United States: The ‘Commercially Reasonable Efforts' Standard As Defined By The Delaware Supreme Court

In its recent decision in The Williams Cos., Inc. v. Energy Transfer Equity, L.P., et al.,1 the Delaware Supreme Court offered guidance on the interpretation of the "commercially reasonable efforts" standard in a merger agreement with respect to the delivery of a tax opinion under a closing condition.


Energy Transfer Equity (ETE) and The Williams Companies (Williams) are both midstream energy holding companies and substantial participants in the gas pipeline business. On Sept. 28, 2015, ETE and Williams entered into a merger agreement pursuant to which Williams, through an intermediate holding company, would contribute its assets to ETE in return for $6.05 billion in cash along with equity in ETE. The parties intended that the contribution of the Williams asset to ETE should qualify as a tax-free transaction under Section 721 of the Internal Revenue Code and required, as a condition to closing, a legal opinion from ETE's tax counsel (ETE Tax Counsel) to that effect (the 721 Opinion). ETE agreed in the merger agreement to undertake "commercially reasonable efforts" to procure the 721 Opinion.

Following the execution of the merger agreement, oil prices declined and, as a result, the assets of Williams and ETE experienced a precipitous decrease in value. Williams was particularly affected by the downturn, as one of its biggest customers, Chesapeake Energy, was rumored at the time to be seeking bankruptcy protection.

On March 29, 2016, ETE instructed ETE Tax Counsel to analyze whether it would be able to give the 721 Opinion. On April 11, ETE Tax Counsel informed ETE it would not be able to provide the 721 Opinion and on the next day informed Williams' tax and deal counsel (Williams Counsel) of its conclusion. Williams Counsel disagreed with ETE Tax Counsel's conclusion but, on April 14, offered two proposals to address ETE Tax Counsel's concerns. On April 18, four days after Williams Counsel sent their alternative proposals to ETE Tax Counsel, ETE went public with the information that ETE Tax Counsel would not be able to deliver a 721 Opinion. On April 29, 15 days after Williams Counsel sent their alternative proposals, ETE Tax Counsel communicated to Williams Counsel that it had reviewed the alternative proposals and determined that neither would give it the comfort needed to issue the 721 Opinion. On May 13, Williams filed a complaint in the Delaware Court of Chancery alleging that ETE breached the merger agreement by failing to use "commercially reasonable efforts" to obtain the 721 Opinion from ETE Tax Counsel.

During this process and over the course of the ensuing trial, myriad other law firms and experts were consulted on this issue, all reaching varying conclusions. ETE's deal counsel indicated that they would be prepared to issue the 721 Opinion. Another firm acting as Williams' deal counsel also reviewed the issue and determined that it could give a qualified 721 Opinion if asked, but acknowledged that it would be difficult to reach such a conclusion. ETE consulted yet another law firm specifically on the tax issue, which concluded, on a different legal theory from that of ETE Tax Counsel, that it would not be able to give a 721 Opinion. ETE's expert witness concluded that the transaction structure was flawed at inception and there is likelihood that it was never tax-free.

Delaware Court of Chancery Decision

The Court of Chancery ruled in favor of ETE, holding, among other things, that "commercially reasonable efforts" imposes a negative duty on ETE to not act unreasonably. Further, the Court of Chancery placed the burden on Williams to show that ETE had acted unreasonably and that such unreasonable act had a material effect on ETE Tax Counsel's ability to issue the 721 Opinion. The court did not consider ETE's request that ETE Tax Counsel reconsider its ability to deliver the 721 Opinion to be an unreasonable request and stated that even if it is an unreasonable request, it was not a material breach because ETE Tax Counsel reached its own conclusion on the issue independently of ETE's request. Principal in the Court of Chancery's analysis of this issue was the credence it granted to testimony by the lawyers at ETE Tax Counsel. The court concluded that, given ETE Tax Counsel's reputation and national stature, it would not be motivated to lie in order to appease ETE. Additionally, given the difference in opinions from the various law firms and experts on the tax structure, the court was persuaded that ETE Tax Counsel made a good faith determination that it could not issue the 721 Opinion.

In response to Williams' argument that the burden should be on ETE to prove that its failure to take more forceful actions did not result in ETE Tax Counsel's decision to not give the 721 Opinion, the Court of Chancery concluded in a footnote that, even if the burden of proof was allocated to ETE, the result would be the same.

Williams appealed the decision to the Delaware Supreme Court, arguing, among other things, that the Court of Chancery erred in ruling that the "commercially reasonable efforts" standard imposes a negative duty as opposed to an affirmative duty; in placing the burden of proof on Williams, the nonbreaching party; and in finding that any alleged breach of covenant by ETE did not materially contribute to ETE Tax Counsel's decision to not give the 721 Opinion.

The Delaware Supreme Court Decision

With respect to the legal issues on appeal, the Delaware Supreme Court agreed with Williams that the "commercially reasonable efforts" standard imposes an affirmative duty to help ensure performance, as opposed to a negative duty not to thwart or obstruct performance, of the merger agreement. Therefore, ETE had an affirmative obligation to take all reasonable steps to obtain the 721 Opinion, and a failure to take such reasonable steps would constitute a breach of such covenant.

The court specifically identified the following courses of action as evidence of a breach of the obligation to use commercially reasonable efforts: the failure to direct counsel to engage earlier or more fully with opposing counsel, the failure to negotiate the issue directly with the counterparty, the failure to coordinate a response among the various parties, and the publication of information detrimental to the achievement of the objective (in this case, ETE's public announcement of ETE Tax Counsel's decision not to issue the 721 Opinion before the issue was able to be fully vetted), and the failure to generally act like an enthusiastic partner in pursuit of consummation of the transaction. Further, to the extent that ETE had breached such covenant, the court held that the burden of proof would then be on ETE to show that the breach did not materially contribute to ETE Tax Counsel's decision to not give the 721 Opinion.

In accordance with the "clearly erroneous" standard of review with respect to questions of fact, the Delaware Supreme Court deferred to the Court of Chancery's finding that, even if the burden of proof shifted to ETE, ETE's breaches of the "commercially reasonable efforts" standard would not have materially contributed to ETE Tax Counsel's decision to not give the 721 Opinion.

Chief Justice Strine dissented from the decision, arguing that the cursory treatment in a footnote is not a "substitute for proper analysis" and that a retrial is needed for ETE to prove that its breach did not materially contribute to the failure of ETE Tax Counsel to deliver the 721 Opinion. Central in the dissent's analysis is whether ETE Tax Counsel would have come to a different conclusion on the 721 Opinion absent the "undue professional pressure."

Practical Takeaways

In the credit context, the "commercially reasonable efforts" standard is often imposed with respect to a borrower's obligation to, amongst other things, (a) perfect certain collateral on the closing date (and, in some instances, obtain collateral documents such as landlord waivers), (b) repatriate sums held at foreign subsidiaries, (c) maintain credit ratings, (d) identify public versus nonpublic information, (e) comply with laws and (f) cause third parties to comply with certain negotiated objectives.

Following the Energy Transfer decision, in determining whether a performing party had complied with the obligation to use commercially reasonable efforts, parties and counsel should focus on whether the actions and conduct of the performing party conform to those of an "enthusiastic partner" in pursuit of accomplishing the applicable objective.


1. The Williams Companies, Inc. v. Energy Transfer Equity, L.P., Del. Supr., No. 330, 2016 (Mar. 23, 2017).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.