Two recent rulings out of the Delaware Court of Chancery have highlighted the importance of clearly defining the terms of pre-closing obligations. In an M&A transaction, it takes significant time to get from a signed letter of intent to a closed deal. Pre-closing obligations, and the level of effort a party is required to exert to meet those obligations, are typically subject to heavy negotiation. While practitioners tend to negotiate according to a sliding scale of efforts standards—”commercially reasonable efforts,” for example, require something less than “best efforts”—neither Delaware nor New York courts have articulated tiered efforts standards in such a manner. Furthermore, and what the recent Delaware rulings again underscore, the various formulations do not have precisely defined meanings in common law.
The Delaware Court of Chancery recently shed a ray of light on the efforts clause mire. In a July 14 bench ruling on a motion to dismiss (WP CMI Representative v. Roche Diagnostics Operations), Vice Chancellor J. Travis Laster stated that “the inclusion of the word ‘reasonable’” in the commercially reasonable efforts standard makes it “an objective standard.” On this same point, Laster cited Vice Chancellor Sam Glasscock III’s June 24 opinion in Williams v. Energy Transfer Equity. By agreeing to use commercially reasonable efforts, Glasscock wrote, the plaintiff “necessarily submitted itself to an objective standard—that is, it bound itself to do those things objectively reasonable to produce the desired [tax opinion], in the context of the agreement reached by the parties.”
