If your client is going to contractually commit to using commercially reasonable efforts to do something — and if your client expects that obligation to require something less than “all reasonable efforts” — then you’ll want to make that expectation clear in the contract itself: In its October 1 decision in Akorn, Inc. v. Fresenius Kabi AG, No. 2018–0300–JTL, slip op. (Del. Ch. Oct. 1, 2018), the influential Delaware chancery court noted the chasm between the meaning of that term to transactional lawyers versus to courts:
- “Deal practitioners have a general sense of a hierarchy of efforts clauses,” said the court; this hierarchy ranges from good faith efforts at the low end, through reasonable efforts, commercially reasonable efforts, reasonable best efforts, and finally best efforts. See id., slip op. at 213-14 (footnote omitted).
- On the other hand (the court continued): “Commentators who have surveyed the case law find little support for the distinctions that transactional lawyers draw.” Id., slip op. at 214 (footnote omitted).
Seemingly disregarding practitioners’ views, the chancery court continued the Delaware trend —which that court itself started — of treating commercially reasonable efforts as requiring the obligated party to take “all reasonable steps”:
Under the Merger Agreement, Akorn was obligated to use commercially reasonable efforts to operate in the ordinary course of business in all material respects. As interpreted by the Delaware Supreme Court in Williams, this standard required that Akorn “take all reasonable steps” to maintain its operations in the ordinary course of business. The record establishes that Akorn breached that obligation in multiple ways.
Akorn, Inc., slip op. at 216 (emphasis added), following Williams Cos. v. Energy Transfer Equity, L.P., 159 A.3d 264 (Del. 2017). In Williams Cos, the state supreme court had followed (see 159 A.3d at 272) the chancery court’s own decision in Hexion Specialty Chem., Inc. v. Huntsman Corp., 965 A.2d 715, 755 (Del. Ch. 2008). So in one sense, the Akorn decision completed a round trip from the chancery court to the supreme court and back again.
These Delaware precedents make it important for contract drafters to consider defining what they mean by commercially reasonable efforts, as I argued in more detail here and in the Texas Bar Journal, as well as in the California bar’s Business Law News.
(To give credit where due: Vice Chancellor Laster’s Axiom opinion, spanning 247 (!) pages with over 110 pages of factual narrative and 866 (!) footnotes, provides an impressive survey of scholarship about Material Adverse Change clauses and Material Adverse Effect [or Event] definitions. Axiom, supra, text accompanying nn.521-68. )