In an article published by Law360, Bass, Berry & Sims attorney Shayne Clinton discussed a sequence of recent decisions issued by Delaware courts addressing how to interpret best “efforts” terms and other definitions in merger and acquisition agreements.

These cases offer useful guidance to both buyers and sellers when negotiating terms of merger and acquisition agreements, including:

  • Many deals require a party to use “reasonable efforts” or “best efforts” under the terms of the merger agreement. Recent Delaware decisions stress the need for parties to carefully define such “efforts” provisions in the context of the entire bargained-for rights.
  • Using “past practices” and “similarly situated” definitions in merger agreements to set up post-closing requirements can invite protracted litigation.  Delaware courts recently examined such provisions that require using third parties or past practices as the foundation to determine post-closing requisite efforts.
  • Delaware courts remain very cautious before implying any gaps in contracts to impose conduct on one of the parties.
  • Bargained-for-rights in a contract can influence the meaning of what might otherwise be considered standard authorization terms in merger agreements.
  • When parties adopt other contracts into an agreement or use words that can have varying meanings for a particular industry, prolonged disputes can result when facts turn out differently than anticipated.

“As all these recent Delaware cases emphasize, the disappointed party in a transaction will try to convince a court to consider purported gaps in the contract or ambiguities in the terms or definitions,” Shayne noted. “When considering a potential transaction, both sides need to carefully consider how potential events, industry terms of art, and possible business strategies could impact the parties’ contractual rights and expectations. Without the necessary details and clarity, subsequent events can invite protracted litigation.”

The full article, “Negotiating M&A ‘Best Efforts’ Now to Avoid Future Litigation,” was published by Law360 on April 24, 2019, and is available online.