I'm mad at Nintendo, apparently that's who valve is afraid of getting sued by!
still, I think while a lot of people loved watching this get built I'd be surprised if a lot of people actually played it and he said he was almost relieved - he got an amazing amount accomplished but another 2 years of work is a lot!
I'm super interested to see what he does next. Smart guy and his videos are really interesting, and a lot of people know who he is now.
Nintendo has never publicly released the tools required to build games for the N64. The tools that he used during development (specifically the libUltra library that helps programmers talk to the N64 hardware) therefore are not legally his to use, nor does he have legal rights to distribute software built using it.
As such, Valve is stepping up and asking the project to halt because if Nintdo wanted, they could cause legal troubles for the developer and/or Valve. Since the Portal name and assets are in use, Nintendo could go after Valve as well for seemingly "supporting" unauthorized use of their proprietary tools.
In short: they can't. I mean, Nintendo could try, but it would definitely be thrown out. Valve was never directly involved in this project in any way, at least not until stepping in to shut it down. They were just concerned about their IP being in any way connected to anything unauthorized Nintendo.
Portal 64 uses a proprietary library by Nintendo (namely libultra). This library cannot be freely used, and Nintendo can sue anyone for using it without their permission. Portal is Valve’s intellectual property, so there’s a risk that Valve can be dragged in into this if Nintendo takes legal action.
Valve doesn’t want to risk dealing with Nintendo’s lawyers, so to be on the safe side they ask for Portal 64 to be taken down instead. The risks might be slim, but Valve don’t want to take any chances with Nintendo.
It's built using something Nintendo made. It all makes sense after watching the creators video. He outlines how the lawyers probed with questions to see if they could do it and that was the nope moment. Plus they don't have incentive to try to fight Nintendo over something that Nintendo may legitimately have reason to fuss over.
My guess is something along the lines of violating the end user agreement of Nintendos Intellectual property the code that the N64 uses. Same reason you can't really get old ROMs of Nintendo games.