Cross-border M&A deals frequently present unique issues and strategic closing considerations for transaction parties to navigate—including national security approvals. In a recent Delaware Chancery Court decision, these issues intersected when the court was forced to weigh national security-related approval conditions imposed by the Committee on Foreign Investment in the United States (“CFIUS”) against the buyer’s stringent contractual closing obligations.
On July 2, 2024, Nano Dimension, an Israeli company, agreed to acquire Desktop Metal, a U.S. company that makes industrial-use 3D printers which produce specialized parts for missile defense and nuclear-related applications. Unsurprisingly, closing the acquisition was contingent upon receiving CFIUS approval due to the sensitive nature of Desktop Metal’s operations. At the conclusion of its review period, CFIUS required Nano Dimension to enter into a national security agreement (“NSA”) outlining several post-closing operational restrictions imposed upon the parties, which Nano Dimension refused to accept as a result of new leadership that opposed the acquisition. Desktop Metal subsequently filed suit to force Nano Dimension to enter into the NSA to obtain CFIUS approval and consummate the acquisition, which the court granted.
Key Findings and Takeaways:
- Hell-or-High-Water Provision: A pivotal aspect of the court’s decision was the interpretation of a “hell-or-high-water” clause in the transaction merger agreement. This clause required Nano Dimension to undertake all necessary actions—including agreeing to several enumerated conditions typically requested by CFIUS—to secure approval, subject to limited exceptions (i.e., a condition that would require Nano to relinquish control of 10% or more of its business). The court found that Nano Dimension breached this obligation through both its negotiating posture with CFIUS in relation to the NSA and by delaying the CFIUS approval process.
- CFIUS Approval Strategy: Desktop Metal’s operations in critical technology sectors resulted in a complicated CFIUS approval process. The ruling emphasized that transaction parties should be aware of the potential for CFIUS to rely on NSAs impacting post-closing operations to address potential national security risks associated with foreign control.
- Contractual Clarity Around CFIUS Obligations: The court’s decision illustrates the importance of clear contractual language detailing the relative obligations of the parties to obtain CFIUS approvals. We recommend that transaction parties carefully consider the implications of CFIUS approval language included in transaction documents:
- For example, agreements should clearly delineate what conditions would be considered reasonable mitigation conditions that a potential buyer must accept (e.g., data security practices and auditing mechanisms) and those conditions that would not trigger an obligation to close (e.g., divestment of certain business lines or the use of proxy boards).
- The use of clear language outlining stakeholder alignment, permissible negotiation strategies and timing considerations with respect to CFIUS approval also contribute to the likelihood of a better outcome with CFIUS.
The Nano Dimension and Desktop Metal ruling serves as a crucial reminder of the complexities involved in cross-border mergers subject to CFIUS approval and provides valuable insights for practitioners and transaction parties navigating the CFIUS process.