About This Blog
Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Chancery Declines to Dismiss Claim that Acquirer Failed to Use “Commercially Reasonable Efforts” to Reach Earn-out Milestones
Parties in M&A transactions commonly include efforts clauses, like the obligation to use best efforts, commercially reasonable efforts, etc., to some end. Delaware law enforces such covenants and views them as creating affirmative duties. Exactly what duties an efforts clause creates is contextual, however, and courts sometimes wrestle with how to apply them. Parties on occasion try to bring clarity to their contract by defining what they intend their particular efforts clause to mean, like the parties attempted in this case.
Here, the merger agreement required the buyer to use “commercially reasonable efforts” to develop a product and achieve certain earn-out milestones. The agreement defined commercially reasonable efforts as “the exercise of such efforts and commitment of such resources by a company with substantially the same resources and expertise as [the acquirer], with due regard to the nature of efforts and cost required for the undertaking at stake.” The sellers sued the buyer and its affiliates in the Court of Chancery for allegedly failing to use the requisite commercially reasonable efforts. In declining to dismiss the complaint, the Court found one reasonable reading of the parties’ defined efforts clause was that it required efforts that companies with substantially the same resources and expertise would expend in the circumstances at hand. And, because the sellers alleged that the acquirer abandoned efforts toward the milestones while companies with similar resources and expertise continued to pursue them, the Court found dismissal inappropriate.