Most M&A agreements contain provisions obligating the parties to use their “best efforts” or “commercially reasonable efforts” to satisfy contractual obligations. But how should those efforts clauses be interpreted when dealing with an unprecedented event like the Covid-19 crisis? That’s the question this Goodwin memo addresses. Here’s an excerpt discussing what those obligations might entail when it comes to closing conditions & interim operating covenants:
Both sides of an M&A transaction frequently must use “best efforts” or “commercially reasonable efforts” to close the deal. But that obligation is not all-consuming. In Akorn, the Delaware Chancery Court concluded that the buyer’s rigorous investigation of the company and ultimate decision to terminate the agreement did not breach the buyer’s “reasonable best efforts” duties because (i) the buyer repeatedly communicated with the seller in order to determine whether the deal would succeed, and (ii) the buyer’s concerns about the seller’s performance were legitimate and justified the buyer’s decision to back out.
Buyers approaching closing during the COVID-19 crisis subject to similar efforts clauses would be wise to likewise communicate actively with sellers about their ongoing operations as closing approaches and, if the crisis places closure of the deal in jeopardy, to thoroughly investigate and document the impacts of the crisis on the ability or obligation of buyers to close.
Most sale transactions include some duties of the seller to operate the business pre-closing with “best efforts,” frequently paired with language describing the duty as consistent with the “ordinary course of business. The emergent and uncertain nature of the unfolding COVID-19 crisis raises dramatic uncertainty in how any operation currently undertaken is in the “ordinary course,” or whether unanticipated, but necessary, changes in operations in response to the crisis.
While under contract, sellers should be mindful of any interim covenants (including covenants not to enter into certain transactions outside the ordinary course of business) and keep lines of communication open with buyers about any significant steps being taken within the business to address the crisis. Sellers should be prepared to explain and justify the reasons for those steps taken to address the crisis, as well as other options considered but rejected and their reasons for rejecting, in landing on the chosen path.
The memo reviews the applicable case law on efforts clauses from Delaware, New York, and California, and notes that each jurisdiction’s standards are highly flexible “and the interpretation thereof depends on the specific challenges faced by the obligated party, its industry, and the market as a whole.”
– John Jenkins