CONFIDENTIAL — ATTORNEY WORK PRODUCT / ATTORNEY-CLIENT PRIVILEGED
CALDERWOOD & HARKNESS LLP
Review Comments and Mark-Up of Disclosure Schedules to the Agreement and Plan of Merger dated August 10, 2023
by and among
Halcyon Semiconductor Aktiengesellschaft, Halcyon Acquisition Sub, Inc., and Vectris Photonics, Inc.
Distribution:
Oliver Mackenzie — Partner, Calderwood & Harkness LLP Dr. Luisa Hartmann — General Counsel, Halcyon Semiconductor Aktiengesellschaft Markus Ellinger — Chief Financial Officer, Halcyon Semiconductor Aktiengesellschaft
Note: Certain comments contained herein are directed to Whitfield, Prager & Loomis LLP (Catherine Whitfield, lead partner), counsel to Vectris Photonics, Inc., for supplementation and clarification of the Disclosure Schedules. An external-facing version of this memorandum, redacted as appropriate to preserve attorney-client privilege, will be transmitted separately to WPL.
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I. INTRODUCTION AND OVERVIEW
This memorandum sets forth the review comments and mark-up of Calderwood & Harkness LLP ("C&H" or the "Firm") with respect to the Disclosure Schedules (the "Schedules") delivered by Vectris Photonics, Inc. ("Vectris" or the "Company") in connection with the Agreement and Plan of Merger (the "Merger Agreement"), dated as of August 10, 2023, by and among Halcyon Semiconductor Aktiengesellschaft ("Halcyon" or "Parent"), Halcyon Acquisition Sub, Inc. ("Merger Sub"), and Vectris. The Merger Agreement contemplates the acquisition of Vectris by Halcyon by means of a reverse triangular merger in which Merger Sub will merge with and into Vectris, with Vectris surviving as a wholly owned subsidiary of Halcyon (the "Merger").
Purpose. The Disclosure Schedules qualify the representations and warranties of Vectris set forth in Article III of the Merger Agreement. The Schedules serve as a critical component of the contractual framework, identifying exceptions to the Company's representations and establishing the factual baseline against which the accuracy of those representations will be measured at signing and, to the extent applicable, at closing. The adequacy and completeness of the Schedules bear directly on the allocation of risk between the parties, the scope of indemnification obligations, and the terms of the representations and warranties insurance policy being placed by Pinnacle Specialty Underwriters, Ltd.
Preparation and Delivery. The Schedules were prepared by Vectris management, principally Rebecca Lau, General Counsel and Corporate Secretary, and Julian Tate, Chief Financial Officer, with the assistance of Whitfield, Prager & Loomis LLP ("WPL"), counsel to Vectris. C&H received the initial draft Schedules on August 3, 2023. Revised Schedules incorporating certain updates and corrections were delivered by WPL on August 7, 2023. This mark-up reflects our review of the August 7 version of the Schedules (the "Reviewed Version").
Review Methodology. Our review was conducted by cross-referencing each Schedule against: (a) the findings and observations from our ongoing due diligence review of the Vectris virtual data room (VDR), which was opened on June 26, 2023, and which, as of the date of this memorandum, contains approximately 4,700 indexed documents; (b) publicly available information, including SEC filings, patent databases, and court dockets; (c) the specific representations and warranties of Vectris contained in the Merger Agreement; and (d) discussions with Halcyon management and advisors, including the financial advisor team at Ridgeline Partners LLP. We have also cross-referenced the Schedules against the findings contained in our Preliminary Due Diligence Memorandum dated July 14, 2023, and the IP Due Diligence Memorandum dated July 21, 2023 (prepared jointly with Howard Bellamy's technology transactions team), copies of which have been provided to the engagement team and to Dr. Luisa Hartmann and Markus Ellinger.
General Observations. Based on our review, the Schedules are substantially complete and reflect a good-faith effort by Vectris management and WPL to identify and disclose exceptions to the Article III representations. However, we have identified a number of gaps, inconsistencies, and areas requiring supplementation or clarification. Several of these items are categorized as Critical, meaning they must be resolved prior to the contemplated signing of the Merger Agreement on August 10, 2023. Others are categorized as High priority, meaning they should be resolved before signing if possible or, at minimum, flagged for post-signing supplementation pursuant to the Merger Agreement's schedule update mechanics. We have also identified various Medium and Low priority items that may be addressed on a somewhat more relaxed timeline but should nonetheless be resolved in a commercially reasonable time frame.
Commenting Convention. Throughout this memorandum, specific comments are identified with the notation "[C&H Comment]" followed by a priority designation:
• Critical — Must be resolved before signing on August 10, 2023. Failure to resolve may require revision of the Merger Agreement or delay of signing.
• High — Should be resolved before signing or addressed by written commitment to supplement within five (5) business days post-signing.
• Medium — Should be resolved pre- or post-signing in the ordinary course.
• Low — Informational or confirmatory; addressed at counsel's convenience.
This memorandum addresses the following Schedules in detail: Schedule 3.1 (Organization and Good Standing), Schedule 3.4 (Capitalization), Schedule 3.8 (Litigation), Schedule 3.10 (Intellectual Property), and Schedule 3.14 (Material Contracts). We also provide summary comments on Schedules 3.5 (Financial Statements), 3.9 (Tax Matters), 3.11 (Employee Matters), 3.12 (Compliance with Law), and 3.15 (Absence of Certain Changes).
II. SCHEDULE 3.1 — ORGANIZATION AND GOOD STANDING
II.A. Content of Schedule 3.1 as Delivered
Schedule 3.1 to the Merger Agreement, as delivered in the Reviewed Version, discloses the following organizational information regarding Vectris and its subsidiaries:
Vectris Photonics, Inc.
Vectris Photonics, Inc. is a corporation organized and existing under the General Corporation Law of the State of Delaware (the "DGCL"). The Company's Delaware Division of Corporations file number is 5918437. Vectris's registered agent in Delaware is Capitol Corporate Services, LLC, located at 800 N. King Street, Suite 400, Wilmington, DE 19801. The Company's principal executive offices are located at 4750 Ridgepoint Drive, Suite 300, San Jose, CA 95134.
Jurisdictions of Qualification. The Schedule lists the following jurisdictions in which Vectris is qualified to transact business as a foreign corporation:
1. Delaware (state of incorporation)
2. California
3. Texas
4. Oregon
5. Massachusetts
Subsidiaries. The Schedule lists the following direct or indirect subsidiaries of Vectris:
1. Vectris Photonics (Shanghai) Co., Ltd. — a wholly foreign-owned enterprise ("WFOE") organized under the laws of the People's Republic of China.
2. Vectris Photonics UK Limited — a private limited company organized under the laws of England and Wales.
3. Vectris Photonics GmbH — a limited liability company (Gesellschaft mit beschränkter Haftung) organized under the laws of the Federal Republic of Germany.
No additional information is provided with respect to the subsidiaries, such as registration numbers, dates of incorporation, registered addresses, or current good standing status.
II.B. C&H Comments on Schedule 3.1
[C&H Comment — Medium] Colorado Qualification. Schedule 3.1 lists five jurisdictions of foreign qualification (Delaware, California, Texas, Oregon, and Massachusetts), but does not include Colorado. Our due diligence review of documents in the corporate folder of the Vectris data room reveals that Vectris has maintained leased office space in Boulder, Colorado, which serves as a research and development laboratory. The existence of a physical office, employees, and ongoing business operations in Colorado would likely trigger foreign qualification requirements under the Colorado Revised Statutes. Failure to qualify as a foreign corporation in Colorado could subject Vectris to penalties, including the inability to maintain legal actions in Colorado state courts and the potential assessment of back taxes and fees.
Request: We request that WPL confirm with Vectris management whether a Colorado foreign qualification has been obtained and, if so, provide evidence of such qualification. If qualification has not been obtained, we request that WPL assess the exposure and advise whether qualification should be obtained prior to closing. This item should also be cross-referenced with the Boulder, CO lease listed in Schedule 3.14.
[C&H Comment — High] Subsidiary Organizational Details. Schedule 3.1 lists three foreign subsidiaries but fails to provide the organizational details required by Section 3.1(b) of the Merger Agreement, which requires the Company to disclose "the jurisdiction of organization, date of formation, and organizational identification number" of each subsidiary, together with confirmation that each subsidiary is duly organized, validly existing, and in good standing under the laws of its jurisdiction of organization.
Request: We request that WPL supplement Schedule 3.1 to include the following:
(a) Vectris Photonics (Shanghai) Co., Ltd.: The PRC business license number (统一社会信用代码), date of establishment, registered capital, and confirmation that the WFOE is in good standing with the relevant Administration for Market Regulation (AMR) and has obtained all necessary approvals from the Ministry of Commerce (MOFCOM) or its successors;
(b) Vectris Photonics UK Limited: The Companies House registration number, date of incorporation, registered office address, and a confirmation of good standing (or equivalent confirmation that the company is not subject to any strike-off proceedings or compulsory dissolution orders);
(c) Vectris Photonics GmbH: The commercial register (Handelsregister) number and court of registration (Registergericht), registered share capital (Stammkapital), date of formation, and registered office (Sitz).
For each subsidiary, we further request confirmation that Vectris holds one hundred percent (100%) of the outstanding equity interests, free and clear of any liens, pledges, or encumbrances.
[C&H Comment — Low] Good Standing Certificates. While Schedule 3.1 asserts that Vectris and its subsidiaries are duly organized, validly existing, and in good standing, the Schedule does not attach or reference certificates of good standing (or their foreign equivalents). We request that WPL confirm that certificates of good standing will be obtained for Vectris (from the Delaware Secretary of State) and for each subsidiary (from the applicable governmental authority) as of a date no earlier than thirty (30) days prior to signing, and that such certificates will be delivered at or prior to the Closing as a condition precedent under Section 7.2 of the Merger Agreement.
[C&H Comment — Medium] Dissolved or Dormant Entity — Vectris Photonics Japan K.K. Schedule 3.1 does not disclose any dormant or dissolved entities. However, our due diligence review of Vectris's corporate records identified a reference in the minutes of the Vectris Board of Directors meeting held on March 14, 2019, to an entity referred to as "Vectris Photonics Japan K.K." The minutes reflect a board resolution authorizing the formation of a Japanese subsidiary (Kabushiki Kaisha) for purposes of supporting customer relationships in the Asia-Pacific region. No subsequent reference to this entity appears in the data room.
Request: We request that WPL confirm whether Vectris Photonics Japan K.K. was in fact formed and, if so: (i) whether it was subsequently dissolved and, if so, provide dissolution documentation and confirmation that no residual liabilities remain; or (ii) whether it remains in existence and should be scheduled as a subsidiary. If the entity was authorized but never actually formed, we request written confirmation to that effect from Vectris management.
III. SCHEDULE 3.4 — CAPITALIZATION
III.A. Content of Schedule 3.4 as Delivered
Schedule 3.4 to the Merger Agreement, as delivered in the Reviewed Version, discloses the following information regarding the capitalization of Vectris:
Authorized Capital Stock.
The Company's Amended and Restated Certificate of Incorporation authorizes the issuance of (a) 100,000,000 shares of Common Stock, par value $0.001 per share (the "Common Stock"), and (b) 10,000,000 shares of Preferred Stock, par value $0.001 per share (the "Preferred Stock"). No shares of Preferred Stock are currently issued or outstanding.
Issued and Outstanding Shares. As of the date of the Schedule, there are 51,200,000 shares of Common Stock issued and outstanding.
Equity Incentive Plan. Vectris maintains the 2018 Equity Incentive Plan (the "Plan"), pursuant to which a total of 9,500,000 shares of Common Stock have been reserved for issuance. Under the Plan:
• Outstanding Stock Options: 5,142,000 shares of Common Stock are subject to outstanding and unexercised options, with exercise prices ranging from $2.15 to $8.90 per share.
• Outstanding RSUs: 2,052,160 shares of Common Stock are subject to outstanding and unvested restricted stock unit awards.
• Total Options and RSUs: 7,194,160 shares (5,142,000 options + 2,052,160 RSUs).
Fully Diluted Share Count. The Schedule calculates the fully diluted share count as follows:
Per-Share Merger Consideration. Based on the aggregate merger consideration of $800,000,000 and the fully diluted share count of 58,394,160 shares, the per-share merger consideration is approximately $13.70 per share ($800,000,000 ÷ 58,394,160 ≈ $13.70).
Significant Stockholders. The Schedule lists the following significant stockholders of Vectris:
Warrants. The Schedule discloses one outstanding warrant issued to Clearwater Zanthor & Co., LLC (the "Clearwater Zanthor Warrant") for the purchase of 250,000 shares of Common Stock at an exercise price of $7.50 per share. The warrant was issued in connection with a prior financial advisory engagement and remains outstanding and unexercised.
Convertible Securities. The Schedule states that there are no outstanding convertible notes or other convertible securities.
III.B. C&H Comments on Schedule 3.4
[C&H Comment — Critical] Reconciliation of Fully Diluted Share Count — Clearwater Zanthor Warrant. The fully diluted share count set forth in Schedule 3.4 is 58,394,160 shares, calculated as the sum of 51,200,000 shares of issued and outstanding Common Stock plus 7,194,160 in-the-money options and RSUs. However, the Schedule also separately lists the Clearwater Zanthor Warrant for 250,000 shares of Common Stock at an exercise price of $7.50 per share. At the per-share merger consideration of approximately $13.70, this warrant is clearly in-the-money and would be expected to be exercised or cashed out in connection with the Merger.
Issue: The Schedule does not make clear whether the 250,000 warrant shares are included within the 7,194,160 figure or are in addition to it. If the warrant shares are not included, the fully diluted share count should be 58,644,160 shares (i.e., 58,394,160 + 250,000), and the per-share merger consideration would need to be recalculated as approximately $13.64 ($800,000,000 ÷ 58,644,160), a reduction of approximately $0.06 per share. While the per-share difference appears modest, the aggregate impact on the consideration allocable to existing stockholders is approximately $3.1 million, and the discrepancy would create a material inconsistency between the Schedules and the payment mechanics set forth in Section 2.5 of the Merger Agreement.
Request: We request that WPL immediately confirm whether the Clearwater Zanthor Warrant is included in the 7,194,160 figure. If it is not included, the Schedule must be revised, and the per-share merger consideration must be recalculated and reconciled across all transaction documents (including the Merger Agreement, the Paying Agent Agreement, and the Capitalization Certificate to be delivered at Closing). This reconciliation should be coordinated with Ridgeline Partners (Nathaniel Cross) and the Halcyon finance team (Markus Ellinger). This item must be resolved before signing.
[C&H Comment — High] Detailed Option and RSU Schedule. Schedule 3.4 lists aggregate figures for outstanding options (5,142,000 shares) and RSUs (2,052,160 shares) but does not provide a grant-by-grant breakdown. The Merger Agreement requires specific treatment of each outstanding equity award under Section 2.5, and the precise terms of individual awards — including exercise prices, vesting schedules, acceleration provisions, and expiration dates — are essential for purposes of calculating the aggregate consideration payable upon cancellation of equity awards at Closing.
Request: We request that WPL provide a detailed spreadsheet (in Excel format) of all outstanding options and RSUs, including for each award: (a) grantee name and title; (b) grant date; (c) number of shares subject to the award; (d) exercise price (for options); (e) vesting commencement date; (f) vesting schedule (monthly, quarterly, or annual; cliff vesting, if any); (g) whether the award is subject to single-trigger or double-trigger acceleration upon a change of control; (h) number of shares vested and unvested as of the date hereof; and (i) expiration date (for options). This information is necessary not only for purposes of the merger consideration allocation, but also for the representations and warranties insurance underwriting process and for the preparation of Section 280G analyses.
[C&H Comment — High] Repurchase Rights and Transfer Restrictions. Schedule 3.4 does not address whether any shares of Common Stock or other equity interests are subject to repurchase rights, rights of first refusal, co-sale obligations, or other transfer restrictions, beyond those arising generally from applicable securities laws. Our due diligence review of the 2018 Equity Incentive Plan and selected individual award agreements reveals that the Plan provides for a Company right of repurchase with respect to unvested shares issued upon early exercise of options (to the extent early exercise is permitted). Additionally, certain restricted stock purchase agreements issued to early employees contain similar repurchase provisions.
Request: We request that WPL confirm: (a) whether any shares currently outstanding are subject to Company repurchase rights; (b) if so, the number of shares and identity of the holders; and (c) whether such repurchase rights will lapse automatically upon the Closing or must be separately addressed. If repurchase rights survive the Closing, they should be disclosed in the Schedule and addressed in the equity award treatment provisions of the Merger Agreement.
[C&H Comment — Medium] Dr. Raghavan's Ownership. Dr. Anand Raghavan's ownership is listed at 18.2%, corresponding to approximately 9,318,400 shares. The Schedule does not specify whether this figure includes only shares of Common Stock currently outstanding and held of record by Dr. Raghavan, or whether it also includes shares issuable upon exercise of options or settlement of RSUs held by Dr. Raghavan. As founder and CEO, Dr. Raghavan likely holds significant equity awards under the Plan.
Request: We request that WPL confirm: (a) the number of shares of Common Stock held of record by Dr. Raghavan; (b) the number and terms of any outstanding options and RSUs held by Dr. Raghavan; and (c) whether the 18.2% figure is calculated on an as-outstanding or fully diluted basis. This is relevant for cross-referencing against the Voting and Support Agreement, under which Dr. Raghavan, Granite Peak Ventures Fund IV, L.P., and Nordhaven Capital Partners III, L.P. have agreed to vote their shares in favor of the Merger. The aggregate ownership of these three parties is listed as approximately 55.4%, which appears calculated on an outstanding-share basis. Confirmation is required.
[C&H Comment — Medium] Prior Preferred Stock. The Schedule notes that 10,000,000 shares of Preferred Stock are authorized but states that none are currently issued or outstanding. Our due diligence review indicates that Vectris conducted a Series A preferred stock financing in 2015 and a Series B preferred stock financing in 2017, prior to the Company's initial public offering. These financings were documented in the data room.
Request: We request that WPL confirm: (a) the date and manner in which all outstanding shares of Series A and Series B Preferred Stock were converted to Common Stock (presumably in connection with the Company's IPO); (b) that no residual rights, preferences, or privileges associated with the Preferred Stock survive (including liquidation preferences, anti-dilution protections, dividend preferences, or special voting rights); and (c) that the Amended and Restated Certificate of Incorporation does not contain any "blank check" provisions that would permit the Board to issue Preferred Stock with rights superior to Common Stock without stockholder approval. The last point is relevant to the Merger Agreement's interim operating covenants prohibiting the issuance of equity securities between signing and closing.
[C&H Comment — Low] CUSIP Number. We request that WPL confirm that the CUSIP number for the Vectris Common Stock is 92553P108, as referenced in the merger consideration payment provisions of the Merger Agreement and in the Paying Agent Agreement with Adriatic Health IT. Accurate CUSIP identification is necessary for the transmittal and payment mechanics at Closing.
IV. SCHEDULE 3.8 — LITIGATION
IV.A. Content of Schedule 3.8 as Delivered
Schedule 3.8 to the Merger Agreement, as delivered in the Reviewed Version, discloses the following pending and threatened legal proceedings involving Vectris:
Pending Matters:
1. *Rayfield Technologies LLC v. Vectris Photonics, Inc., Case No. 3:22-cv-01987-JSW, United States District Court, Northern District of California. Filed March 2022. Rayfield Technologies LLC ("Rayfield*") alleges that certain Vectris optical transceiver products infringe U.S. Patent No. 10,XXX,XXX, which claims an optical modulator design for use in high-speed data transmission. Vectris has filed an answer denying infringement and asserting affirmative defenses, together with a counterclaim seeking a declaratory judgment of non-infringement and invalidity of the asserted patent. Fact discovery is ongoing; expert discovery has not yet commenced. Trial is currently scheduled for Q2 2024. Vectris estimates its potential damages exposure in the range of $5 million to $15 million.
2. *Garcia v. Vectris Photonics, Inc.*, Case No. 23CV420815, Superior Court of the State of California, County of Santa Clara. Filed January 2023. Carlos Garcia, a former Vectris employee, alleges wrongful termination and employment discrimination on the basis of national origin. Vectris denies all allegations and asserts that Mr. Garcia's termination was performance-based. The matter is in early discovery. Estimated exposure: under $500,000.
3. *In re Vectris Photonics Derivative Demand.* In June 2023, the Company received a demand letter from Hartwick & Pell LLP, counsel to an unidentified minority stockholder, alleging breach of fiduciary duty by members of the Vectris Board of Directors in connection with executive compensation decisions, specifically the approval of the CEO's 2022 equity award package. The Vectris Board has formed a special committee of independent directors to evaluate the demand. No litigation has been filed to date.
Threatened Matters:
4. On July 15, 2023, Vectris received a demand letter from Quelston, Tarkington & Hale LLP, counsel to Luminos Integrated Circuits, Inc. ("Luminos"), alleging that a former Luminos engineer hired by Vectris in 2022 misappropriated Luminos trade secrets relating to certain RF integrated circuit design methodologies, and that Vectris has utilized such misappropriated trade secrets in the development of its products. No lawsuit has been filed. Vectris states that it is investigating the matter internally.
IV.B. C&H Comments on Schedule 3.8
[C&H Comment — Critical] Rayfield Technologies — Preliminary Injunction Motion. The disclosure regarding the Rayfield Technologies patent infringement action is materially incomplete. Our independent review of the public court docket for Case No. 3:22-cv-01987-JSW reveals that Rayfield filed a Motion for Preliminary Injunction on June 14, 2023 (Dkt. No. 87), seeking to enjoin Vectris from manufacturing, selling, or offering for sale certain transceiver products incorporating the allegedly infringing optical modulator design. The motion has been fully briefed, with a hearing scheduled before Judge Jeffrey S. White on September 6, 2023.
Issue: The potential grant of a preliminary injunction against Vectris's core transceiver products would represent a material adverse development. Depending on the scope of the injunction, it could restrict Vectris's ability to fulfill existing customer orders and generate revenue from a significant portion of its product portfolio. This could constitute a "Material Adverse Effect" as defined in Section 1.1 of the Merger Agreement, which could affect the Closing conditions under Section 7.2(a) (no Material Adverse Effect) and potentially implicate the termination provisions of Article VIII.
Request: We request that WPL immediately supplement Schedule 3.8 to disclose the pending preliminary injunction motion, including: (a) the date of filing and current procedural status; (b) the specific products targeted by the injunction request; (c) Vectris's assessment of the likelihood that the motion will be granted; and (d) the potential revenue impact if an injunction is entered. This item should be cross-referenced with Schedule 3.10 (Intellectual Property) and the IP Due Diligence Memorandum dated July 21, 2023. Oliver Mackenzie and Howard Bellamy should also assess whether the preliminary injunction risk warrants additional protective provisions in the Merger Agreement, such as a specific indemnification carve-out or a condition to closing tied to the outcome of the motion. This item must be addressed before signing.
[C&H Comment — High] Luminos Trade Secret Misappropriation Threat. The disclosure regarding the Luminos demand letter is insufficiently detailed. The trade secret misappropriation allegation raises significant concerns, both with respect to Vectris's litigation exposure and with respect to the integrity of Vectris's intellectual property portfolio.
Request: We request that WPL supplement the disclosure to include the following:
(a) The name, title, and former role at Luminos of the engineer who was hired by Vectris in 2022, as well as the engineer's current role at Vectris;
(b) Whether the engineer signed a non-competition agreement, non-solicitation agreement, confidentiality agreement, or invention assignment agreement with Luminos, and if so, copies of such agreements;
(c) The specific technology area implicated by the trade secret allegation, and whether it relates to Vectris's core silicon photonics product line or to an adjacent technology area (e.g., the RF and mixed-signal IC capabilities referenced in the Ardent Semiconductor cross-license);
(d) Whether Vectris conducted an onboarding review or "clean room" protocol when hiring the engineer to prevent trade secret contamination, and if so, the nature and results of that review;
(e) Vectris's assessment of the merits of Luminos's claim, including whether Vectris believes any Luminos trade secrets were in fact obtained or utilized.
If litigation is filed by Luminos, the exposure could be significant, both in terms of damages and in terms of potential injunctive relief. A trade secret misappropriation finding could also implicate the representations regarding compliance with law (Section 3.12) and could affect the conduct of business during the pendency of the Merger (Section 3.15).
[C&H Comment — Medium] Shareholder Derivative Demand. The derivative demand letter from Hartwick & Pell LLP on behalf of an unidentified minority stockholder raises governance-related concerns, particularly in the context of a pending acquisition.
Request: We request that WPL confirm: (a) whether the special committee formed by the Vectris Board has made a determination regarding the demand (i.e., whether the demand has been accepted, rejected, or remains under review); (b) if the committee has rejected the demand, whether a written determination has been issued and can be provided for our review; (c) the identity of the minority stockholder, to the extent known; and (d) whether Vectris or its counsel believes that litigation is likely to follow. If the stockholder files a derivative action (or a direct action challenging the Merger), it could create board-level distraction during a critical period. We also note that the subject matter of the demand — executive compensation — could overlap with the disclosures required under Schedule 3.11 (Employee Matters) and the executive employment agreements listed in Schedule 3.14.
[C&H Comment — Medium] Cross-References to Other Schedules. As a general matter, Schedule 3.8 should cross-reference any pending or threatened matters that are also required to be disclosed under other Schedules to the Merger Agreement. Specifically:
(a) The Rayfield Technologies patent infringement action should be cross-referenced to Schedule 3.10 (Intellectual Property);
(b) The Garcia wrongful termination and discrimination claim should be cross-referenced to Schedule 3.11 (Employee Matters);
(c) The Luminos trade secret threat should be cross-referenced to Schedule 3.10 (Intellectual Property) and Schedule 3.12 (Compliance with Law);
(d) The shareholder derivative demand should be cross-referenced to Schedule 3.11 (Employee Matters) to the extent it relates to executive compensation.
Request: We request that WPL add appropriate cross-references to each item in Schedule 3.8 and confirm that the information disclosed is consistent across all relevant Schedules.
[C&H Comment — Low] Directors & Officers Insurance. In light of the pending derivative demand and the potential for transaction-related claims (including potential stockholder challenges to the Merger), we request that WPL confirm whether Vectris maintains directors and officers liability insurance, and if so, provide the following information for inclusion in the closing checklist and for purposes of the tail policy provisions in Section 6.11 of the Merger Agreement:
(a) Name of the carrier(s); (b) Policy number(s); (c) Aggregate policy limits; (d) Per-occurrence or per-claim limits; (e) Retention/deductible amounts; (f) Whether the current policy includes Side A (individual director/officer coverage), Side B (reimbursement), and Side C (entity coverage); and (g) Whether the policy contains a change-of-control exclusion or a prior/pending litigation exclusion.
V. SCHEDULE 3.10 — INTELLECTUAL PROPERTY
V.A. Content of Schedule 3.10 as Delivered
Schedule 3.10 to the Merger Agreement, as delivered in the Reviewed Version, discloses the following information regarding the intellectual property assets of Vectris:
Part (a) — Owned intellectual Property.
Vectris owns the following categories of intellectual property:
• Patents: 187 issued U.S. patents and 43 pending U.S. patent applications. The Schedule provides patent numbers and filing dates for the top 50 patents by claim scope, with a cross-reference to a "full patent list" stated to be set forth in Exhibit A to the Schedule. Additionally, Vectris holds 12 issued foreign patents across four jurisdictions (European Patent Office, Japan, South Korea, and China).
• Trademarks: 15 registered U.S. trademarks, including the "VECTRIS" word mark, the "VECTRIS PHOTONICS" word mark, and various product-line marks (registration numbers provided).
• Domain Names: 8 registered domain names, including vectris.com, vectrisphotonics.com, and related variants.
Part (b) — Licensed-In intellectual Property.
The Schedule lists seven (7) inbound license agreements pursuant to which Vectris has obtained rights to intellectual property owned by third parties, including the following principal licenses:
1. Stanford University License. Non-exclusive license from the Stanford University Office of Technology Licensing ("Stanford OTL") to foundational silicon photonics patents arising from Dr. Anand Raghavan's doctoral research at Stanford. The license provides for an annual royalty of $175,000 and expires in 2029. The license is non-exclusive, meaning Stanford retains the right to license the same patents to other parties.
2. Ardent Semiconductor Cross-License. Mutual non-exclusive cross-license agreement with Ardent Semiconductor Corp. ("Ardent") covering RF and mixed-signal integrated circuit patents. No royalties are payable by either party. The cross-license is perpetual.
3. Cascadia Optical Systems Exclusive License. Exclusive license from Cascadia Optical Systems, Inc. ("Cascadia") to certain waveguide coupling patents. Vectris paid an upfront license fee of $2,500,000 in 2020 and pays an ongoing royalty of 1.5% on net sales of products incorporating the licensed technology. The license term extends through 2031.
4. Four additional non-exclusive technology licenses with various vendors (details provided in the Schedule).
Part (c) — Licensed-Out intellectual Property.
The Schedule lists three (3) outbound license agreements pursuant to which Vectris has granted rights to its intellectual property to third parties. The most significant of these is a license to Meridian Datacom Ltd. (which the Schedule notes is unrelated to Meridian Atlantic Bank) for the use of certain transceiver interface patents in non-competing telecommunications applications. Royalties received under this license are approximately $1,200,000 per annum.
Part (d) — IP Encumbrances.
The Schedule states: "None. There are no liens, security interests, or encumbrances on the intellectual property of the Company or any of its subsidiaries, other than licenses described in Parts (b) and (c) above."
V.B. C&H Comments on Schedule 3.10
[C&H Comment — Critical] Missing Exhibit A — Complete Patent and Application List. Schedule 3.10, Part (a) states that the complete list of Vectris's 187 issued U.S. patents and 43 pending U.S. patent applications is set forth in "Exhibit A" to the Schedule. However, Exhibit A was not included in the Schedules delivered by WPL on August 7, 2023. This is a material omission that must be corrected immediately.
Request: We request that WPL provide Exhibit A on an expedited basis, no later than end of day on August 9, 2023. The Exhibit should include, for each issued patent: (a) patent number; (b) title; (c) issue date; (d) expiration date (including any patent term adjustments or extensions); (e) assignee of record; and (f) whether the patent is subject to any terminal disclaimers. For each pending application: (a) application number; (b) title; (c) filing date; (d) current status (pending, allowed, under examination, office action outstanding); and (e) priority claims, if any.
This information is essential for multiple purposes: (i) verification of the IP representations in Section 3.10 of the Merger Agreement; (ii) the representations and warranties insurance underwriting process being conducted by Pinnacle Specialty Underwriters, Ltd. (Fiona Brennan), which has specifically requested a complete patent schedule as a condition to binding the policy; (iii) the IP valuation analysis being performed by Ridgeline Partners; and (iv) Halcyon's post-closing integration planning, which requires a complete understanding of the Vectris patent portfolio. Failure to deliver Exhibit A before signing will require either a delay in signing or a specific covenant in the Merger Agreement obligating Vectris to deliver the complete list post-signing.
[C&H Comment — High] Stanford University License — Change of Control. Schedule 3.10 lists the Stanford University non-exclusive license as one of the seven inbound licenses but does not disclose whether the license contains any provision that would be triggered by the Merger, such as a consent requirement for assignment in connection with a change of control.
Issue: Our review of the Stanford license agreement in the data room (Document VDR-IP-0047) indicates that Section 8.2 of the license includes a provision requiring Stanford OTL's prior written consent for any "assignment" of the license, and the definition of "assignment" in the agreement appears broad enough to encompass a change of control of the licensee. While Vectris may take the position that a reverse triangular merger — in which Vectris is the surviving entity and the license remains with the same legal entity — does not constitute an "assignment" for purposes of the Stanford license, this position is not free from doubt and depends on the specific contract language and applicable law. Certain courts have held that a reverse triangular merger does not trigger anti-assignment provisions (see, e.g., SQL Solutions, Inc. v. Ostrander Corporation., No. C-91-1079, 1991 WL 626458 (N.D. Cal. Dec. 18, 1991)), while others have reached the opposite conclusion.
Request: We request that WPL: (a) confirm Vectris's position on whether the Merger triggers the consent requirement under Section 8.2 of the Stanford license; (b) advise whether Vectris has sought or obtained Stanford OTL's consent to the Merger; and (c) if consent has not been obtained, provide an analysis of the risk that Stanford could terminate or challenge the license post-closing. The Stanford license covers foundational silicon photonics patents that are integral to Vectris's core technology platform. Loss of this license could constitute a Material Adverse Effect. If consent cannot be confirmed prior to signing, we will recommend that the Merger Agreement include a specific representation or covenant addressing this issue and that the matter be added to the regulatory/consent closing condition.
[C&H Comment — High] Cascadia Optical Systems Exclusive License — Scope and Obligations. The Schedule describes the Cascadia license as an "exclusive" license to certain waveguide coupling patents, but our review of the underlying agreement (Document VDR-IP-0062) reveals that the exclusivity is subject to a field-of-use limitation to "data center transceiver applications."
Request: We request that WPL: (a) confirm the precise scope of the field-of-use exclusivity and whether "data center transceiver applications" is defined in the agreement; (b) advise whether Cascadia has retained the right to license the same waveguide coupling patents to third parties for use outside the defined field of use, and whether any such third-party licenses have been granted; (c) confirm whether any competitive products sold by Cascadia or its licensees could conflict with Halcyon's planned use of the licensed technology post-closing, particularly in adjacent application areas such as telecommunications and automotive LiDAR; (d) confirm that the 1.5% royalty obligation is accurately reflected in the Schedule and whether there are any minimum royalty payments, milestone payments, or escalation clauses; and (e) advise whether the Cascadia license contains a change-of-control or assignment provision that could be triggered by the Merger.
[C&H Comment — High] Ardent Semiconductor Cross-License — Post-Closing Benefit. The Ardent Semiconductor cross-license is described as a mutual non-exclusive, perpetual, royalty-free license covering RF and mixed-signal IC patents. This cross-license is potentially significant for Halcyon, which has existing RF and mixed-signal IC product lines that could benefit from access to Ardent's patent portfolio.
Request: We request that WPL: (a) confirm whether the cross-license agreement contains a change-of-control provision or any restriction on the licensee's successors or assigns; (b) advise whether Halcyon (as the post-closing parent of Vectris) would be able to benefit from the licensed Ardent patents for Halcyon's own products, or whether the license is limited to Vectris and its subsidiaries; (c) confirm the scope of the patent portfolio covered by the cross-license; and (d) advise whether Ardent has raised any concerns about the Merger. If the cross-license is limited to Vectris and cannot be extended to Halcyon, this could reduce the anticipated synergy value of the Ardent relationship.
[C&H Comment — Medium] IP Encumbrances — Prior Lender Lien. Part (d) of Schedule 3.10 states that there are no liens, security interests, or encumbrances on Vectris's intellectual property. However, our due diligence review of Vectris's existing credit facility documentation reveals that the Company's revolving credit facility with Pacific West Commercial Bank (the "Revolving Credit Facility") included a blanket security interest on substantially all assets of the Company, including intellectual property. The Revolving Credit Facility was established in 2020 and amended in 2021.
Request: We request that WPL confirm: (a) whether the blanket lien under the Revolving Credit Facility has been released; (b) if the lien has been released, provide evidence of the release (UCC-3 termination statement or equivalent); (c) if the lien has not been released, when the release is expected and whether it will be a condition to closing; and (d) whether any other creditor holds a security interest in Vectris's intellectual property. If the lien has not been released, the "None" disclosure in Part (d) is inaccurate and must be corrected.
[C&H Comment — Medium] Foreign Patent Jurisdiction Detail. The Schedule lists 12 issued foreign patents across four jurisdictions (EPO, Japan, South Korea, and China) but does not provide a jurisdiction-by-jurisdiction breakdown.
Request: We request that WPL supplement the Schedule to provide: (a) the specific patent number for each foreign patent; (b) the issuing jurisdiction (for EPO patents, the designated states); (c) the issue date and expiration date; (d) the assignee of record; and (e) confirmation that all required maintenance and annuity fees have been paid and are current. Patent maintenance status is particularly important for the EPO and Japan, where failure to pay annuity fees can result in lapse of patent rights.
[C&H Comment — Medium] Cross-Reference with Schedule 3.8. The Rayfield Technologies patent infringement litigation (discussed in Section IV above) directly relates to Vectris's intellectual property portfolio and should be cross-referenced in Schedule 3.10.
Request: We request that WPL add a cross-reference to Schedule 3.8, Item 1 (Rayfield Technologies litigation) in Schedule 3.10, Part (a). Additionally, we request confirmation of which specific Vectris patents, if any, are being asserted in the counterclaim filed in the Rayfield action. If Vectris's counterclaim asserts invalidity of the Rayfield patent based on prior art found in Vectris's own portfolio, this should be disclosed.
[C&H Comment — Low] Freedom-to-Operate Analyses. We request that WPL confirm whether Vectris has at any time conducted freedom-to-operate ("FTO") analyses or clearance opinions for its current and next-generation product lines. If such analyses exist, they should be produced in the data room for our review and for the review of Halcyon's IP counsel. The existence (or absence) of FTO analyses is relevant to the assessment of patent infringement risk, including the risk profile of the Rayfield litigation and any other potential infringement claims.
VI. SCHEDULE 3.14 — MATERIAL CONTRACTS
VI.A. Content of Schedule 3.14 as Delivered
Schedule 3.14 to the Merger Agreement, as delivered in the Reviewed Version, lists the following categories of material contracts to which Vectris is a party:
1. Customer Contracts.
The Schedule identifies agreements with three of the top five U.S. hyperscale cloud infrastructure operators, referred to by code name as "Cloud Customer A," "Cloud Customer B," and "Cloud Customer C." Aggregate revenue from these three customers for FY2022 represented approximately 68% of Vectris's total FY2022 revenue ($312 million × 68% ≈ $212 million). Each agreement is on multi-year terms (ranging from two to three years) and includes volume commitments and tiered pricing structures.
2. Supply/Foundry Agreements.
The Schedule lists two third-party foundry agreements for semiconductor wafer fabrication, consistent with Vectris's fabless business model. One agreement is with a Taiwanese foundry, and the other is with a Singapore-based foundry. Each agreement includes minimum volume commitments.
3. License Agreements.
The Schedule cross-references Schedule 3.10 for a complete listing of intellectual property license agreements.
4. Employment Agreements.
The Schedule lists executive employment agreements with the following individuals:
(a) Dr. Anand Raghavan — Founder, Chief Executive Officer, and Chairman of the Board; (b) Margaret Sørensen — Chief Technology Officer; (c) Julian Tate — Chief Financial Officer; (d) Rebecca Lau — General Counsel and Corporate Secretary.
Each employment agreement includes change-of-control provisions providing for double-trigger acceleration of outstanding equity awards (requiring both a change of control and a qualifying termination within a specified period) and severance payments.
5. Lease Agreements.
The Schedule lists the following real property leases:
(a) San Jose, CA — 4750 Ridgepoint Drive, Suite 300 (corporate headquarters); (b) Boulder, CO — R&D laboratory facility; (c) Austin, TX — design center.
6. Investor Rights Agreement.
The Schedule lists the Amended and Restated Investor Rights Agreement, dated as of 2019, among Vectris, Granite Peak Ventures Fund IV, L.P., Nordhaven Capital Partners III, L.P., Stonebridge Institutional Investors, L.P., and other stockholders party thereto. The agreement includes registration rights, information rights, and board designation rights, specifically:
• Granite Peak Ventures Fund IV, L.P. (represented by Rhys Calloway) has the right to designate one member of the Vectris Board;
• Nordhaven Capital Partners III, L.P. (represented by Simone Achterberg) has the right to designate one member of the Vectris Board.
7. Other Agreements.
The Schedule lists non-disclosure agreements with "key partners" and states that standard vendor agreements below the materiality threshold have not been individually listed.
VI.B. C&H Comments on Schedule 3.14
[C&H Comment — Critical] Hyperscale Cloud Customer Agreements — Identity and Key Terms. The three hyperscale cloud customer agreements represent the core of Vectris's business, accounting for approximately 68% of FY2022 revenue (approximately $212 million). The Schedule identifies these customers by code name only — "Cloud Customer A," "Cloud Customer B," and "Cloud Customer C." While the use of code names may have been appropriate in earlier stages of the process, at this stage — one day before signing — full disclosure is required.
Request: We request that WPL provide the actual names of each hyperscale cloud customer, at minimum to be shared with Halcyon under the confidentiality provisions of the Exclusivity Agreement dated June 20, 2023, between Halcyon and Vectris. In addition, for each customer agreement, we request the following information:
(a) Change-of-control provisions: Whether the agreement contains any assignment restrictions, change-of-control consent requirements, or provisions that would be triggered by the Merger (whether structured as a reverse triangular merger or otherwise);
(b) Exclusivity and MFN clauses: Whether any agreement contains exclusivity provisions requiring Vectris to supply the customer exclusively or most-favored-nation ("MFN") pricing clauses requiring Vectris to offer the customer pricing no less favorable than that offered to any other customer;
(c) Termination-for-convenience rights: Whether any agreement includes a termination-for-convenience provision that could be exercised by the customer following the Merger, which could result in a material loss of revenue;
(d) Competitor restrictions: Whether any agreement contains restrictions that would prohibit the customer from purchasing competing products from a Halcyon-owned Vectris, or conversely, that would prohibit Vectris from supplying a competitor of the customer.
These terms are fundamental to deal value and post-closing integration planning. The identity of the customers and the key contractual terms also have implications for the antitrust analysis and regulatory filings. This item must be resolved before signing.
[C&H Comment — Critical] Customer Consent Requirements. In direct connection with the preceding comment, we note that the question of whether customer consent is required for the Merger is potentially deal-critical.
Request: We request that WPL confirm affirmatively whether any of the three hyperscale customer agreements contain provisions that would be triggered by the reverse triangular merger structure contemplated by the Merger Agreement, or that would require the consent of the customer as a condition to the continued validity and enforceability of the agreement post-closing. If consent is required:
(a) This must be identified as a condition to closing or addressed in the Merger Agreement's interim operating covenants (Section 5.2);
(b) Vectris should commence the consent solicitation process immediately, if it has not already done so;
(c) Halcyon should be apprised of the status of any consent discussions.
We also note that the identity and terms of these customer relationships are directly relevant to the antitrust analysis. The Department of Justice's market definition in the hyperscale data center optical interconnect segment focuses on supplier concentration and customer switching costs. If the customer agreements contain long-term volume commitments and limited termination rights, this supports the argument that customers are "locked in" — which could cut both ways in the competitive effects analysis. We recommend that Howard Bellamy coordinate with the antitrust team on this issue.
[C&H Comment — High] Foundry Agreements. Given Vectris's fabless business model, the two third-party foundry agreements are mission-critical supply relationships upon which Vectris is entirely dependent for wafer fabrication.
Request: We request that WPL provide the following information for each foundry agreement:
(a) Identity of the foundry;
(b) Whether the agreement contains change-of-control or assignment restrictions that could be triggered by the Merger;
(c) Capacity allocation commitments — whether the foundry is obligated to allocate a minimum quantity of wafer starts or production capacity to Vectris, and whether such commitments survive a change of control;
(d) Minimum purchase obligations and whether the agreements include "take-or-pay" provisions requiring Vectris to pay for a minimum volume regardless of actual orders;
(e) Term, renewal, and termination provisions;
(f) Pricing mechanisms and any price escalation or renegotiation triggers.
We note that Halcyon operates its own fabrication facilities in Munich, Dresden, and Singapore. The existence of a Singapore-based foundry agreement for Vectris raises potential overlap and integration questions. We recommend that the Halcyon operations team (to be coordinated through Dr. Hartmann) assess whether Vectris's production requirements could be transitioned in-house post-closing, and on what timeline.
[C&H Comment — High] Executive Employment Agreements — Severance and Acceleration Exposure. The Schedule references change-of-control provisions in the employment agreements for the four named executives but does not quantify the severance and acceleration exposure.
Request: We request that WPL provide the following:
(a) For each named executive, the aggregate cash severance payable upon a qualifying termination following a change of control (including the multiplier, base salary, bonus assumptions, and benefit continuation periods);
(b) The aggregate value of equity awards that would accelerate upon a qualifying termination, calculated at the $13.70 per-share merger consideration;
(c) The aggregate cost across all four named executives, broken down by cash severance and equity acceleration;
(d) Confirmation that the non-competition and non-solicitation provisions contained in each executive's employment agreement are consistent with the three-year post-closing non-compete contemplated by Section 6.14 of the Merger Agreement. If the existing employment agreements contain non-compete periods shorter than three years, supplemental restrictive covenant agreements will need to be negotiated and executed as a condition to closing;
(e) Whether any of the employment agreements contain "modified" or "best net" Section 280G cutback provisions, and whether a Section 280G analysis has been conducted.
We recommend cross-referencing this analysis with the form of restrictive covenant agreement currently being negotiated between C&H and WPL.
[C&H Comment — High] Investor Rights Agreement — Termination Upon Merger. The Amended and Restated Investor Rights Agreement grants Granite Peak Ventures Fund IV, L.P. (Rhys Calloway) and Nordhaven Capital Partners III, L.P. (Simone Achterberg) the right to designate members of the Vectris Board of Directors, as well as registration rights and information rights.
Request: We request that WPL confirm: (a) whether the board designation rights of Granite Peak and Nordhaven will automatically terminate upon consummation of the Merger (since Vectris will become a wholly owned subsidiary of Halcyon and all shares of Vectris stock will be converted to the right to receive the merger consideration); (b) whether the registration rights will be extinguished upon the Merger, given that there will be no outstanding registrable securities; (c) the specific provisions in the Investor Rights Agreement that provide for termination upon a change of control or merger, and the relevant text of such provisions; and (d) whether any consent or waiver from Granite Peak, Nordhaven, or Stonebridge is required under the Investor Rights Agreement in connection with the Merger. While we would expect these rights to terminate as a matter of law when all shares are converted to cash consideration, we wish to confirm that no contractual "tail" provisions or surviving obligations exist that could encumber Halcyon post-closing.
[C&H Comment — Medium] Government Contracts and Export Controls. Schedule 3.14 does not appear to list any government contracts, subcontracts, or agreements subject to the International Traffic in Arms Regulations ("ITAR"), the Export Administration Regulations ("EAR"), or other export control regimes. Given that Vectris's silicon photonics technology has potential applications in defense, national security, and other regulated sectors, this absence warrants affirmative confirmation rather than reliance on a negative inference.