An Unheard-of Result: Specific Performance of Regulatory Approval Covenant in a M&A Transaction

John is joined by Christopher D. Kercher, a partner in Quinn Emanuel’s New York office. They discuss the recent win Chris’s team achieved in a Delaware Chancery Court trial involving a high-stakes case involving Desktop Metal and Nano Dimension. The dispute centered around a merger agreement that included a "hell or high water" clause obligating Nano, the buyer, to do whatever was necessary to secure regulatory approval from the Committee on Foreign Investment in the United States (CFIUS), with a narrow exception if required actions would result in a loss of 10% or more of the company’s revenue.

After the agreement was signed, a hedge fund replaced Nano’s board and management with personnel opposed to the deal. The new board then sought ways to back out. Although CFIUS approval was near, Nano’s new leadership began stalling, making endless counterproposals, delaying communications, and attempting to trigger the revenue-loss exception by claiming that a requirement to maintain a German facility would exceed the 10% threshold.

While the buyer tried to appear compliant with the contract, the evidence—particularly a 38-day gap in responding to CFIUS—revealed a pattern of bad faith and delay. Desktop Metal, struggling financially, was meticulous in adhering to operating covenants, collecting receivables and consulting Nano on business decisions, knowing any misstep could be weaponized to kill the deal. Despite pressure, the seller never received a renegotiation offer from Nano.

At trial, the team presented the buyer’s conduct as a strategic “slow-walk.” The court ultimately agreed, affirming that a hell or high water clause must be honored in both letter and spirit. The case serves as a reminder that efforts to evade deal obligations—particularly those cloaked in delay or technicalities—will be exposed under judicial scrutiny, and that Delaware courts remain committed to upholding contractual integrity in complex M&A transactions.

Podcast Link: Law-disrupted.fm
Host: John B. Quinn
Producer: Alexis Hyde
Music and Editing by: Alexander Rossi

Transcript

Note: This transcript is generated from a recorded conversation and may contain errors or omissions. It has been edited for clarity but may not fully capture the original intent or context. For accurate interpretation, please refer to the original audio.

JOHN QUINN: This is John Quinn and this is Law, disrupted, and today we're speaking with my partner Chris Kercher, who's in our New York office, about a really interesting case that he and the team of lawyers from our firm tried in Delaware Chancery Court earlier this year. The case made waves in the merger and acquisition world, because of the outcome of the case.

It was kind of unexpected to many practitioners, it got some real attention. Basically, the case poses the question where a merger or acquisition agreement has a so-called hell or high water clause requiring that the seller do everything necessary to get government approvals, can kind of slow walk or you know, not get approvals, in this case, a regulatory approval from CFIUS, the Committee for Foreign Investment in the United States. 

Could they buy a pattern of behavior and delay, defeat or hell or high water clause? I mean, basically I think what we're gonna learn by talking to Chris is that, you just can't hide if you're not trying to close a deal, that's going to come out in discovery and it's not gonna come out in the evidence.

Chris, tell us a little bit about who the parties were. 

CHRIS KERCHER: Yeah, thanks John and happy to be here. So Desktop Metals is a 3D printing company, effectively based in Boston that prints among other things, components for U.S. defense applications, missiles, submarines, you know, really high-tech stuff, really sensitive stuff.

And it is a company with great technology that has struggled historically to turn a profit. And so the company had been looking for a merger partner for some time. It actually had another merger partner in a company called Stratasys. And then Nano, the defendant in the case came along, and this is what made it such an interesting story.

I think one of the most interesting stories of corporate intrigue I've ever read about or seen, Nano Dimensions, an Israeli company, was interested in rolling up the 3D printing market, that there were a lot of, fractionalized businesses. They weren't turning a profit. Nano Dimensions had raised a bunch of cash and its CEO Yoav Stern was going out to roll them up.

So Nano Dimensions, which was the largest shareholder of Stratasys, Desktop's original merger partner, killed that deal effectively. They killed Desktop's ability to merge with Stratasys, and then the next day, Nano Dimensions came in with a bit of its own. So really interesting, corporate intrigue up to that point, but it gets even weirder.

After, Desktop and Nano Dimensions signed the deal, Yoav Stern and his board of directors, through a combination of litigation in Israel and a shareholder vote, were replaced wholesale by a slate of directors nominated by a savvy, hostile, activist hedge fund that had a major position in Nano Dimensions and that hedge fund ran on a campaign of revising the strategy to roll up the industry and to kill these deals, the deal at Desktop Metal. 

So the board comes in after signing, after the parties are well along the way, diligence is done. The CFIUS process was nearing its end by the end of last year, and they had a massive integration team involving both companies and PWC, which was the integration partner.

So the board comes in after signing, after the parties are well along the way, a diligence is done, the CFIUS process is nearing its end by the end of last year, and they had a massive integration team involving both companies and PWC, which was the integration partner. So the new board comes in, and they immediately get to work on, right, how do we get out of this deal?

JOHN QUINN: There's a signed deal, but they wanna get out of it. So, this deal has one of the hell or high water clauses as I understand. 

CHRIS KERCHER: That's right. And that became critical in the negotiations between buyer and seller because it was a sensitive technology, because it was a foreign buyer, the seller, our client desktop, which had another firm that negotiated the deal, negotiated carefully for a hell or high water commitment on CFIUS the Committee on Foreign Investment in the United States to ensure that Nano Dimensions would have to effectively do anything that CFIUS required, with one exception, which we can get to later.

In order to satisfy CFIUS, strike a national security agreement or other mitigation measure and close the deal.

And what Nano Dimensions and its new board decided to do was basically never stop negotiating. So rather than rejecting, clearly a provision from CFIUS, they just kept offering new and different terms. Ultimately, on the eve of trial, literally on the eve of trials, we were walking in, they took the position that the exception to the hell or high water had been triggered and they weren't obligated to close after all.So it was a moving target throughout. 

JOHN QUINN: What was the exception to the hell or high water commitment? 

CHRIS KERCHER: Right, so under the deal effectively, the one thing that they did not have to agree to were any mitigants, involving more than 10% of the revenue, losing control over more than 10% of the revenue, and that was designed obviously for major mitigants.

And what was interesting is they couldn't actually find anything significant, they couldn't actually identify anything that CFIUS wanted to do. Moreover, a loss of control of more than 10%. So they came up, you know, really in the 11th hour with a theory that because, which you can understand why the U.S. government would want a 3D printing company with 3D printing Technology that goes into nuclear submarines to remain in the same manufacturing facilities.

For example, they didn't want them, you know, closing the existing inspected and approved manufacturing facilities to, you know, spring up new ones. So the buyer came up with this theory that because they had to keep open this facility in Germany and they decided they didn't wanna keep open the facility in Germany, that entire facility, because they couldn't close it was more than 10%. And obviously the court rejected that. 

JOHN QUINN: So they took the position. Just to recap, so there's a deal to sell the company, with the previous management, and new management comes in. They don't wanna do the deal, but they've inherited a deal that has a hell or high water clause that says you're gonna do everything necessary to get the approval of this Federal regulatory body CFIUS in order to close this deal. It's your responsibility to make it happen, Full stop. With one exception, if CFIUS requires that you do something that impacts 10% or more of the revenue, you don't have to do that. And they entered into a pattern of, I gather just continuing to negotiate with CFIUS right up to the start of the trial.

And at the very end they say, well, CFIUS is making us keep open this facility in Germany. And that in effect, represents, you know, we wanna close it. The keeping that open in effect is, you know, 10% delta in our business. So the exception is triggered, we don't have to close. Is that essentially it?

CHRIS KERCHER: That's it, and the other prong of their strategy was to try to time us out. They wanted to time us out, both under the contract, which had a March 30th long stop date, but also as a matter of corporate existence that our client, remember it was losing money, they knew the burn rate. The outside date was more or less pegged at how long our client had to survive, and so they felt like it was like the old joke, we don't have to outrun the bear, we just have to outrun you. They needed to outrun our company's own survival. 

JOHN QUINN: Did you use that? Did you use that line in the trial? 

CHRIS KERCHER: I don't think I did, but I kind of wish I did. I like it. It's mine, you know, so they're trying to time us out and meanwhile, our client is trying to comply with the interim operating covenants, right?

They have to run the business in the ordinary course. They can't, you know, let bills go unpaid, they have to collect money. It was actually kind of bizarre that they claim that we breached the interim operating covenants because we were collecting receivables too.

They didn't like how we had an uptick in how we were bringing in receivables. And so it was like, you know, it sort of reminded me of the movie, if you remember from the eighties, Brewster's Millions, where he got tripped up on a technicality in the end and he had to spend all the money. It was the same thing here, where we're going through every receipt trying to find, is there some payment that our client hasn't made but was supposed to make that they're gonna use as a footfall, right?

JOHN QUINN: And so, yep. That's fascinating because you tried a case a couple of years ago in Delaware, where we represented a buyer who did not wanna close on a deal and defended you, defended successfully on the grounds that the seller had not continued to maintain the assets in the ordinary course between signing the deal in the transaction, and here you're representing a seller that's running outta money, they're facing a deadline and they know they're being watched very carefully about those ordinary course issues and are being very punctilious about making sure even though their cash, their bank account is running out, making sure they're continuing to operate the company in the ordinary course.

CHRIS KERCHER: That’s right, and the case you're referring to is the AB stable case, which was affirmed by the Delaware Supreme Court. And that case, just to recap briefly because it's relevant, our client having agreed to purchase in late 2019, about 20 trophy U.S. hotel properties in the U.S.

It was gonna close in the first quarter of 2020. Some things happened in the first quarter of 2020 that made financing difficult, it made the hotel business difficult. There was obviously the pandemic, and in that case, the seller closed the hotels without checking with us, without checking with our client. And that act, it wasn't just closing the hotel, though it was doing so without giving, without seeking our consent.

We couldn't unreasonably withhold consent in that case, but they closed the hotels before our client had a chance to weigh in. And so our team was acutely aware of that logic and so we were constantly on a daily basis on the phone with our CFO, CEO, finance teams, giving them advice. As you know, things come up every day when you're running a business.

And when things look like they might be out of the ordinary, we were constantly going back to the buyer to get their consent or to ask them for their position, and I think that put them in a tough spot. 

JOHN QUINN: So how did this play out in court? I mean, I would think if you are a buyer and you're trying to, you know, set up an excuse like this for not closing, you gotta be very careful about what you do, where your fingerprints are.

You know, everything you do is going to be scrutinized as to whether this is all a charade to whether you're really trying. What are the issues? That's a very difficult thing to do and to pull off. 

CHRIS KERCHER: Yeah, and it's interesting because hedge fund comes in, they replace the board.

Not only do they replace the board, they replace almost the entire management team. They found a guy who was the director of investor relations, a nice, you know, younger guy, and he had written a memo, actually advising the CEO against doing our deal. And so the new board found that memo and thought, this is our guy, he's our new CEO.

So they prop him up and they put him in the CEO chair, and he's now supervising the CFIUS process. And so I think, you know, part of it was perhaps a little bit of inexperience on his part. I think it wasn't just what was in the documents because they were careful and they took a lot of privileged positions and given the expedited litigation, we didn't have a chance to fully explore those in court. So there was a lot hidden, I think, on the privilege. But we know how to use it because it's not just what story, the document tells, it’s what story they don't tell. And there was this massive 38 day gap in correspondence to CFIUS in responding to a CFIUS proposal that occurred after this new board took over, and that's clearly not best efforts. 

It's clearly not complying with hell or high water. So how did they explain it? They tried to explain that they were working with lawyers to understand the deal, they were trying to fulfill their fiduciary duties. But of course, if that were true, you would expect among other things, that they would've reached out to our client to tell us, hey, this is what's going on.

We're reviewing the deal, we need this much time. You would've seen some effort, which they had a best effort requirement, some effort to expedite this so-called review. But what we really saw was that they brought litigators in, we know what that looks like. They brought litigators in and you know, no doubt, although I don't have the document, I am sure that there was a conversation that started roughly like, how do we get out of this deal?

JOHN QUINN: Mm-hmm. I mean, were there some really telling cross examinations at the trial? 

CHRIS KERCHER: You know, I enjoyed my cross of the CEO, he was a you know, a smart guy. He knew the business well, but I was able to find documentary evidence that, you know, the other analogy I came up with, when you have a best efforts obligation as merger partners, think of it like a couple who's engaged to be married, right?

And you would expect that they're engaged to be married. Maybe there's a condition that they have to agree on the efficiency or something, but they're gonna be picking on flowers and talking about bands. And if suddenly one of the fiances is talking about going on spring break with his buddies instead of planning a future with his new wife, you start to have a sense that maybe this wedding isn't gonna happen. And so that was the kind of evidence we looked for. Where is the evidence suggesting that Nano Dimensions, the buyer, is going through this as a true co-venture who is committed to this deal as opposed to someone who's trying to find a footfall to get out.

And that was pretty powerful on cross. 

JOHN QUINN: Yeah, we've had a similar case. I don't know whether, similar in some respects, whether you know about it in Singapore. That our partner, John Rhie, Corey Wooster, Ellyde Thompson and others tried, where we represented the Korean private equity firm, Mirae, at adverse to Brookfield.

And that's confidential arbitration, so we can't say a lot about that, except that it did involve an issue about a breakup fee, a deposit, that's part of the issue in the case. However, how that's characterized and whether our client had used reasonable best efforts to get in a regulatory approval for a transaction when the regulatory approval was not obtained.

What then becomes of the deposit or the down payment was the issue in that case? I mean, so I guess these clauses require parties, you know, exercise hell or high water efforts or reasonable best efforts or different formulations of that to get regulatory approvals are not A, not uncommon in merger and acquisition agreements, and B, seemingly, if the approvals aren't obtained, are a ripe source for disputes. 

CHRIS KERCHER: That's right and, Delaware, you know, obviously has built up, built up a wealth of well thought out case law that attempts to align the business realities with these contracts. And so understanding that once you sign that contract between signing and closing, you're sort of joined at the hip.

And all of the body language, all of the effort needs to really look like you're both moving towards the same final outcome. You know? Sure, there'll be hiccups just like in any, I guess, marriage and things to work out. But when the body language is all, we're not with these guys, we're doing our own thing. We're looking for ways to get out of this, that's where you run into trouble. 

Likewise on, you know, interim operating covenants, ironically, Murial was the same party we represented the same wonderful client, we represented in the hotel case. That's right, yeah, so they certainly are big friends of Quinn Emanuel and it's mutual.

But in that case, the same thing that the court wanted to see, if you're gonna take some extraordinary action after signing and before closing, you have to talk to your partner, you have to figure out how they would do it, right? In that case, it was, would you keep the concierge when you shut, you know, when you shut it down and how do you know, protect the spot or whatever.

I mean, there's important business considerations and the Delaware courts are insisting that merger partners communicate and work out those issues in good faith. And if that's not what's going on, you know, Delaware consistently has shown a problem with it. 

JOHN QUINN: I mean, I guess in this case, the court actually found that the buyer did not wanna close.

I mean this was all a Kabuki dance. I mean, let me ask you a question. It's kind of interesting to think about if you had been representing the other side from the beginning, you know, at the time of the drafting the closing documents going forward, if you assume that new management comes in, they don't wanna close, is there anything that could have done differently?

CHRIS KERCHER: You know, they had very good lawyers. They had three law firms, firms we respect and work with all the time. And so, you know, I think, let me describe the strategy and then I can quarterback it. First they went for the information rights, and that's gonna happen in all these deals where the buyer doesn't have, you know, they're not in the business every day.

They typically negotiate for information rights. And so that was the first launch. It was not just, you know, high level, cash flow information or business information. They wanted every thread of paper, data entry, anything under the sun, and that's clever. They could use their information rights as a sort of early discovery to probe through everything with an army of experts in an army of really good litigators to find if there is a breach.

JOHN QUINN: Yes. Some covenant or rep or warranty or something in the document that they could declare a default or you know, an obligation not to close. 

CHRIS KERCHER: That's absolutely right. And so they knew our company's financial situation. They knew they're smart. They know what it's like.

You know, they say bankruptcy happens two ways, slowly and then all at once, I think that was Hemingway maybe. But, you know, that's right. And that's what kept me up at night was that as we got closer, and employees knew this deal was done, we're, you know, we're in a bad spot, we might be outta jobs, suppliers know if I'm gonna send this product for their machines, am I gonna even get paid or are they gonna be on the other side?

And so that's how you start to see it go poorly. But the management team at Desktop Metal did a phenomenal job of their great people, they locked arm in arm with their suppliers. And as Rick Fuller the CEO testified, there were 700 families that were counting on us, which was, you know, in the usual hustle and bustle of corporate litigation, the kind of thing that sometimes isn't noticed. But it was noticed by me, it was noticed by our team, and we felt it, we felt the management team in court every day, completely counting on us.

They came through and they had to run the business, and they gave great testimony. And then our team, myself, Bill Burke, Peter Fountain, Jesse Bernstein, and honestly, so many others. We could be here all day congratulating people, but we had a huge team that worked really hard under some of the hardest circumstances I've ever seen.

And this is my fourth expedited busted deal case, but we got it done. We did not let ourselves or a client footfall, we didn't let them take advantage of the other side of our, you know, misfortune and got to closing. So what could they have done differently? I think generally the strategy made a lot of sense.

I think there were probably a few opportunities where we did have some concern, including our audit. Our client did not engage auditors in the fourth quarter thinking this deal's gonna be done, there's no need for that kind of expense. But as we got closer and closer, suddenly it started to become a problem that there wasn't going to be an audit.

Because you can't just summon an audit overnight. There's no amount of money that you can pay to make an audit.

JOHN QUINN: Audited financials were a precondition to closing?

CHRIS KERCHER: They were not, but they were a condition to certain stock exchange requirements that would only trigger if the deal was still open.

Like in April. There was this ordinary course issue: what if we end up in April And there are, and by that point, because of outside requirements, there are supposed to be audited financials and we don't have 'em, and we don't have an ability to get 'em done promptly. 

But we navigated that very carefully, again, seeking consent at all steps to engage auditors to, you know, hire auditors to, you know, find an audit firm, willing to do it on a short timeline. And I think maybe the other side could have leveraged that a little bit more. I also think that, you know, it was curious to me, in all of these deals, you have, you know, somewhat of an option right by the buyer, unless there's a huge breakup fee.

Maybe you spin the dice and you litigate and you see if something comes up in discovery that gets you out of the deal or at least generates enough uncertainty that your very nervous seller says, you know what, we'll retrade, we'll, you know, we'll take a discount or something. But it didn't really happen here.

And that surprised me. I really thought we were gonna get some sort of godfather offer at the end that our clients couldn't refuse no matter how much they trusted us, but that never came. 

JOHN QUINN: And from a seller standpoint and a drafting standpoint in terms of the deal documents, thinking about if you're a seller and you wanna avoid litigation, this, you know, you're running outta money.

The last thing they needed was to hire us and pay lawyers. But is there anything more you can do to avoid litigation than to have hell or high water commitment to get to regulatory approval? I'm not thinking of something else they could have done to avoid a dispute if the other side's intent is trying to get out of it. 

CHRIS KERCHER: Yeah, I really don't think so. I think the drafters on our side did a quality job looking out for our interests, especially given, you know, that we had the weaker negotiating position as the weaker company. And ultimately you have to rely on Delaware longstanding principle that a contract means a Delaware Courts, really pride themselves on that. It's really important, I think, for commerce in this country that big sophisticated parties can sign merger and acquisition and other important agreements and specify that disputes will be heard in Delaware and know that Delaware is gonna do its level best, subject to the terms of the contract, to make sure that those contracts are enforced. And we were very pleased that the Chancellor, did that once again. 

JOHN QUINN: Well, thank you Chris.Very interesting case. Stands for the principle that if you have a hell or high water commitment obligation to get regulatory approval for a transaction, it means just what it says. Because if you don't close and you haven't, if you've used subterfuges, if you've used faints or charades to try to avoid closing, and there's a dispute that's all gonna come out, it's all gonna come out in discovery as it did in this case. 

So congratulations Chris. Thank you for being on the podcast. This is John Quinn and this has been Law, disrupted. Thank you for listening to Law Disrupted with me, John Quinn. If you enjoyed the show, please subscribe and leave a rating and review on your chosen podcast app to stay up to date with the latest episodes. You can sign up for email alerts at our website, Law-disrupted fm, or follow me on X at JB Q Law or at Quinn Emanuel.

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