Devil’s in the Details: Hell, High Water, and CFIUS

Delaware Chancery Court Orders Buyer to Execute CFIUS Mitigation Agreement Within 48 hours

The Delaware Court of Chancery’s recent decision in Desktop Metal, Inc. v. Nano Dimension Ltd., ordering specific performance in the face of buyer’s failure to meet its contractual hell or high water (“HOHW”) commitment, offers a stark example of the risks and benefits of using such a clause to manage risk related to transaction reviews by the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”). It highlights the importance of identifying in advance the type of mitigation measures that CFIUS might seek and ensuring, from the buyer’s perspective, that the “efforts” clause protects the buyer against measures that would undermine the commercial rationale for the transaction and, from the seller’s perspective, that any carveout to buyer’s obligations is narrowly scoped.

I. Importance of “Efforts” Clauses in the CFIUS Context

Given the unpredictability of the CFIUS review process and CFIUS’s increased propensity to require mitigation, allocation of CFIUS-related risk in transaction documents has become an important consideration in many transactions. In the CFIUS context, use of a HOHW clause carries particular risk for the buyer because (i) it is challenging  to assess CFIUS risk (decisions are not published, may be made based on classified information or other information not knowable to the parties, and generally are not driven by objective or quantifiable factors), (ii) CFIUS has broad discretion to require virtually any mitigation term not tantamount to a prohibition or duplicative of another U.S. government authority, and (iii) CFIUS typically puts forward a mitigation proposal (unlike antitrust review, where the parties bear the burden of proposing remedies), clearly laying the path necessary to satisfy a HOHW obligation.  Carefully-formulated “efforts” provisions can help a buyer avoid a circumstance where it is obligated to accept mitigation that undermines anticipated benefits of the transaction.

II. Transaction Background

• The Parties:
  • Target: Desktop Metal (“Desktop”) is a Massachusetts-based producer of industrial 3D printers used in sensitive applications, including missile defense and nuclear systems.
  • Buyer: Nano Dimension (“Nano”), an Israeli firm, sought to acquire Desktop in a $183 million all-cash transaction signed in July 2024.
• The Deal:
  • Closing Condition: CFIUS clearance was a condition precedent to closing given the national security sensitivities of the transaction.
  • Efforts provision:
    • The parties agreed generally to use reasonable best efforts to resolve any objection that could be asserted by any governmental entity.
    • The agreement required the parties to agree to divestitures and any other action “to the extent required in order to obtain the Required Regulatory Approvals.” For CFIUS specifically, in lieu of a reverse termination fee, Nano committed to take “all action necessary” to obtain CFIUS approval—a HOHW clause—except that Nano was not required to accept mitigation requiring Nano to relinquish control of any portion of Desktop’s business that accounted for 10% or more of its revenue.
    • The parties also included a “Required Actions” list in a disclosure schedule, pre-agreeing that certain common mitigation terms—like supply assurances, U.S. citizen-only requirements, and information firewalls—would not count as triggering the 10% carveout.
• Changes at Nano: Following a proxy contest, Nano’s board underwent a dramatic turnover in the middle of the CFIUS process. The Court of Chancery found that the new board—controlled by an activist investor that had opposed the transaction and advocated waiting until Nano went bankrupt to acquire it—saw the CFIUS process as a potential exit ramp.

III. The CFIUS Process:

• The CFIUS Filing:
  • Initially, both sides worked cooperatively with each other to prepare the joint CFIUS filing, which was submitted in August 2024, and then with the Committee during its review and investigation of the deal.
  • The parties were negotiating a national security agreement (“NSA”) with CFIUS by November and expected to close before year-end.
  • As a result of the proxy contest, however, there was significant turnover on Nano’s board in December, after which, the Court found, the board halted its cooperation in the CFIUS process, as described below.
• The National Security Risk: CFIUS informed the parties that it identified national security risks arising from the transaction and that it would require the parties to enter into an NSA to address those risks. As is common, CFIUS presented the parties with a draft NSA outlining mitigation measures sufficient to resolve CFIUS’s national security concerns. Based upon the proposed mitigation, we expect that CFIUS was likely concerned that Nano may take actions that could:
  • Jeopardize the continuity of supply to the U.S. government of certain Desktop products; and
  • Undermine the integrity of the products used by the U.S. government, including by providing unauthorized remote access to U.S. government information systems.
• The Draft National Security Agreement: The principal terms of the draft NSA included:
  • preventing integration of Nano and Desktop IT networks;
  • restrictions on global manufacturing locations for products supplied to the U.S. government;
  • limitations on the use of “remote access” software in products supplied to the U.S. government;
  • a third-party auditor and monitor to verify compliance, and
  • a non-voting, U.S.-citizen board observer approved by the CFIUS Monitoring Agency on the board of Nano.
• CFIUS Delays and Refiling:
  • The first 90-day review and investigation period ended without final agreement on an NSA, resulting in the case being withdrawn and refiled to restart the review clock.
  • After the board turnover, Nano began delaying its CFIUS responses, paused engagement with CFIUS, and ultimately resisted accepting the NSA.
  • As the merger agreement’s outside date approached, Desktop filed suit in Delaware seeking specific performance to require Nano to conclude negotiations on the NSA and obtain CFIUS approval.

IV. The court’s ruling

The court held that Nano breached its obligation to use reasonable best efforts to close the merger as soon as reasonably possible and to take all action necessary to obtain CFIUS approval. The court further held that even if Nano carried its burden of showing that the required mitigation prevented control over a part of the business that accounted for over 10% of Desktop’s revenue, Desktop had shown that the NSA terms fell squarely within the Required Actions list (and therefore did not trigger the 10% exception to the HOHW obligation).

The court, therefore, granted Desktop’s request for specific performance, noting that the merger agreement provided for specific performance as the appropriate remedy for a breach. In furtherance of this determination, and given that CFIUS has already confirmed that the execution of the NSA would allow it to clear the transaction, the court ordered Nano to agree to and execute with 48 hours an NSA in a form proposed by CFIUS.

V. Key takeaways

Transaction parties can glean several important lessons from this opinion:

• ”Efforts” covenants merit special attention when applicable to the process for obtaining CFIUS clearance:
  • In contrast to the practice in antitrust reviews where the burdens will be on the merger parties to propose adequate remedies and the enforcers will not spell out what remedies  the parties need to adopt to ensure clearance, CFIUS will often unilaterally offer up a draft NSA or other set of terms that are necessary to obtain CFIUS approval.  This distinction may leave a clearer path for a target or seller to obtain specific performance orders against a buyer in the CFIUS context than in the antitrust context, especially as a merger agreement’s outside date gets closer.
  • Using revenue or other financial performance figures to cap the scope of an “efforts” covenant, as the Nano-Desktop merger agreement did, can be an unreliable means for capping the scope of remedies when, as is regularly the case in CFIUS, the remedies required to obtain clearance are behavioral in nature and of a nature that is not easily tied to impacts on financial performance.
  • CFIUS remedies can be less predictable than antitrust remedies due to the highly varied and wide range of national security risks.
    • In this case, Nano sought to limit its obligations by carving out measures that would “effectively limit or prohibit control of a portion of the business constituting more than 10% of the business’ revenue.”
    • This revenue percentage-based approach, however, appears to have left a large gap that would allow some behavioral remedies that could still be highly corrosive but not clearly constitute a loss of control triggering the HOHW carveout.
• Break fees vs. HOHW: In terms of effectively allocating CFIUS risk, it is useful to conceptualize break fees and “efforts” clauses as having a hydraulic relationship where one goes down as the other goes up. If a buyer wants greater flexibility to walk away from a deal due to CFIUS mitigation, it may be useful to “buy” a lesser “efforts” clause or a wider carveout from the HOHW obligation with a break fee up front. This same approach can work from a seller’s perspective, where the risk associated with a CFIUS closing condition can be managed by either a heightened “efforts” requirement or a higher reverse termination fee.
• Lists of specific mitigation measures can be useful, despite roadmapping risks: A pre-agreed list of mitigation measures that are either acceptable or are unacceptable is often a more precise way to scope the buyer’s obligation. The principal concern with this approach is that it can provide the regulator with a “roadmap” to seeking the maximum concessions palatable to the buyer. While this is a risk, CFIUS, in our experience, generally makes its decisions independently of what the parties have agreed to, and the risk and cost of CFIUS overshooting is often greater than the risk of roadmapping.
• CFIUS is a Black Box—Bring a Flashlight: While no party can predict exactly what risks CFIUS might identify and the remedies it may require, understanding the full range of reasonably possible mitigation remedies helps you draft regulatory covenants with eyes wide open. Parties should carefully consider recent CFIUS practice and how new policy developments may impact proposed mitigation measures and assess the commercial feasibility of these measures early on. The better you know your own red lines, the more precisely you can carve deal-killers out of the scope of HOHW.
• Leverage First-Mover Advantage: Standard guidance about “not negotiating against yourself” is not advisable in a CFIUS context, particularly when mitigation remedies are expected. When facing a HOHW clause, buyers should consider proactively proposing pressure-tested, operationally feasible, and commercially acceptable mitigation measures. Otherwise, parties risk CFIUS proposing onerous mitigation and anchoring to their proposal.
• Timing is Crucial—Prepare for Purgatory: If CFIUS mitigation is a possibility, parties should ensure the transaction agreement affords them sufficient time to negotiate with CFIUS to reach mutually acceptable terms. Putting aside what the Court found to be Nano’s deliberate attempts to delay the CFIUS process, transaction parties still need to account for a sometimes lengthy and unpredictable CFIUS process.
  • CFIUS data from recent years indicates that almost all transactions involving CFIUS mitigation require a minimum of one refiling (extending the total CFIUS timeline to over 6 months).
  • If a buyer agrees to HOHW, it should ensure that it has both time and flexibility to negotiate, as CFIUS’s first mitigation proposal almost always overshoots both what is necessary to address a risk and what is operationally feasible for the parties.