Undertaking to use "best efforts", "commercially
reasonable efforts" and variations of such specified levels of
effort are frequently provided for in M&A deals. Undertaking to
use a specific degree of effort addresses parties' obligations
that are not entirely within their control and indicates that
performance and result are not guaranteed or assured. Examples of
obligations for which parties typically undertake to use a
specified degree of effort include the obtaining of regulatory
approvals, financing and third party consents. Although the
rationale for undertaking to try to accomplish something is clear,
the desire to circumscribe obligations by "best" or
"reasonable" efforts can produce vague standards open to
interpretations. The application of these provisions can be linked
to the particular circumstances in which they are applied and which
may not have been considered by the contracting parties at signing.
There is no clearly defined or settled meaning to the terms
"best efforts" or "commercially reasonable
efforts." Although the terms are frequently used in M&A
deals, there is much uncertainty as to the meanings associated with
the standards of efforts.
The recent high-profile Delaware
Court of Chancery case of Williams Companies, Inc. v. Energy
Transfer Equity, L.P., C.A. Nos. 12168-VCG, 12337-VCG,
involving a deal valued at approximately US $33 billion, is a clear
reminder that drafters should be aware of the importance of
"efforts" provisions, their fact-specific nature, the
nuanced differences between them, and the impact that these
provisions can have on the outcome of a deal. The case also
highlights that having no clearly defined standard by which to
evaluate parties' efforts will leave the interpretation of
efforts made to the courts.
When Williams Companies Inc.
("Williams") and Energy Transfer Equity
L.P. ("ETE") entered into a merger
agreement, the deal was commercially attractive to both sides.
However, prior to the deal closing, the energy market experienced a
significant decline, making the transaction unattractive to
The merger was subject, among other conditions, to a condition
that the U.S. tax lawyers on both sides issue an opinion that the
transaction contemplated by the parties should be treated by tax
authorities as being a tax-free exchange. Pursuant to the merger
agreement, ETE was obliged to use "commercially reasonable
efforts" to obtain the tax opinion from its counsel. The
latter concluded that it could not provide the opinion, making it
possible for ETE to avoid the deal on the basis of the failed
condition precedent. Williams applied for a court order enjoining
ETE from terminating or otherwise avoiding their obligations under
the merger agreement. Williams alleged that ETE failed to use
"commercially reasonable efforts" to secure the tax
opinion. William's court order was denied.
As is usually the case, the merger agreement between ETE and
Williams did not define the term "commercially reasonable
efforts." Interpreting this term, the court noted that it
"is not addressed with particular coherence in ... case
law" and that it implies an "objective standard,"
binding the party "to do ... things objectively reasonable to
produce the desired [result], in the context of the agreement
reached by the parties."1 The court also held that
motivation to terminate a deal is not necessarily indicative of a
failure to use "commercially reasonable efforts." The
court found that Williams identified no concrete actions that ETE
could have taken to cause its counsel to issue the opinion. The
court's analysis of "commercially reasonable efforts"
illustrates that the interpretation of "efforts"
provisions is linked to the particular circumstances in which the
provisions are applied.
Although the case is American, Williams Cos. v. Energy
Transfer Equity LP should be of interest to Canadian legal
practitioners. In Canadian M&A agreements the
"effort" provisions are common, and Canadian drafters of
contracts face the same practical challenges of defining the
meaning of "efforts".
For further reading about the
Canadian perspective on effort provisions, please see the following
blog posts previously featured on the topic:
Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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