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New Delaware decision highlights (again) the importance of defining “commercially reasonable efforts”

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 effortsreasonable 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. Axiomsupra, text accompanying nn.521-68. )

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