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Akorn, Inc., v. Fresenius Kabi AG et al will undoubtedly become known as the first case where a Delaware court found a material adverse effect, or MAC (often referred to as a material adverse effect, or MAE), to exist.  The opinion also contains a helpful description of a description of “commercially reasonable efforts” as compared to other efforts based clauses.

Efforts based clauses mitigate the rule of strict liability for contractual non-performance that otherwise governs. The Court noted that generally if a party agrees to do something, he must do it or be liable for resulting damages (or potentially be subject to an order compelling specific performance).   At times, however, a party’s ability to perform its obligations depends on others or may be hindered by events beyond the party’s control.  In those situations, drafters commonly add an efforts clause to define the level of effort that the party must deploy to attempt to achieve the outcome. The language specifies how hard the parties have to try.

Describing how many deal lawyers think, the Court cited the ABA Committee on Mergers and Acquisitions which ascribed the following meanings to commonly used standards:

  • Best efforts: the highest standard, requiring a party to do essentially everything in its power to fulfill its obligation (for example, by expending significant amounts or management time to obtain consents).
  • Reasonable best efforts: somewhat lesser standard, but still may require substantial efforts from a party.
  • Reasonable efforts: still weaker standard, not requiring any action beyond what is typical under the circumstances.
  • Commercially reasonable efforts: not requiring a party to take any action that would be commercially detrimental, including the expenditure of material unanticipated amounts or management time.
  • Good faith efforts: the lowest standard, which requires honesty in fact and the observance of reasonable commercial standards of fair dealing. Good faith efforts are implied as a matter of law.

The Court noted that commentators who have surveyed the case law find little support for the distinctions that transactional lawyers draw.  Consistent with this view, in Williams Companies v. Energy Transfer Equity, L.P., the Delaware Supreme Court interpreted a transaction agreement that used both “commercially reasonable efforts” and “reasonable best efforts.” Referring to both provisions, the high court stated that “covenants like the ones involved here impose obligations to take all reasonable steps to solve problems and consummate the transaction.” The high court did not distinguish between the two.

The Court also discussed that while serving as a member of the Court of Chancery, Chief Justice Strine similarly observed that even a “best efforts” obligation “is implicitly qualified by a reasonableness test—it cannot mean everything possible under the sun.” Another Court of Chancery decision—Hexion—also framed a buyer’s obligation to use its “reasonable best efforts” to obtain financing in terms of commercial reasonableness: “[T]o the extent that an act was both commercially reasonable and advisable to enhance the likelihood of consummation of the financing, the onus was on Hexion to take that act.”