Delaware Law Alert: Court of Chancery Orders Specific Performance in Acquisition of a Company Approaching Insolvency

On March 24, 2025, Chancellor Kathaleen McCormick of the Delaware Court of Chancery issued a post-trial opinion in Desktop Metal, Inc. v. Nano Dimension Ltd.,¹ ordering the parties to comply with a merger agreement and close a transaction to consummate Nano’s acquisition of Desktop Metal. The decision offers a helpful case study of a deal involving a financially distressed target company’s successful effort to force a buyer to close a merger where the buyer failed to use reasonable best efforts to close.

This Legal Update examines the deal context, discusses the court’s assessment of the merger agreement provisions relied upon by the buyer and target company at trial, and performs a detailed analysis of how the court evaluated those specific provisions after factfinding as to each provision.

Deal Context

The target, Desktop Metal, was a public company that made industrial-use 3D printers that created specialized parts for missile defense and nuclear capabilities. Prior to deal negotiations and increasingly after the merger agreement was signed, Desktop Metal was experiencing a financial decline. At the time of the merger negotiations, the company had added a going-concern qualification to its quarterly SEC filing. Over the two preceding years, the company had been undertaking aggressive cost-cutting measures, including efforts to extend payables, increase collection of receivables, consolidate its locations, and reduce its workforce.

Nonetheless, the buyer’s board unanimously approved the merger with the target, and the parties executed the merger agreement. Because the target was a US government contractor, the parties anticipated review and approval of the transaction by the Committee on Foreign Investment in the US (CFIUS) as a condition to closing, which could potentially slow the acquisition. As Desktop Metal was concerned about having enough cash to get to closing, particularly given anticipated regulatory delays, it secured Nano’s agreement to use reasonable best efforts to close as soon as reasonably possible, in addition to a “hell or high water provision” requiring that Nano take all actions necessary to obtain CFIUS approval. In addition, the agreement provided that the parties would negotiate a bridge loan by which the buyer would extend credit to the target in case the regulatory approvals pushed out the closing. Nano also negotiated for certain protections related to Desktop Metal’s potential bankruptcy, in addition to certain covenants requiring the target to, among other things, maintain its business in the ordinary course, and maintain its policies and procedures regarding receivables and payables.

In the meantime, a major stockholder of the buyer had opposed the transaction and launched a proxy contest. The stockholder advocated for terminating the transaction and acquiring components of the target out of bankruptcy. The stockholder gained board seats, and at this time, the buyer began to deliberately delay its efforts in obtaining CFIUS approval, specifically by delaying the negotiation of a national security agreement (NSA) required by CFIUS. The stockholder won additional board seats and eventually took control of the board when the remaining directors resigned.

With the CFIUS review stalling over protracted NSA negotiations, in which the buyer appeared to be either non-responsive or moving backwards, the target sued for breach and specific performance, moving to expedite the case. The buyer asserted counterclaims, and in the interim continued to stall the negotiation of the NSA. After expedited discovery and trial, the Delaware Chancery Court determined that the target was entitled to specific performance and ordered the buyer to execute the NSA within 48 hours and otherwise comply with all of its obligations under the merger agreement.²

Key Takeaways

Although the relevant provisions are discussed in more detail below, we highlight here a few high-level takeaways for transactions involving distressed target companies.

Target’s Deal Protections: The court praised the outcome in this case as a “victory for deal certainty.” For the target company, this victory hinged on a few key specifically bargained-for provisions.

• The detailed reasonable best efforts clauses and CFIUS hell or high water provisions were key in preserving the deal. The buyer identified the CFIUS process as the deal’s weak point, believing it could tactically slow the process until the target entered insolvency. Of particular benefit to the target was the detailed nature of the hell or high water provision. Although the seller granted the buyer an exception if CFIUS required the buyer to relinquish control over a portion of the target accounting for 10% or more of revenues, this exception was narrowly tailored and would not apply with respect to a number of common requirements CFIUS would impose (such as certain manufacturing and software requirements that could theoretically reduce the buyer’s control of the post-closing target). In litigation, the buyer claimed the 10% carveout applied, but the target was able to rebut these claims thanks to the detailed limitations in the provision.

Also, as discussed in greater detail below, these provisions helped prove that the target was entitled to specific performance. Once established that the buyer had breached these covenants and engaged in tactical delay, the court determined that equities balanced in favor of the target. In addition, the buyer’s breach helped the target establish the prevention doctrine as a defense to the buyer’s counterclaims of breach. The court held that, by establishing the buyer’s breach of the hell or high water and reasonable best efforts covenants, the target had shown that the buyer’s delay had materially contributed to the potential failure of the no-bankruptcy closing condition.

• The specific performance provision was central to the court ordering the merger to close. Because these two sophisticated deal parties had stipulated to specific performance in the merger agreement, the buyer’s only defense was to claim that the equities favored not enforcing the agreement. Once the court determined that the buyer had breached its efforts covenants by slow-rolling the CFIUS process, this became a difficult argument for the buyer to win.

Buyer’s Lines of Attack: The buyer in this case was not in a strong position to terminate the transaction, but we note those claims that probably provided the most promising grounds for termination.

• The buyer nearly proved that the no-bankruptcy condition had failed. Perhaps the buyer’s strongest argument was that the buyer was insolvent. Importantly, though, the target had negotiated for a very carefully worded no-bankruptcy condition. The target had avoided including a solvency representation in the merger agreement, and the no-bankruptcy condition gave the buyer an opening to terminate only if it could identify a written admission that Desktop Metal could not pay its debts as they matured. Fortunately for the target, although there was extensive fact and expert evidence concerning the target’s financial peril, there was no “smoking gun” written admission. The court held that forward-looking statements about insolvency did not qualify.

A distressed target company should be aware of the record it is creating. The buyer scoured the target’s public filings, internal communications, discussions with customers and suppliers, and statements made to CFIUS for evidence of insolvency. A wrong statement in any of these materials could have given the buyer grounds to terminate. The court noted that the target appeared to have very carefully crafted its written statements to avoid breaching the no-bankruptcy condition.

• The ordinary course conduct covenant gave the buyer another opening. Although the buyer failed to prove that the ordinary course covenants were breached, the covenants were broad, allowing the buyer to search the target’s operations for evidence of material changes in business conduct, especially among key personnel, customers, and suppliers. The buyers also targeted changes in collection and payables policies. The target required extensive expert analysis in these areas to prove that it had not made or experienced any material changes. Sellers should take care to avoid making material changes in these areas after signing.

The Agreement Terms and How They Played Out

Below are the key provisions from the merger agreement at issue, along with a brief summary of the parties’ claims with respect to each and how they stood up in litigation.

1. Regulatory Approval Covenants

As a general matter, the parties agreed to use their “reasonable best efforts” to close the merger as soon as reasonably possible and to resolve any objections asserted by a governmental entity. Notably, for CFIUS approval, the buyer agreed to a “hell or high water” provision, by which it would take all action necessary to receive CFIUS approval, including providing assurances, entering into a national security agreement (NSA) or similar arrangements.

However, as a proviso to these obligations, the buyer was not obligated to close if any condition of CFIUS approval would effectively prohibit the buyer’s board from exercising control over any portion the target’s business that, in the aggregate, constituted more than 10% of revenue during certain periods (the “10% Carveout”). This limitation was pared back in a further proviso—the 10% Carveout would not apply to certain potential government remedies listed in the disclosure schedules. In other words, the buyer would still be obligated to close if CFIUS imposed any of the listed remedies (the “Permitted Remedies”). The Permitted Remedies included, among other things, CFIUS requirements regarding sensitive information; access to certain technology, facilities, and information; security protocols for products sold to the US government; and assurance of supply continuity and certain rights triggered upon changes to the target’s business. 

2. No-Bankruptcy Closing Condition

The no-bankruptcy closing condition provided that, as a condition precedent to the buyer’s obligations, the target and its subsidiaries had not “experienced a Bankruptcy.” A “Bankruptcy” would occur when the target “admits in writing its inability to pay its debts as they mature.”

3. Other Closing Conditions

The merger agreement also conditioned the buyer’s obligation to consummate the merger on the target performing its covenants in all material respects. The covenants at issue included the following:

• Ordinary Course Covenant Closing Condition. The target agreed to an ordinary course conduct covenant, by which it would use commercially reasonable efforts to (1) “conduct its business in the ordinary course consistent with past practice in all material respects” and (2) keep available the services of its current officers and key employees and maintain relationships with key customers and suppliers.

• Receivables/Payables Covenant Closing Condition. The agreement also included an interim covenant relating to accounts receivable and accounts payable. Prior to closing, the target could not change the existing credit, collection, or payment policies, procedures, or practices regarding accounts receivable and accounts payable. 

• Transaction Expense Covenant Closing Condition. Another interim covenant related to the target’s transaction expenses. The target could not incur transaction expenses over $15 million. Transaction expenses were defined to include (1) all fees, costs, and expenses incurred or payable by the target at any time in connection with the transaction and (2) the fees and expenses of legal counsel in connection with the agreement or the consummation of the transactions.

4. Specific Performance

The agreement included a fairly typical specific performance provision, by which the parties acknowledged that money damages would not be an adequate remedy for non-performance or breach and that the parties would be entitled to injunctive relief to prevent breaches of the agreement and to enforce specifically the performance of its terms.

The authors would like to thank Alexander H. Aschi for his contributions to this Legal Update.

 

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¹ C.A. No. 2024-1303-KSJM (Del. Ch. March 24, 2025, McCormick, C.).

² Order and Partial Final Judgment, C.A. No. 2024-1303-KSJM (Del. Ch. March 24, 2025, McCormick, C.).