Type: Law Bulletins
Date: 01/16/2018

"Efforts" Covenants in Delaware Contracts

Many commercial contracts use some variation of “efforts” in qualifying a party’s obligation to perform an obligation. For instance, a contract may require a party to use its “best efforts” to satisfy various closing conditions, use “commercially reasonable efforts” to secure various regulatory approvals or exercise “reasonable best efforts” in entering into an agreement with a third party.

It is often unclear exactly what these efforts commitments entail, however. This is particularly true when a contract is silent as to how a party is required to act in order to comply with an efforts covenant. Several recent cases from Delaware have provided some insight into how courts analyze and interpret contractual commitments to use various levels of “efforts” under Delaware law.

Williams v. ETE

The Majority Opinion
In March 2017, the Delaware Supreme Court analyzed what was required of a party subject to various levels of “efforts” under a merger agreement. In Williams Cos. v. Energy Transfer Equity, L.P., 159 A.3d 264 (Del. 2017), two natural gas pipeline companies entered into an ill-fated merger agreement. Under the terms of the agreement, the merger was conditioned on the issuance of a tax opinion by the acquiring company’s tax counsel. The parties were required to use “commercially reasonable efforts” to obtain the tax opinion and to use their “reasonable best efforts” to consummate the merger.

After the parties signed the merger agreement, the acquirer sought to abandon the merger due to deteriorating energy market conditions. Prior to closing, an executive of the acquirer notified the acquirer’s tax counsel of a potential tax issue, which eventually led the acquirer’s tax counsel to determine it could not issue the required tax opinion. The target filed suit, alleging that the acquirer breached the merger agreement by failing to exercise commercially reasonable efforts to obtain the tax opinion and by failing to use its reasonable best efforts to consummate the merger.

In its analysis of the efforts covenants, the Delaware Supreme Court recognized that covenants to use “commercially reasonable efforts” and “reasonable best efforts” imposed an obligation on the parties “to take all reasonable steps to solve problems and consummate the transaction.” Id. at 273 (approving the Court of Chancery’s reasoning in Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008)). Notably, the court did not distinguish between the “commercially reasonable efforts” standard and the “reasonable best efforts” standard.

The court then found that the acquirer had breached its efforts covenants because it had not taken “all reasonable steps” to obtain the tax opinion. Specifically, the court noted that following facts as demonstrative of such breach:

  • The acquirer did not direct its tax counsel to engage earlier or more fully with the target’s counsel.
  • The acquirer failed itself to negotiate the issue directly with the target.
  • The acquirer failed to coordinate a response among the various players.
  • The acquirer went public with the information that its tax counsel had declined to issue the tax opinion.
  • The acquirer generally did not act like “an enthusiastic partner” in pursuit of consummation of the merger agreement.

See Williams, 159 A.3d at 273. However, the court ultimately affirmed the Court of Chancery’s decision by finding there was no clear error with the Court of Chancery’s finding that there was no “indication that the action or inaction of the [acquirer] (other than simply drawing [its tax counsel]’s attention to the problem) contributed materially to [its tax counsel]’s inability to issue the [tax opinion].” Id. at 274 (quoting Williams Companies, Inc. v. Energy Transfer Equity, L.P., C.A. No. 12168-VCG, 2016 WL 3576682, at *16 (Del. Ch. June 24, 2016)).

Chief Justice Strine’s Dissenting Opinion
In a relatively rare dissenting opinion, Chief Justice Strine specifically addressed the acquirer’s covenant to use commercially reasonable efforts to obtain the tax opinion. He noted that “commercially reasonable efforts” was a “comparatively strong” obligation and cited a treatise for the proposition that it was slightly more limited than a “best efforts” standard, which could potentially lead to a party having to take extreme measures to fulfill it. Williams Companies, Inc. v. Energy Transfer Equity, L.P., 159 A.3d 264, 276 n.45 (Del. 2017) (C.J. Strine, dissenting) (citing Lou R. Kling & Eileen T. Nugent, Negotiated Acquisitions of Companies, Subsidiaries and Divisions § 13.06 (17th ed. 2001)).

Chief Justice Strine reasoned that when problems arise in a complex merger, both parties typically “work together to resolve those problems in good faith.” He noted that the absence of such mutual cooperation and good faith may constitute a breach of an efforts covenant. See id. at 277.

Chief Justice Strine then addressed the acquirer’s conduct in connection with its obligation to use commercially reasonable efforts to obtain the tax opinion. The opinion strongly suggested that the acquirer likely knew about the issue prior to signing the merger agreement, which indicated that the acquirer conveyed the issue to its tax counsel in order to convey “client pressure to get to no.” The opinion explained that such client pressure would be “extremely problematic” because the acquirer had “exactly the opposite duty—to act in a commercially reasonable fashion” to obtain the tax opinion.

The opinion then highlighted various facts and circumstances in the record that suggested a breach of the commercially reasonable efforts covenant, including:

  • The acquirer discouraged its deal counsel and tax counsel from working together to solve the tax issue.
  • The acquirer did not disclose the tax issue to the other side for 14 days, which the opinion described as a “commercially unreasonable and thus highly suspect period of time.”
  • Despite the other side’s proposed fixes and opposition to publicly disclosing the issue, the acquirer filed an amended proxy statement only six days after disclosing the issue to the other side.
  • The acquirer did not respond to the other side’s proposals for 15 days, which was “well after the proxy was filed.”
  • A significant number of players, including the acquirer’s own deal counsel, initially believed that there was either no tax issue or there were potential solutions to the tax issue.
  • The tax issue could have been resolved by a “modest amendment of the merger agreement,” which Chief Justice Strine noted would have had “no material economic effect on [the acquirer] from the terms of the deal it clearly struck.”

Id. at 281-84. Chief Justice Strine ended his dissent by stating that he would remand and noted that “under settled contract law, when, in desperation, you breach your obligation to help a condition come about, you do not get credit for rigging the game.” Id. at 284.

TA Operating LLC

In TA Operating LLC, the Court of Chancery analyzed what duties were owed under an obligation to “reasonably cooperate.” TA Operating LLC v. Comdata, Inc., C.A. No. 12954-CB, 2017 WL 3981138 (Del. Ch. Sept. 11, 2017). The agreement at issue required two parties to “reasonably cooperate” to launch a new project “as soon as reasonably practical.” The court noted that the reasonable cooperation covenant did not obligate either party to treat the project as “its top priority.” Id. at *31 (Del. Ch. Sept. 11, 2017). The court also found that while one party was not in breach of the covenant because it adhered to the parties’ shared expectations, the other party had breached the covenant by letting another contract lapse and refusing to share necessary information. Id. at *33.

ITG Brands

In another recent Court of Chancery opinion, the court discussed the duration of a “reasonable best efforts” provision. Under the terms of an asset purchase agreement, the purchaser of several cigarette brands was required to use its “reasonable best efforts” to enter into agreements with third parties by which the purchaser would assume certain obligations of the seller. The purchaser filed suit, arguing in part that its obligation to use “reasonable best efforts” terminated at the closing of the asset purchase transaction. Specifically, the purchaser contended that a provision requiring it to use its “reasonable best efforts” beyond the closing would subject the purchaser to an obligation that would go on “potentially forever.” The court rejected this argument, noting that a duty to use reasonable best efforts “is not limitless in time” but simply requires that a party “actually expend reasonable best efforts, which is a question of fact.” ITG Brands, LLC v. Reynolds Am., Inc., C.A. No. 2017-0129-AGB, 2017 WL 5903355, at *13 (Del. Ch. Nov. 30, 2017). The court cited the Delaware Supreme Court’s decision in Williams for the proposition that “reasonable best efforts” covenants impose “an affirmative obligation” to “take all reasonable steps to solve problems and consummate the [contemplated] transaction.” See id. at *13 n.66 (citing Williams, 159 A.3d at 273).

Wellstat Therapeutics

In Wellstat Therapeutics, two parties entered into a distribution agreement by which the parties were required to use “diligent efforts” to develop, promote and market a pharmaceutical. C.A. No. 12562-VCL, 2017 WL 4151172 (Del. Ch. Sept. 19, 2017), judgment entered, (Del. Ch. Nov. 2, 2017). The distribution agreement expressly defined “diligent efforts” as follows:

Diligent Efforts means, with respect to a Party, the carrying out of obligations specified in this Agreement in a diligent, expeditious and sustained manner using efforts and resources, including reasonably necessary personnel and financial resources, that specialty pharmaceutical companies typically devote to their own internally discovered compounds or products of most closely comparable market potential at a most closely comparable stage in their development or product life, taking into account the following factors to the extent reasonable and relevant: issues of safety and efficacy, product profile, competitiveness of alternative products in the marketplace, the patent or other proprietary position of the Subject Product, and the potential profitability of the Subject Product. Diligent Efforts shall be determined without regard to any payments owed by a Party to the other Party (excluding the transfer price for supply of such Subject Product).

Id. at *2. In analyzing whether one of the parties breached a “diligent efforts” covenant, the court looked specifically to the contractual definition to determine whether that party devoted “efforts and resources, including reasonably necessary personnel and financial resources, that specialty pharmaceutical companies typically devote to their own internally discovered compounds or products.” Id. at *10. The court ultimately found that the party breached the distribution agreement by failing to exercise “diligent efforts” in marketing the pharmaceutical. Id. at *14.


As demonstrated by the Williams and Hexion decisions, Delaware courts have taken the position that “reasonable best efforts” and “commercially reasonable efforts” covenants are largely one and the same. Namely, these covenants impose an affirmative obligation to take all reasonable steps to solve a problem and consummate a transaction.

Delaware courts have recognized that these types of efforts covenants do not create an unconditional commitment, as compared to a “hell or high water” covenant that requires a party to take any action that it is capable of taking. See, e.g., Alliance Data Sys. Corp. v. Blackstone Capital Partners V L.P., 963 A.2d 746, 763 n.60 (Del. Ch. 2009), aff’d, 976 A.2d 170 (Del. 2009) (comparing a reasonable best efforts covenant with a “hell or high water” covenant).

However, Chief Justice Strine has taken the position that “best efforts” imposes a higher standard than “commercially reasonable efforts” and “reasonable best efforts.” See, e.g., Williams, 159 A.3d at 276 n.45; Alliance Data Sys., 963 A.2d at 763 n.60. Chief Justice Strine has also noted that “best efforts” is not an absolute commitment and is “implicitly qualified by a reasonableness test–it cannot mean everything possible under the sun.” Alliance Data Sys., 963 A.2d at 763 n.60 (citing sources).

As such, it appears that Delaware courts (or at least Chief Justice Strine) have recognized that while a “best efforts” covenant does not impose an absolute commitment, it may require parties to do more than take all reasonable steps to solve a problem and consummate a transaction (as was required by the standards discussed in Williams). In any event, the courts have noted that interpreting efforts clauses is a fact-intensive exercise and depends on the circumstances. See, e.g., ITG Brands, 2017 WL 5903355, at *13.

While the Williams decision is useful as an example of what not to do, the Court of Chancery’s decision in Wellstat Therapeutics demonstrates the Court of Chancery’s continuing deference to unambiguous contractual language. Accordingly, contracting parties may want to consider expressly providing a definition for what constitutes “diligent efforts” (as was the case in Wellstat Therapeutics), or a variant thereof, in order to lessen uncertainty on how their obligations will be interpreted down the road.

Henry D. Alderfer is an attorney with Taft Stettinius & Hollister LLP. Reach him at halderfer@taftlaw.com or LinkedINThis article was published by Law360.

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