Matt Levine's latest Money Stuff newslegter discusses Albertsons suit against Krogers. On December 11th, Albertsons explained that:
Albertsons Companies, Inc. (NYSE: ACI) (“Albertsons”) today filed a lawsuit against The Kroger Co. (NYSE: KR) (“Kroger”) in the Delaware Court of Chancery, bringing claims for willful breach of contract and breach of the covenant of good faith and fair dealing arising from Kroger’s failure to exercise “best efforts” and to take “any and all actions” to secure regulatory approval of the companies’ agreed merger transaction, as was required of Kroger under the terms of the merger agreement between the parties (the “Merger Agreement”).
Kroger willfully breached the Merger Agreement in several key ways, including by repeatedly refusing to divest assets necessary for antitrust approval, ignoring regulators’ feedback, rejecting stronger divestiture buyers and failing to cooperate with Albertsons.
The key provision of their merger agreement is section 6.3, which deals with "Regulatory Matters." Subsection (a) states, in pertinent part:
Subject to the terms and conditions of this Agreement (including any differing standard set forth herein with respect to any covenant or obligation, including, with respect to Antitrust Law, as provided below), the Company [i.e., Albertsons], on the one hand, and each of Parent [i.e., Kroger] and Merger Sub, on the other hand, will cooperate with the Other Party and use (and will cause their respective Subsidiaries to use) its reasonable best efforts to (i) take or cause to be taken all actions, and do or cause to be done all things, necessary, proper or advisable to cause the conditions to the Closing to be satisfied as promptly as reasonably practicable and to consummate and make effective, as promptly as reasonably practicable, the Merger, including taking actions necessary to avoid, eliminate, and resolve any and all impediments under any Antitrust Law with respect to the Transactions, including without limitation preparing and filing promptly and fully all documentation to effect all necessary filings, notifications, notices, petitions, statements, registrations, submissions of information, applications and other documents (including filing any Notification and Report Form required pursuant to the HSR Act within fifteen (15) Business Days following the execution of this Agreement) ...
In addition, Kroger took on a further antitrust-related obligation in section 6.d:
Without limiting the generality of the obligations of Parent and Merger Sub pursuant to this Section 6.3, Parent agrees to, and will cause its Affiliates to, use best efforts, to take, or to cause to be taken, any and all actions necessary to avoid, eliminate, and resolve any and all impediments under any Antitrust Law with respect to the Transactions, in each case, so as to enable the Closing to occur as promptly as practicable, including (i) proposing, negotiating, committing to and effecting by consent decree, hold separate orders, or otherwise, the sale, divestiture, transfer, license, or disposition or hold separate (through the establishment of a trust or otherwise) of such of Parent’s assets, properties or businesses or of the Company’s assets, properties or businesses to be acquired by it pursuant hereto ....
Matt explores at some length arguments about whether or not Kroger complied with these obligations. it's a good read. But I want to focus on what those obligations legally required of Kroger. According to Matt, Albertsons argues that:
First, Kroger generally agreed to use “reasonable best efforts” to satisfy all closing conditions “as promptly as reasonably practicable.”
Second, Kroger assumed a more stringent obligation to use its “best efforts” — not limited by any standard of reasonableness — “to avoid, eliminate, and resolve any and all impediments under any Antitrust Law . . . so as to enable the Closing to occur as promptly as practicable.” That “best efforts” provision explicitly required Kroger to divest any assets and make any changes to its operations that were necessary to obtain antitrust approval.
In fact, however, the best efforts clause probably will not work the way Albertsons claims. As I explain in my book, Mergers and Acquisitions (Concepts and Insights) (4th Edition 2021):
What does it mean for an agreement to require the target board to use best efforts to accomplish something? Covenants in M&A agreements, as well as other business contracts, sometimes include qualifications regarding how far the party making the covenant must go in pursuing the goal of the covenant. Many practitioners subscribe to the view that such “efforts” standards lie along a continuum on which the standards fall. In order of decreasing level of commitment, these effort levels include “best efforts” (the highest level), “reasonable best efforts,” “reasonable efforts,” and “commercially reasonable efforts.” ...
However, there is no general agreement in case law as to whether the various clauses in fact reflect different standards.[1] Courts often use the same analysis in determining whether an efforts clause has been breached, regardless of the specific level of effort prescribed in the agreement.[2] Specifically, courts frequently consider the facts and circumstances of the case and require that the parties act diligently, reasonably, and in good faith in complying with an efforts clause.
Hence, the unadorned "best efforts" clause is not more stringent. Nor does it require Krogers to throw itself on a hand grenade (a metaphor lawyers for companies in Albertsons' shows like to use). It simply requires Kroger to act reasonably and in good faith.
[1] In re IBP, Inc. S’holders Litig., 789 A.2d 14 (Del. Ch. 2001).
[2] See Triple-A Baseball Club Assocs. v. Northeastern Baseball, Inc., 832 F.2d 214, 225 (1st Cir. 1987) (“We have been unable to find any case in which a court found . . . that a party acted in good faith but did not use its best efforts.”); Bloor v. Falstaff Brewing Corp., 601 F.2d 609, 614 (2d Cir. 1979) (best efforts imposes an obligation to act with good faith in light of one’s own capabilities); W. Geophysical Co. of Am. v. Bolt Assocs., Inc., 584 F.2d 1164, 1171 (2d Cir. 1978) (stating that an obligation to use best efforts can be met by “active exploitation in good faith”).
