Francis Pileggi reports that:
In an expedited deal litigation matter, in The Williams Companies, Inc. v. Energy Transfer Equity, L.P., C.A. No. 12168-VCG (Del. Ch. June 24, 2016), the Court of Chancery denied a request to enjoin Energy Transfer Equity, L.P. (“ETE”) from evading a deal based on its inability to obtain a tax opinion that was a condition precedent to closing on a deal with The Williams Companies, Inc. ...
One of the key facts of the case was that a condition precedent to consummation of the merger was the issuance of an opinion by the tax attorneys for ETE at the law firm of Latham & Watkins. ... Although Latham initially, at the time the agreement was signed, expected to be able to issue that opinion, after the agreement was signed something changed. Based on changing market conditions and reduced value of the stock on the tax impact, Latham disclosed that it was no longer able to issue such an opinion. One of the claims that Williams maintained against ETE was that it failed to use “commercially reasonable efforts” to secure the Latham opinion and, therefore, materially breached its contractual obligations. ...
Delaware is a contractarian state, and recognizes and respects provisions in contracts that favor specific performance in case of breach. But conditions precedent to a transaction must be enforced as well. ...
The court observed that the phrase “commercially reasonable efforts” was not defined in the agreement, and that even though the phrase has been addressed in other cases – – “the term is not addressed with particular coherence in our case law”. The phrase has also been articulated as “reasonable best efforts” which has been described as “good-faith in the context of the contract at issue.” Citing Hexion Specialty Chemicals Inc. v. Huntsman Corp., 965 A.2d 715 (Del. 2008), the court found that the phrase “commercially reasonably efforts” in the agreement in this case required the purchaser, ETE, to submit itself to a “objective standard to ‘do those things objectively reasonable to produce the desired’ tax opinion in the context of the agreement reached by the parties.”
Which brings me to one of my pet peeves: Lawyers using "best efforts" and its variants without understanding its meaning.
These sort of phrases are routine in commercial and M&A contracts but are almost never defined therein:
Update: In an earlier version of the post, I inadvertently failed to credit the author of the study from which the summary chart was taken. With sincere apologies, I do so now: Kenneth A. Adams, Understanding “Best Efforts” And Its Variants (Including Drafting Recommendations). It's an extremely helpful guide that I strongly recommend.
In my M&A class, I follow this slide up with the following:
Bottom line: Lawyers use these phrases without thinking about what they mean or how a court will interpret them.
What I tell my class is simple: Define the terms (unless you've got a really good strategic reason for not doing so that's been validated by at least two experienced M&A lawyers).
