to formal appointment to VPI's board. The approval process includes both a background investigation and a substantive assessment of the nominee's qualifications and independence.
Analysis. The requirement that all three Security Board Members hold or be eligible for TS/SCI clearances is more restrictive than some precedent NSAs, which have required only SECRET-level clearance eligibility for Security Board Members. However, given VPI's classified contract portfolio — which includes programs conducted at the TS/SCI level, particularly those undertaken on behalf of the Missile Defense Agency and certain Air Force Research Laboratory programs — the TS/SCI requirement appears justified and proportionate. Both Col. (Ret.) Bryce Hendrickson (VPI's Vice President of Government Programs and Facility Security Officer) and Dr. Trevorrow currently hold active TS/SCI clearances and participate in VPI's most sensitive programs at that classification level. Approximately 40% of the NSAs surveyed in our Comparative NSA Precedent Analysis imposed a TS/SCI requirement where the target company maintained TS/SCI-level contracts. Accordingly, we do not recommend contesting this qualification requirement in the NSA negotiations.
The prohibition on prior HSAG affiliation (qualification (3) above) is broadly drafted. We note that the twelve-month look-back period is shorter than the five-year look-back applicable to the Independent Security Director (discussed in Section III.C below), reflecting an appropriate tiering of independence requirements.
C. Independent Security Director Requirement
NSA Section 5.3 introduces a distinctive governance element: the requirement that one of the three Security Board Members serve in the designated role of "Independent Security Director." The Independent Security Director must satisfy all of the Security Board Member qualifications set forth in Section 5.2 (and discussed in Section III.B above), plus the following additional requirements:
1. The Independent Security Director must not have had any employment, consulting, advisory, or board relationship with HSAG, VPI, or any of their respective affiliates, subsidiaries, parent entities, or predecessors within the five (5) years preceding the date of appointment;
2. The Independent Security Director must possess substantial professional experience in one or more of the following domains: U.S. national security policy, defense contracting and acquisition, intelligence community operations, or military service at a senior level (defined in the draft NSA as O-7/GS-15 equivalent or above); and
3. The Independent Security Director must be nominated jointly by the other two Security Board Members and must receive the written approval of the CFIUS monitoring agencies — specifically DCSA, the Department of the Treasury, DoD, and DOE — before assuming the role.
The Independent Security Director is designated under the draft NSA as the permanent chair of the Government Security Committee (discussed in detail in Section IV below). In this capacity, the Independent Security Director serves as the primary point of contact between VPI's board and the CFIUS monitoring agencies on all governance and security matters.
Analysis. The Independent Security Director role is the most novel element of the governance structure in the draft NSA and merits careful attention. While all twelve NSAs in our precedent survey required some form of independent security-focused board leadership, the specific designation of an "Independent Security Director" with the combined qualifications and appointment procedures set forth in the draft NSA is more formalized and prescriptive than the approach taken in the majority of those precedent agreements. Several precedent NSAs achieved a similar result through a less formalized "Lead Independent Director" or "Security Committee Chair" designation without the same level of procedural specificity for appointment and approval.
Notwithstanding the novelty of the formalized approach, we recommend that HSAG accept this requirement, as it serves the legitimate purpose of ensuring that at least one member of VPI's board is wholly independent of both the acquirer and the target, providing a credible point of accountability for CFIUS and DCSA oversight. The selection of a suitable candidate for this role will require early and proactive coordination with CFIUS. Based on our experience with similar appointments in other NSA contexts, the typical profile for an Independent Security Director is a retired senior military officer (typically at the two-star general/flag officer level or above), a former senior intelligence community official (such as a former Deputy Director or Associate Director of a member agency of the intelligence Community), or a former senior civilian official at the Department of Defense with experience in defense acquisition or technology security. HSAG should begin identifying potential candidates promptly, as the CFIUS approval process for such appointments can take four to eight weeks.
D. Proposed Security Board Member Nominees
Based on VPI's current personnel and board composition, and in light of the qualification requirements set forth in the draft NSA, we have identified the following proposed nominees for the Security Board Member positions:
1. Col. (Ret.) Bryce Hendrickson — Proposed Security Board Member (Nominee #1)
Col. Hendrickson currently serves as VPI's Vice President of Government Programs and Facility Security Officer ("FSO"). He is a retired U.S. Air Force Colonel with over 28 years of military service, including extensive experience in defense acquisition, classified program management, and industrial security administration. Col. Hendrickson holds an active TS/SCI security clearance. He is a U.S. citizen by birth. He has no employment, consulting, or board relationship with HSAG or any HSAG affiliate, and he holds no financial interest in HSAG. Col. Hendrickson satisfies all Security Board Member qualifications set forth in NSA Section 5.2.
Col. Hendrickson's appointment to VPI's reconstituted board is critical for several reasons. First, he is essential for ensuring continuity of VPI's classified programs and ongoing relationships with DoD program offices, particularly the Army's Program Executive Office for intelligence, Electronic Warfare, and Sensors ("PEO IEW&S"), the Air Force Research Laboratory ("AFRL"), and the Missile Defense Agency ("MDA"). Second, as VPI's current FSO, he is the individual primarily responsible for VPI's FCL administration, personnel security clearance processing, and classified information handling procedures. The NSA's personnel continuity provisions (Section 8.1) independently require that Col. Hendrickson remain employed by VPI for a minimum of twenty-four (24) months following the closing, with any replacement requiring approval by both the GSC and DCSA.
Col. Hendrickson's dual role as both a VPI officer (VP Government Programs / FSO) and a Security Board Member is permissible under the draft NSA, which does not prohibit VPI employees from serving as Security Board Members. Indeed, the combination of operational and governance responsibilities in a single individual is a feature of many precedent NSAs, where the target company's FSO or senior cleared officer serves on the reconstituted board.
2. Adrienne Delacroix — Proposed Security Board Member (Nominee #2)
Ms. Delacroix currently serves as an Independent Director on VPI's pre-closing board. She holds an active SECRET security clearance. Under the draft NSA's qualifications, she would need to hold or be eligible to obtain a TS/SCI clearance. Based on our preliminary assessment, Ms. Delacroix's background and current SECRET clearance status suggest that she would be eligible for a TS/SCI upgrade, though this will need to be confirmed through the appropriate adjudication process. Ms. Delacroix is a U.S. citizen by birth. She has no employment, consulting, or board relationship with HSAG or any HSAG affiliate, and she holds no financial interest in HSAG. She satisfies the independence criteria applicable to Security Board Members.
Ms. Delacroix's continued service on VPI's board provides valuable governance continuity through the transition to HSAG ownership. Her familiarity with VPI's operations, board practices, and compliance history will be beneficial in the critical post-closing period. However, we note that if Ms. Delacroix is nominated as a Security Board Member (rather than as the Independent Security Director), the five-year look-back requirement applicable to the Independent Security Director would not apply to her, notwithstanding the fact that she has served on VPI's pre-closing board. This is because the five-year look-back applies only to the Independent Security Director position and covers relationships with both HSAG and VPI.
3. Independent Security Director — To Be Identified (Nominee #3)
The Independent Security Director must be a new appointee who satisfies the enhanced independence and experience requirements of NSA Section 5.3. This individual must have had no employment, consulting, advisory, or board relationship with either HSAG or VPI (or their respective affiliates) within the preceding five years. As discussed above, this position typically requires a retired senior military officer or former senior intelligence community official.
HSAG should work with CFIUS to identify acceptable candidates for this role. Calderwood & Harkness maintains a roster of individuals who have served in comparable roles under prior NSAs and who may be suitable candidates for this appointment. We recommend that the identification and vetting process begin immediately, with a target of identifying at least two qualified candidates by December 1, 2023, in order to preserve the overall Transaction timeline.
Management as Board Members. We note that Dr. Nathan Trevorrow (who holds TS/SCI clearance) and Marissa Sung-Avila (who holds SECRET clearance) are members of VPI's current management team and could, in principle, serve as Security Board Members under the draft NSA's qualifications. However, the NSA's personnel continuity provisions (Section 8.1) require that Dr. Trevorrow and Ms. Sung-Avila remain employed as VPI's CEO and President/COO, respectively, for a minimum of twenty-four months post-closing. Dual service as both officers and board members is not prohibited by the draft NSA, but may create practical complications — particularly if management-board conflicts arise during the post-closing integration period. Whether Dr. Trevorrow or Ms. Sung-Avila should serve in dual roles as both officers and Security Board Members requires further discussion with CFIUS and will depend in part on whether the Independent Security Director can be identified and approved in a timely manner.
C&H's Proposed Letter to CFIUS. Calderwood & Harkness is preparing a formal letter to CFIUS proposing the Security Board Member nominees. The letter will specifically identify Col. (Ret.) Bryce Hendrickson and Adrienne Delacroix as proposed Security Board Members, along with a proposed Independent Security Director candidate once identified. The letter will include detailed biographical information, clearance histories, and certifications of independence for each nominee.
E. HSAG Designees — Qualifications and Restrictions
Under NSA Section 5.4, HSAG has the right to designate two (2) members of VPI's reconstituted board (the "HSAG Designees"). Unlike Security Board Members, HSAG Designees are not required to be U.S. citizens and are not required to hold or obtain U.S. government security clearances. This flexibility permits HSAG to appoint senior executives from its own organization or from its U.S. subsidiary, Halcyon US Inc., who can provide the commercial, financial, and strategic oversight that HSAG requires as VPI's sole shareholder and a company that has invested $1.42 billion in the acquisition.
However, the draft NSA imposes significant restrictions on the activities and access of HSAG Designees, as follows:
1. HSAG Designees may not hold, access, receive, or be briefed on any classified national security information held, processed, or generated by VPI, including but not limited to classified contract specifications, classified technical data, classified performance reports, and any information classified at the CONFIDENTIAL, SECRET, or TOP SECRET levels;
2. HSAG Designees may not participate in, attend, or vote on any matter that falls within the exclusive jurisdiction of the Government Security Committee, as defined in NSA Section 6.2 (discussed in Section IV.B below);
3. HSAG Designees may not access VPI's classified facilities — specifically identified in the draft NSA as Sections C-7 through C-12 of the Albuquerque Fab — without prior written approval from both DCSA and the GSC, which approval may be withheld in the sole discretion of the GSC;
4. HSAG Designees may not receive, access, review, or possess any technical data controlled under ITAR (22 C.F.R. Parts 120–130) or any technology controlled under EAR (15 C.F.R. Parts 730–774) except as specifically permitted under the Technology Control Plan set forth in NSA Annex B and any applicable export licenses or license exceptions; and
5. Each HSAG Designee must be approved by CFIUS before assuming a board seat. The CFIUS approval process for HSAG Designees is limited to a background check and does not involve the full clearance investigation or substantive qualifications review applicable to Security Board Members. However, CFIUS retains the right to object to a proposed HSAG Designee on the basis of background check results.
Analysis. The restrictions imposed on HSAG Designees are consistent with the standard SSA-equivalent governance framework applied in prior NSAs involving foreign acquisitions of cleared U.S. defense contractors. The restrictions serve the essential purpose of preventing foreign access to classified information and controlled technology through the governance channel while permitting the foreign acquirer to maintain meaningful oversight of its investment through board-level representation.
Recommended HSAG Designee Candidates. HSAG Designees should be individuals who possess the commercial, financial, and operational expertise necessary to provide effective oversight of VPI's unclassified business operations while understanding and respecting the boundaries imposed by the classified program and export control restrictions. Based on our understanding of HSAG's organizational structure, suitable candidates for the HSAG Designee positions could include:
• Stefan Lohse — General Counsel (Chefjustitiar) of HSAG. Mr. Lohse holds an LL.M. from Georgetown University Law Center and is admitted to practice in both New York and Germany. Notably, Mr. Lohse holds dual German and U.S. citizenship, which, while not required for an HSAG Designee, would provide certain practical advantages in the context of the NSA's information access framework — specifically, as a U.S. person under ITAR and EAR, Mr. Lohse would be eligible to access certain EAR-controlled (though not ITAR-controlled) technical data under the TCP, subject to GSC need-to-know determinations. Mr. Lohse's legal expertise and familiarity with the Transaction make him a strong candidate to bridge the governance requirements of the NSA with HSAG's broader corporate interests.
• A senior executive of Halcyon US Inc. — HSAG's existing U.S. subsidiary, located at 11501 Alterra Parkway, Suite 300, Austin, Texas 78758, operates as a fabless semiconductor design center with approximately 320 employees. A senior executive from Halcyon US Inc. would bring U.S.-based operational expertise and could serve as a practical liaison between VPI's commercial operations and HSAG's broader semiconductor business. The selection of such a designee would also signal HSAG's commitment to managing VPI through its U.S. platform, which may be viewed favorably by CFIUS.
We request HSAG's input on proposed HSAG Designee candidates by November 15, 2023, in order to initiate the CFIUS background check process in a timely manner.
IV. Government Security Committee (GSC)
A. Composition. NSA Section 6.1 establishes the Government Security Committee as a standing committee of VPI's board of directors, composed exclusively of the three (3) Security Board Members. The GSC is permanently chaired by the Independent Security Director, who serves as the committee's presiding officer and as the principal point of contact between the GSC and the CFIUS monitoring agencies.
The quorum requirements for GSC action are set forth in NSA Section 6.1(c): a quorum consists of two (2) of the three (3) Security Board Members, provided that the Independent Security Director is present at the meeting or has delegated his or her authority in writing to one of the other two Security Board Members for the specific meeting in question. This quorum provision ensures that the Independent Security Director retains a central role in GSC decision-making while providing operational flexibility in the event of the Independent Security Director's temporary unavailability.
HSAG Designees are explicitly excluded from all aspects of GSC operations. Specifically, NSA Section 6.1(d) provides that HSAG Designees may not: (i) serve as members of the GSC; (ii) attend GSC meetings, whether in person, by telephone, by video conference, or by any other means; (iii) receive, access, or review GSC meeting minutes, agendas, materials, or records; or (iv) receive any briefing or summary of GSC deliberations, except as provided in the GSC quarterly reporting provisions described in Section IV.D below.
B. Exclusive Authority of the GSC
The draft NSA grants the GSC exclusive and autonomous decision-making authority over a broad range of matters that CFIUS has determined to be directly relevant to the national security concerns identified in connection with the Transaction. NSA Section 6.2 enumerates the following categories of matters within the GSC's exclusive jurisdiction:
1. Classified Programs and Contracts. All decisions relating to VPI's classified programs and contracts with U.S. government agencies and their contractors, including but not limited to the fourteen (14) active Department of Defense contracts with aggregate backlog of approximately $193 million. These contracts include agreements with the U.S. Army Program Executive Office for intelligence, Electronic Warfare, and Sensors ("PEO IEW&S"); the Air Force Research Laboratory ("AFRL"); the Missile Defense Agency ("MDA"); the Naval Sea Systems Command ("NAVSEA"), under a subcontract to Ironclad Defense Systems Inc.; and the Department of Homeland Security Science and Technology Directorate ("DHS S&T"). The GSC has exclusive authority over all aspects of these contracts, including performance decisions, staffing allocations, proposal submissions, and contract modifications.
2. ITAR-Controlled Defense Article Activities. All decisions relating to VPI's activities involving defense articles controlled under ITAR Category XI(a)(3), including research, development, production, export, and related licensing matters. VPI currently holds three (3) active DSP-5 export licenses authorizing deliveries of ITAR-controlled defense articles to end-users in the United Kingdom and Australia. VPI is registered with the Directorate of Defense Trade Controls ("DDTC") under Registration Number M-24817. All matters relating to the maintenance of VPI's DDTC registration, the application for and management of export licenses, and the compliance with ITAR requirements fall within the GSC's exclusive authority.
3. Personnel Security Decisions. All decisions relating to personnel security, including the hiring, termination, reassignment, and compensation of employees who hold or require security clearances; the sponsorship of employees for initial or upgraded security clearances; the determination of access levels and need-to-know authorizations for classified information; and the reporting of adverse information or security incidents involving cleared personnel. As of the date of this memorandum, 212 of VPI's 486 employees (approximately 43.6%) hold active U.S. government security clearances and are subject to the GSC's exclusive authority with respect to the security aspects of their employment.
4. Facility Security Clearance Administration. All decisions relating to the maintenance, administration, and renewal of VPI's Facility Security Clearance at the SECRET level (CAGE Code 7VK92), including compliance with NISPOM requirements (32 C.F.R. Part 117), DCSA inspection preparation and response, and the establishment and enforcement of facility security procedures at the Albuquerque Fab.
5. Facility Security Officer Oversight. The appointment, supervision, evaluation, and, if necessary, replacement of VPI's Facility Security Officer. As discussed above, Col. (Ret.) Bryce Hendrickson currently serves as FSO and is required to remain in that position for a minimum of twenty-four months post-closing. The FSO reports to the GSC — not to VPI's CEO, HSAG, or the full board — on all security matters.
6. Cybersecurity Incident Response for Classified Systems. The management and direction of cybersecurity incident response activities involving VPI's classified information systems, including coordination with DCSA, the Department of Defense Cyber Crime Center ("DC3"), and other relevant government agencies. This authority encompasses both the initial response to suspected or confirmed cybersecurity incidents and the post-incident investigation, remediation, and reporting obligations.
7. Government and Monitor Engagement. All engagement and communication with DCSA, the CFIUS monitoring agencies (Treasury, DoD, DOE), and the third-party compliance monitor — Whitmore Compliance Group LLC (principal: Gerald Whitmore; office: 1300 Crystal Drive, Suite 710, Arlington, Virginia 22202) — on all security-related matters arising under the NSA. This includes the preparation of responses to monitoring agency inquiries, cooperation with compliance audits, and the submission of required reports and notifications.
8. New Classified or ITAR-Controlled Contracts. The approval of any new classified contract, classified subcontract, ITAR-controlled contract, or ITAR-controlled subcontract that VPI proposes to enter into following the closing of the Transaction. This provision ensures that VPI's expansion into new classified or defense-related work is subject to independent security oversight.
9. Facility Access Decisions. All decisions regarding access to VPI's classified facilities (identified as Sections C-7 through C-12 of the Albuquerque Fab) by any person who does not hold an active security clearance at the appropriate level, including HSAG personnel, HSAG Designees, visitors, and contractor personnel.
10. Technology Transfer Review. The review and approval of any proposed transfer, disclosure, or provision of access to VPI technical data, technology, or source code to any non-U.S. person, whether within or outside of VPI's organization, including transfers to HSAG personnel, HSAG affiliates, and third-party recipients. This authority is exercised in coordination with the Technology Control Plan (NSA Annex B).
C. Analysis of GSC Authority Scope
The scope of the GSC's exclusive authority as set forth in the draft NSA is broad and encompasses essentially all of VPI's government-facing and security-sensitive operations. In practical terms, the GSC will exercise autonomous decision-making authority over a substantial portion of VPI's revenue-generating activities, workforce, and physical facilities. This reflects CFIUS's determination that the breadth of VPI's classified and controlled activities requires a commensurately broad insulation mechanism.
Key Concern for HSAG. The most significant concern that the GSC authority provisions raise for HSAG relates to the scope of exclusive authority over personnel security decisions (covering approximately 43.6% of VPI's workforce) and classified contracts (representing the substantial majority of VPI's $193 million contract backlog). Taken together, these two categories of exclusive GSC authority substantially limit HSAG's ability to manage and direct VPI's core business operations through its two board designees. While HSAG can exercise full commercial and financial oversight of VPI's unclassified commercial operations — which represent a meaningful but minority portion of VPI's total revenue and workforce — the GSC's exclusive jurisdiction over classified programs and cleared personnel means that HSAG's practical influence over a substantial majority of VPI's operations will be limited to the information provided through GSC quarterly reports and full-board discussions of non-classified matters.
Dual-Character Decision Gap. A critical deficiency in the draft NSA is the absence of a clear protocol for decisions that have both security and commercial dimensions — what we term "dual-character" decisions. VPI's operations present numerous situations in which a single decision implicates both the GSC's security jurisdiction and the full board's commercial and financial jurisdiction. Examples include:
• Capital expenditures at the Albuquerque Fab that serve both classified production lines (within Sections C-7 through C-12) and unclassified commercial production. Upgrades to shared infrastructure — such as HVAC systems, power supply, clean room air handling, and wafer processing equipment — may serve dual purposes. Under the draft NSA as currently drafted, it is unclear whether such expenditures fall within the GSC's exclusive authority (because they relate to classified facilities), the full board's authority (because they involve capital allocation above the $5 million threshold), or both.
• Hiring of engineers who may initially work on unclassified commercial projects but who may subsequently need to be cleared for classified work. Under the draft NSA, hiring decisions for employees who require clearances fall within the GSC's exclusive authority, but the initial hiring of an engineer for unclassified work is not clearly classified as either a GSC-exclusive or a full-board matter.
• Bids on new government contracts that may involve both classified and unclassified work streams. The decision to pursue such a contract has significant commercial implications (revenue, resource allocation, capital investment) and security implications (classification level, clearance requirements, ITAR controls).
Recommendation. We recommend that HSAG negotiate for the inclusion of a clear and detailed protocol for dual-character decisions in the NSA. The proposed protocol would provide that dual-character decisions require the approval of both the GSC (with respect to the security aspects of the decision) and the full board (with respect to the commercial and financial aspects). Under this protocol, the GSC would have a veto right only with respect to those elements of the decision that directly implicate classified information, controlled technology, personnel security, or facility security. The full board — including the HSAG Designees — would retain authority over the commercial and financial dimensions of the decision. This approach balances the legitimate national security interests underlying the GSC's authority with HSAG's equally legitimate interest in exercising meaningful oversight of VPI's operations and protecting the value of its $1.42 billion investment.
D. GSC Reporting Obligations
NSA Section 6.4 establishes reporting obligations that the GSC must satisfy in order to provide the full board — including the HSAG Designees — with sufficient visibility into the GSC's activities, while safeguarding classified and controlled information. The reporting obligations include:
Quarterly Written Reports. The GSC must provide quarterly written reports to the full VPI board that address the non-classified aspects of the GSC's activities during the preceding quarter. These reports are required to include, at a minimum: (i) aggregate contract performance metrics (e.g., percentage of milestones met, aggregate revenue from classified contracts, overall contract health assessments) without disclosing classified contract details; (ii) headcount of cleared personnel, including new clearance sponsorships initiated and clearances terminated during the quarter; (iii) facility compliance status, including the results of any DCSA inspections or reviews; and (iv) a summary of any security incidents or NSA compliance issues, reported in sufficient detail to inform the full board without disclosing classified information. The quarterly reports are subject to review by the third-party compliance monitor before distribution to the full board.
Cooperation with Third-Party Monitor. The GSC must cooperate fully with Whitmore Compliance Group LLC in the conduct of its annual compliance audits and any ad hoc reviews initiated by the CFIUS monitoring agencies. This includes providing the monitor with access to GSC records, minutes, and materials; making GSC members available for interviews; and facilitating the monitor's access to VPI's classified and controlled facilities to the extent authorized by DCSA. Mr. Gerald Whitmore, the principal of Whitmore Compliance Group LLC, holds an active TS/SCI clearance and is authorized to access classified information for monitoring purposes.
Incident Notification. The GSC must notify DCSA and the CFIUS monitoring agencies within seventy-two (72) hours of any security incident, potential NSA violation, or governance-related compliance concern. This notification obligation runs to the GSC (through the Independent Security Director) and is separate from any notification obligations that VPI may have under its classified contracts, its NISPOM obligations, or other regulatory requirements.
V. Full Board Reserved Matters
A. Matters Requiring Full Board Approval
While the GSC exercises exclusive authority over security-related matters, the draft NSA reserves a defined set of corporate governance decisions to the full five-member board, ensuring that HSAG's two Designees participate in and vote on these matters alongside the three Security Board Members. NSA Section 7.1 identifies the following as full-board reserved matters:
1. Annual Operating Budget and Capital Expenditure Plan. Approval of VPI's annual operating budget and capital expenditure plan for each fiscal year, including allocations for both classified and unclassified operations (subject to the dual-character decision issue discussed in Section IV.C above).
2. Material Indebtedness. Authorization for VPI to incur indebtedness in excess of a specified threshold, set in the draft NSA at five million dollars ($5,000,000) in the aggregate at any one time outstanding. This threshold applies to borrowings, credit facilities, guarantees, and other forms of indebtedness, but excludes ordinary course trade payables and accrued liabilities.
3. Material Acquisitions and Divestitures. Approval of material acquisitions or divestitures of VPI assets, business units, or subsidiaries, subject to CFIUS pre-notification requirements. The draft NSA requires HSAG and VPI to provide CFIUS with at least thirty (30) days' advance written notice of any material change to VPI's business, including any proposed acquisition, divestiture, joint venture, or strategic alliance. CFIUS retains the right to review any such proposed transaction and to require modifications or additional mitigation measures.
4. Charter and Bylaw Amendments. Approval of any changes, amendments, or restatements of VPI's certificate of incorporation (as filed with the Delaware Secretary of State) or bylaws.
5. Dividends and Distributions. Declaration or payment of dividends, distributions, or other returns of capital to HSAG (through Halcyon US Holdings as VPI's direct shareholder). This provision ensures that HSAG's financial return on its investment is subject to full board oversight, including input from the Security Board Members on whether proposed distributions could adversely affect VPI's financial capacity to perform its classified contracts.
6. Appointment and Removal of Non-Security Officers. Appointment or removal of VPI's Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, and other officers whose roles are not exclusively related to security or classified programs. This provision is subject to an important qualification: the removal or replacement of any "Key Personnel" identified in the NSA's personnel continuity provisions — specifically, Dr. Nathan Trevorrow (CEO), Marissa Sung-Avila (President & COO), and Col. (Ret.) Bryce Hendrickson (VP Government Programs / FSO) — during the twenty-four (24) month post-closing period requires the prior approval of both the GSC and DCSA, regardless of whether the removal is otherwise within the full board's authority.
7. Material Commercial Contracts. Entry into material commercial (non-government) contracts, including supply agreements, customer contracts, technology licenses, and joint development agreements that exceed a specified dollar threshold or term (the draft NSA does not specify the precise thresholds for this category; this is a point for negotiation).
8. Material Litigation Decisions. Authorization of the commencement, settlement, or resolution of litigation, arbitration, or regulatory proceedings involving claims above a specified dollar threshold (the draft NSA references a threshold to be agreed; based on precedent, we anticipate this will be set in the range of $1 million to $5 million).
9. Audited Financial Statements. Approval of VPI's annual audited financial statements, prepared in accordance with U.S. GAAP and audited by VPI's independent registered public accounting firm, Arbor & Greenfield LLP (engagement partner: Joan Greenfield).
B. Analysis. The full-board reserved matters enumerated above preserve HSAG's legitimate interest in commercial and financial oversight of its $1.42 billion investment. The inclusion of budget approval, capital expenditure planning, indebtedness authorization, dividend declarations, and officer appointments within the full board's jurisdiction ensures that HSAG — through its two Designees — has a meaningful voice in the core financial and operational decisions that drive VPI's enterprise value.
However, the interaction between the full board's authority over capital expenditures and the GSC's exclusive authority over classified facilities and programs remains a significant point of ambiguity in the draft NSA. As discussed in Section IV.C above, capital expenditures at the Albuquerque Fab frequently serve dual purposes: a single equipment upgrade or facility improvement may enhance both classified production capacity (in Sections C-7 through C-12) and unclassified commercial production capacity. The draft NSA does not clearly delineate the allocation of authority for such expenditures, creating the potential for both jurisdictional disputes between the GSC and the full board and practical delays in the capital allocation process.
Recommendation. We recommend that HSAG negotiate for explicit carve-outs in the NSA confirming that HSAG Designees have full and unrestricted voting rights on all commercial and financial matters that do not involve classified information, ITAR-controlled technical data, or EAR-controlled technology. These carve-outs should be drafted with sufficient specificity to minimize the potential for jurisdictional ambiguity, particularly with respect to the dual-character decision categories identified above. In addition, HSAG should seek to establish defined dollar thresholds for the material litigation and material commercial contract categories (items 7 and 8 above), preferably at levels that ensure full board oversight of significant decisions without creating unnecessary administrative burden for routine operational matters.
VI. Interaction with FOCI Mitigation and Facility Security Clearance
A. SSA-Equivalent Treatment
The board governance provisions of the draft NSA are structured to function as a Special Security Agreement ("SSA") equivalent for purposes of the Defense Counterintelligence and Security Agency's Foreign Ownership, Control, or Influence ("FOCI") mitigation framework. Under the National Industrial Security Program Operating Manual ("NISPOM"), codified at 32 C.F.R. Part 117, a company that is subject to foreign ownership, control, or influence may be required to implement one of several FOCI mitigation instruments — including Board Resolutions, Special Security Agreements, Security Control Agreements, or Proxy Agreements — as a condition of obtaining or maintaining a Facility Security Clearance.
An SSA is the most commonly used FOCI mitigation instrument for foreign-owned companies that require access to classified information at the SECRET level (and, with additional safeguards, at higher levels). Under an SSA, the foreign-owned entity establishes a governance structure that insulates its classified operations from foreign influence through the appointment of cleared U.S.-person directors, the establishment of a government security committee, and the imposition of access restrictions on foreign-affiliated personnel. The NSA's board governance provisions — including the Security Board Member requirements, the GSC framework, and the access restrictions on HSAG Designees — satisfy all of the substantive requirements of an SSA, thereby eliminating the need for VPI to file a separate SSA with DCSA.
VPI's Facility Security Clearance at the SECRET level, assigned CAGE Code 7VK92, will be maintained under this SSA-equivalent framework. The transition from VPI's current FOCI-unmitigated status (as a domestically owned company with no foreign shareholders) to FOCI-mitigated status (as a foreign-owned subsidiary operating under an NSA with SSA-equivalent provisions) will require coordination with DCSA, including the submission of a post-closing notification and the completion of DCSA's review and approval of the reconstituted board and GSC. DCSA's approval is a condition to VPI's continued eligibility to perform classified contracts post-closing.
B. Role of the Facility Security Officer
Col. (Ret.) Bryce Hendrickson will continue to serve as VPI's Facility Security Officer following the closing of the Transaction. The FSO is the individual primarily responsible for the day-to-day administration of VPI's industrial security program, including:
• Maintenance and renewal of VPI's Facility Security Clearance;
• Processing of personnel security clearance applications, upgrades, and reinvestigations for VPI employees;
• Administration of classified information handling, storage, transmission, and destruction procedures;
• Coordination with DCSA on inspections, audits, and vulnerability assessments;
• Management of visitor access to VPI's classified facilities;
• Reporting of adverse information, security incidents, and suspicious contacts to DCSA;
• Ensuring compliance with NISPOM requirements and applicable contract security provisions.
Under the NSA, the FSO reports directly to the GSC — not to HSAG, Halcyon US Holdings, or VPI's CEO in his HSAG-designated capacity — on all security matters. This reporting structure is essential to ensure that the FSO's security responsibilities are insulated from foreign ownership influence. The FSO may continue to report to VPI's CEO on non-security operational matters (such as general administrative and human resources matters), but the GSC retains supervisory authority over all aspects of the FSO's security functions.
The NSA's personnel continuity provisions require that Col. Hendrickson remain employed as VPI's FSO for a minimum of twenty-four (24) months following the closing of the Transaction. During this period, Col. Hendrickson may not be terminated, reassigned, or have his FSO responsibilities reduced without the prior written approval of both the GSC and DCSA. Any successor FSO must be approved by the GSC and DCSA before assuming the role.
C. DCSA Coordination
Post-closing coordination with DCSA is a critical implementation requirement. The following DCSA-related actions must be completed in connection with the board reconstitution and GSC establishment:
1. Post-Closing DCSA Notification Letter. Within the timeframe specified in the NSA (typically five business days after closing), VPI must submit a formal notification to DCSA confirming: (a) the change in ownership from the pre-closing shareholders (Ridgecrest Ventures Fund III, L.P., Cascadian Capital Partners Growth Fund II, L.P., and other existing shareholders) to Halcyon US Holdings (as the direct parent) and HSAG (as the ultimate parent); (b) the NSA-based FOCI mitigation structure, including the composition of the reconstituted board and the GSC; (c) the identity of the continuing FSO (Col. Hendrickson); and (d) VPI's continued maintenance of its FCL at the SECRET level. Calderwood & Harkness will prepare a draft of this notification letter for VPI's review prior to closing.
2. DCSA Review and Approval. DCSA will review the post-closing notification and the governance structure established under the NSA to confirm that the FOCI mitigation measures are adequate to support VPI's continued FCL eligibility. This review process typically takes four to six weeks from the date of the notification submission. During this period, VPI's FCL status may be placed in a transitional or interim status, but VPI should be able to continue performing its existing classified contracts without interruption, subject to DCSA's concurrence.
3. Ongoing DCSA Monitoring. DCSA serves as one of the monitoring agencies under the NSA and will conduct periodic oversight of VPI's compliance with the governance provisions. DCSA's monitoring activities include annual security reviews, ad hoc inspections, and coordination with the third-party compliance monitor. Whitmore Compliance Group LLC (1300 Crystal Drive, Suite 710, Arlington, Virginia 22202) will serve as the primary point of contact for coordinating DCSA monitoring activities with VPI's governance structure.
VII. Restrictions on Information Flow to HSAG
The draft NSA establishes a comprehensive framework governing the flow of information from VPI to HSAG, Halcyon US Holdings, and other HSAG affiliates. This framework is designed to prevent unauthorized disclosure of classified information and controlled technology to foreign persons while preserving HSAG's ability to access unclassified business information necessary for financial and commercial oversight.
A. Classified Information
The information flow restrictions for classified information are absolute and admit no exceptions. NSA Section 9.1 provides that:
• HSAG personnel — including but not limited to HSAG officers, directors, employees, agents, consultants, and HSAG Designees serving on VPI's board — are absolutely and unconditionally prohibited from accessing any classified national security information held, processed, generated, or received by VPI, regardless of the classification level (CONFIDENTIAL, SECRET, or TOP SECRET) or the nature of the information;
• No classified information may be transmitted, communicated, discussed, referenced, or made available in any form — oral, written, electronic, or otherwise — in any communication between VPI and HSAG or its affiliates, including in board meetings, management reports, financial disclosures, integration planning documents, or any other corporate communication;
• GSC minutes, materials, and records that contain or reference classified information must be maintained separately from VPI's general corporate records and must not be distributed to, or accessible by, HSAG Designees, HSAG personnel, or any non-cleared person.
These restrictions are non-negotiable and reflect the fundamental requirements of the National Industrial Security Program and the applicable security classification guides. Violation of these restrictions would constitute both a material breach of the NSA (with the penalty consequences discussed in Section X below) and a potential criminal offense under 18 U.S.C. §§ 793–798 (the Espionage Act).
B. ITAR/EAR-Controlled Technical Data
Access to ITAR-controlled technical data and EAR-controlled technology by HSAG personnel is governed by the Technology Control Plan set forth in NSA Annex B, in coordination with applicable export control regulations.
ITAR-Controlled Defense Articles. VPI's products include defense articles classified under ITAR Category XI(a)(3), and VPI generates technical data related to these defense articles in the course of its design, manufacturing, and testing activities. Under ITAR (22 C.F.R. § 120.10), "technical data" includes information required for the design, development, production, manufacture, assembly, operation, repair, testing, maintenance, or modification of defense articles, including blueprints, drawings, engineering data, and software source code. The disclosure of ITAR-controlled technical data to any "foreign person" (defined under 22 C.F.R. § 120.16 to include any person who is not a U.S. citizen, U.S. national, lawful permanent resident, or protected individual) requires prior authorization from DDTC in the form of an export license (e.g., DSP-5) or an applicable exemption. The default rule under the NSA and TCP is that no ITA