The Court of Chancery awarded $15 million in damages against defendants Millennium Digital Media Systems, LLC, et al. (“Millennium”) for breaching agreements with WaveDivision Holdings LLC and Michigan Broadband LLC (“Wave”) that contained “no solicitation” and “reasonable best efforts” clauses in the matter of WaveDivision Holdings, LLC v. Millennium Digital Media Systems, L.L.C., C.A. No. 2993-VCS (Del. Ch. Sept. 17, 2010), read opinion here.

This summary was prepared by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP.

Background

Wave and Millennium are broadband cable operators. Wave was in the business of acquiring and upgrading cable systems, and since 2000 Millennium had been struggling financially due to increased competition in the cable market. Even though Millennium had been involved in a series of refinancings, by 2005, Millennium was highly leveraged and under strong pressure from its creditors to meet its repayment obligations under the credit agreement. It was at this time that Millennium’s senior management and its secured creditors (the “Senior Lenders”) decided that a sale of Millennium’s assets was Millennium’s best option. Both the Management Committee and the holders of its high-yield senior increasing rate notes (the “IRNs,” and the “IRN Holders”) approved the plan to pursue a sale of Millennium’s assets.

On December 15, 2005, Wave made an offer to purchase some of Millennium’s assets for $157 million (the “Letter of Intent”). The Letter of Intent had a 30-day “Exclusivity of Negotiation” provision in it, and despite being bound not to entertain or discuss any offer to sell any interest in its assets, Millennium continued to actively look for additional sources of cash infusions.

Millennium’s APA with Wave

On February 8, 2006, Wave and Millennium, with the approval of Millennium’s Senior Lenders and IRN Holders, executed an Asset Purchase Agreement (“APA”) for the sale of a cable system in Michigan and a largely identical Unit Purchase Agreement for the sale of cable systems in Oregon and Washington (collectively, the “Agreements”). The Agreements and the Letter of Intent contained no solicitation provisions. The Agreements also contained a provision requiring Millennium to use “reasonable best efforts” to obtain the consent of its lenders to the sale. After the execution of the Agreements, Millennium continued to actively look at refinancing alternatives. It continued to brainstorm with the IRN Holders and it retained a consultant to help develop a refinancing plan as an alternative to the sale to Wave.

Millennium Enters Into Refinancing Agreement and Terminates APA

On July 28, 2006, Millennium executed restructuring agreements that transferred control to IRN Holders and terminated its Agreements with Wave. On June 1, 2007, Wave filed an action alleging breach of the APA Section 5.05 (reasonable best efforts) and Section 5.09 (no solicitation) by consciously facilitating a refinancing transaction with the very lenders whose consent Millennium was supposed to be working to obtain. Millennium countered that: (i) its actions were not intended to facilitate a refinancing but rather to get its lenders’ consent to the sale; and (ii) its lenders “would not have consented to the sale under any circumstances and that the failure of that condition excuses Millennium’s performance thereby rendering any potential breach by Millennium moot.”

The Court rejected Millennium’s arguments because a party to a contract cannot rely on the failure of a condition to excuse its performance when its own conduct materially caused the condition’s failure. Moreover, the Court noted that “it is not necessary that the consent would have been given ‘but for’ Millennium’s conduct, but only that Millennium’s actions contributed materially to the non-consent of the lenders.” The Court found that Millennium acted “as an in-house banker for the IRN Holders, assisting them to analyze a possible refinancing by developing financial models comparing the results of a sale with refinancing and restructuring plans in which Millennium and the IRN Holders would retain ownership of the assets.” In addition, the Court noted that “Millennium’s retention of Barrier in contravention of the no solicitation provisions materially contributed to the lenders’ failure to consent to the sale. Millennium is therefore precluded from using this lack of consent to abrogate its responsibility to compensate Wave for Millennium’s breach.” The Court went on to state:

The clearest evidence that Millennium did not comply with its duty to use its reasonable best efforts to obtain consent was that Millennium spent a significant amount of time and energy helping to develop an alternative to the sale. That is, instead of working in good faith with Wave to obtain the necessary consents, Millennium kept Wave in the dark and on a string so it could prospect for a better deal. Despite Wave’s repeated offers to assist Millennium with gathering the necessary consents, Millennium never told Wave about its involvement in stimulating an alternative refinancing deal…Millennium’s behavior undercuts any claim that it was actively pursuing consents in good faith.

Fiduciary Out

Millennium also argued that the “no solicitation” provision could not be enforced against it because that provision would have forced the Management Committee to breach its fiduciary duties to its creditors. The Court rejected this argument because:

The whole point of the Agreements was to sell the Systems and help pay off the creditors as the creditors had themselves demanded, thus Millennium cannot now use its duty to the creditors as a reason not to go through with the sale…. Delaware entities are free to enter into binding contracts without a fiduciary out so long as there was no breach of fiduciary duty involved when entering into the contract in the first place.


Court Awards Wave $15 Million in Damages

The Court found that Wave was entitled to an amount of damages that reflected the value Wave expected to realize from the Agreements minus any cost avoided by not having to perform (most obviously, the purchase price), and minus any mitigation that Wave was able to achieve by purchasing the two cable systems in the first quarter of 2007. The Court determined that the appropriate amount was approximately $15 million plus pre-judgment interest.
 

 In Pharmathene, Inc. v. SIGA Technologies, Inc., 2008 WL 151855 (Del. Ch., Jan. 16, 2008), read opinion here, the Chancery Court addressed several key issues of great interest to those involved in business litigation–and civil litigation in general. The background of this case involved various documents entered into by two companies, some of which were formal and complete and others that were not, but all of which were initially intended to lead to additional collaboration that never happened.

Here is a quick list of the important issues decided, and statements of Delaware law explained,  in what the court describes as "essentially an action for breach of contract".

1) In a Motion to Dismiss under Rule 12(b)(6), the court will not consider matters outside the pleadings and thus, refused to consider an affidavit submitted in opposition to the motion. The exception to this rule, that did not apply here, is when documents are integral to the claim, or are referred to in the complaint, or when not presented to prove the truth of their contents.

2) Delaware has a specific statute, Section 2708 of Title 6 of the Delaware Code, that authorizes the court to uphold a choice of law clause in a contract, despite contrary conflicts of law principles, if the contract involves more than $100,000. Such a provision is itself presumed to be a significant, material and reasonable relationship with the state. See Section 187(1) of the Restatement, Second, of Conflicts of Laws.

3) Faced with three separate agreements, one without a choice of law provision, one with a New York choice of law clause, and one choosing Delaware law, the court chose Delaware law to apply for deciding the Motion to Dismiss, for several reasons. For example, it was the last agreement signed by the parties and covered the broadest scope of matters compared with the other two. See also, the recent Chancery Court decision in Abry,  891 A.2d 1032, 1048 n.25 (Del. Ch., 2006), discussing the likely preference of a reasonable businessperson to have one state’s law apply to the same basic dispute involving various agreements.

4)  Is an "agreement to agree" enforceable"? The parties entered into an agreement that provided for them to "negotiate in good faith with the intention of executing a definitive License Agreement in accordance with the terms set forth in a [term sheet, that included a footer that said it was ‘non-binding’]." The court found too many ambiguities to grant a Motion to Dismiss.

 The court cited to Delaware cases  holding that "a contract to make a contract may be specifically enforced if it contains all of the material and essential terms to be incorporated into the final contract and those terms are definite and certain." See footnotes 49 and 50. The court noted that even if the prerequisites are satisfied, specific performance is a discretionary form of  relief. The factual issues made it premature to dismiss this claim at this preliminary stage of the proceedings.

5) The claim for breaching a duty to "negotiate in good faith a definitive license agreement in accordance with the …[term sheet] " was also allowed to proceed to trial based on the court’s finding that it could conceivably be proven that best efforts were not used to conclude a license agreement.

 

 

A recent Delaware Court of Chancery decision discussed many issues of great interest to commercial and corporate litigators in connection with a finding that Boston Scientific Corporation could not justifiably terminate an acquisition agreement with the target company, including an analysis of the familiar contractual standard of “commercially reasonable efforts,” which has been held to be synonymous with the similar phrase “reasonably best efforts.” In Channel Medsystems, Inc. v. Boston Scientific Corporation, C.A. No. 2018-0673-AGB (Del. Ch. Dec. 18, 2019), a 119-page decision, Delaware’s equity court determined that Boston Scientific did not fulfill its contractual duty to use “commercially reasonable efforts” to consummate the merger.

The court noted that Delaware case law “contains little support for distinctions” between the clause “commercially reasonable efforts” and the clause “reasonably best efforts.” See footnote 410 (citing the Delaware Supreme Court decision in Akorn, 2018 WL 4719347, at * 91.)   Many prior Delaware decisions interpreting and applying that contractual standard have been highlighted on these pages. Followers of this area of the law will find the scholarly insights on this topic by Professor Bainbridge especially notable.

In the instant Chancery decision, the court relied on the Akorn case that interpreted a similar covenant to “impose obligations to take all reasonable steps to solve problems and consummate the transaction.”  (citing Williams Cos. v. Energy Transfer Equity, L.P., 159 A.3d 264, 272 (Del. 2017)).  The Williams case was highlighted on these pages.  The court further relied on the Delaware Supreme Court decision in Akorn to provide the following guidance:

“When evaluating whether a merger partner has used reasonable best efforts, this court has looked to whether the party subject to the clause: (i) Had reasonable grounds to take the action it did; and (ii) Sought to address problems with its counter party.” See footnote 410.

The instant Chancery decision provided several examples why the record supported the holding that Boston Scientific, according to the court’s findings, made no reasonable efforts to engage with Channel, or “to take other appropriate actions to attempt to keep the deal on track . . ..” See Slip op. at 102.

The court used the reasoning of another decision when it explained that:

“Utter failure to make any meaningful attempt to confer with Channel when Boston Scientific first became concerned . . ., both constitutes a failure to use reasonable best efforts to consummate the merger and shows a lack of good faith.” See footnote 418 (citing to Hexion, 965 A.2d at 755-56.)

Finally, the court observed that even though motive to avoid a deal does not demonstrate the lack of a contractual right to do so, the evidence in this case, according to the court’s findings:

“Adds credence to and corroborates other robust factors demonstrating that Boston Scientific did not fulfill its obligation to engage with Channel in a commercially reasonable manner to vet any concerns they may have had about the findings in the Greenleaf Report and to keep the transaction on track thereafter. To the contrary, Boston Scientific simply pulled the ripcord.”

When the phrase “commercially reasonable efforts” appears as a standard of performance in contracts, it seems predetermined to generate litigation, and the recent Court of Chancery decision in Himawan v. Cephalon, Inc., C.A. No. 2018-0075-SG (Del. Ch. Dec. 28, 2018), supports that observation. Although the agreement in this case had a contractual definition for “commercially reasonable efforts”, prior Delaware decisions highlighted on these pages that discuss this phrase should be of relevance to anyone who needs to know what the Delaware cases say about this somewhat amorphous standard, and similarly-phrased “efforts clauses”.

Why this decision is noteworthy: The most notable aspect of this decision is its collection of Delaware cases interpreting various iterations of “efforts clauses”. See footnotes 83 to 85.

[By the way, as I write this on New Year’s Eve, I extend best wishes to all my readers for a Happy New Year!]

Brief overview: This case involved an earn-out dispute and a claim by the seller that it did not receive milestone payments pursuant to an earn-out provision because the buyer did not use commercially reasonable efforts to reach the milestones. The buyer was the pharmaceutical company Cephalon, but Teva Pharmaceuticals later bought Cephalon. The product at issue was an antibody that would allow an organism’s immune system to overcome disease-causing pathogens. As with new drugs, the process to bring antibodies to market is long, difficult and risky.

The earn-out in the merger agreement in this case was payable upon the meeting of certain milestones in the process of obtaining  approval by government agencies for the antibody to treat two different conditions. The buyer agreed to use “commercially reasonable efforts” to develop the antibody and achieve those milestones. The seller claims that the buyer did not comply with that efforts clause.

Key takeaways:

  • The Court provides an excellent collection of Delaware decisions that have wrestled with various permutations of “efforts clauses”. See footnotes 83 to 85 and accompanying text. The Court categorizes the collected decisions into the following groups, some of which are overlapping: (i) motions to dismiss (at the pleadings stage); (ii) post-trial decisions; (iii) post-merger decisions (often involving a related earn-out clause); and (iv) pre-merger decisions where the efforts clause applied to the satisfaction of a condition to closing.
  • The agreement involved in this case provided a contractual definition for “commercially reasonable efforts” as follows: “the exercise of such efforts and commitment of such resources by a company with substantially the same resources and expertise as [Cepahlon], with due regard to the nature of efforts and cost required for the undertaking at stake.”
  • The Court observed that the parties agreed that the foregoing is an “objective standard”, but the Court described the contractual definition as “inartfully” drafted and ambiguous. Also, in the context of denying a Motion to Dismiss this claim, the Court found that neither side offered a reasonable interpretation of this contract provision (as compared to another basis to deny an MTD: when both sides offer reasonable, but differing, interpretations.)
  • Based on Delaware’s version of Rule 12(b)(6)–which is not as stringent as the current Federal standard–the Court found that there was a “reasonably conceivable set of circumstances susceptible of proof” in which (allowing for factual issues at this early stage of the case), it could be shown that companies with similar resources and expertise as Cephalon are currently developing treatments for a similar antibody as the one at issue in this case.

Postscript: See also highlights on these pages of a Delaware Supreme Court decision on the interpretation of the important phrase addressed in this Chancery ruling, as well as related commentary.

The best way to explain the noteworthiness, for those engaged in corporate litigation, of the recent Delaware Chancery decision in Wilkin v. Narachi, C.A. No. 12412-VCMR (Del. Ch. Feb. 28, 2018), is to quote from the Court’s introduction: “This case … is a prime example of the difference between a best practice and a legal obligation  . . . but Plaintiff fails to point to a single legal obligation that directors violated … [and] Plaintiff has not pled facts that give the Court reason to doubt that these [unexpectedly less successful] outcomes stemmed from rational, good faith decisions of faithful, loyal directors.”

Overview:

This case involved a pharmaceutical company that thought it had a blockbuster drug, but subsequent regulatory and clinical due diligence indicated that the drug would not be as much of a commercial success as originally anticipated. The court explained in this 46-page decision why the complaint failed to plead sufficient facts to show that a majority of the board faced a “substantial likelihood of liability such that they cannot exercise their independent and disinterested business judgment when considering such a [pre-suit] demand.”

The first 23-pages of the decision provide necessary detailed facts that provide the context for the legal analysis, but for purposes of this short overview I will focus on the key legal principles that the Court applies.

This decision is thorough enough to be used as a primer for the prerequisites that a successful derivative action must satisfy in order to survive a challenge under Chancery Rule 23.1.

Basic Delaware Corporate Law Principles Applied:

  • The Court began its analysis with a few basic fundamentals of Delaware corporate governance. Namely, the Court began by explaining that DGCL Section 141(a) empowers directors to manage the business and affairs of the corporation which includes the right to bring all suits on behalf of the corporation.
  • The right of a stockholder to prosecute a derivative suit is an exception to that rule, and the prerequisites that must be satisfied for a stockholder to bring a lawsuit on behalf of the corporation, contrary to the general rule, are mainly as follows: (1) The complaint must allege with particularity that the board was presented with a demand and refused it wrongfully; or (2) That the board could not properly consider a demand thereby excusing the efforts to make demand as futile. See footnotes 113 through 115.
  • The plaintiff in this case only sought to plead demand futility which required the satisfaction of Rule 23.1, which is much more rigorous and requires much more detail than the general notice pleading under Chancery Rule 8(a).
  • Under Rule 23.1, the complaint “must set forth particularized factual statements that are essential to the claim of demand futility. Rule 23.1 is not satisfied by conclusory statements or mere notice pleading, nor is mere speculation or opinion enough.” See footnotes 116 through 119.

Aronson and Rales:

  • The Court reviewed the seminal cases of Aronson and Rales, quoting a recent Delaware Supreme Court decision which explained that both of those cases addressed the same question: “Whether the board can exercise its business judgment on the corporate behalf in considering demands.” (citing In re Duke Energy Corp., Deriv. Litig. 2016 WL 4543788, at * 14 (Del. Ch. Aug. 31, 2016); see also Kandell ex rel. FXCM, Inc. v. Niv, 2017 WL 4334149, at * 11 (Del. Ch. Sept. 29, 2017) (quoting In re China Agritech, Inc. S’holder Deriv. Litig., 2013 WL 2181514, at * 16 (Del. Ch. May 21, 2013)) (“The tests articulated in Aronson and Rales are complementary versions of the same inquiry.”) See footnote 125.
  • Nonetheless, the court described the different procedural context in which Aronson and Rales are usually presented. In order to succeed in a derivative claim that pre-suit demand is excused, the complaint must allege particularized facts sufficient to raise a reasonable doubt that: “(1) The directors are disinterested and independent or (2) The challenged transaction was otherwise the product of a valid exercise of business judgment.” See footnote 123.
  • Under Rales, a derivative plaintiff who does not challenge the actions taken by a majority of the board members considering demand must allege particularized facts sufficient to “create a reasonable doubt that as of the time of the complaint being filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.” See footnotes 123 and 124.

Breach of the Duty of Loyalty by Violation of Positive Law:

  • “Because sophisticated and well advised individuals do not customarily confess knowing violations of law, a plaintiff alleging demand is excused under Aronson or Rales because a majority of the board faces a substantial likelihood of liability for breaching of the duty of loyalty by violating positive law, “must plead facts and circumstances sufficient for a Court to infer that the directors knowingly violated positive law.” See footnotes 126 and 127. The Court noted that one way to establish the breach of the duty of loyalty for failure to act in good faith is to demonstrate that the fiduciary acted in a way with the intent to violate applicable positive law.

Demand Not Excused as Futile:

  • The Court explained that pre-suit demand was not excused as futile because even though the complaint alleges that a majority of the board knowingly or intentionally caused the company to violate its obligations and applicable regulations, as well as making improper public statements and breaching confidentiality duties, the Court concluded that “at worst [the board] failed to follow best practices.” Rather, actual knowledge is required to show the directors knew that they were not fulfilling their fiduciary duties. The Court noted that “imposition of liability requires a showing that directors knew they were not discharging their fiduciary duties.
  • But, the Court explained a “failure to follow best practices does not create a substantial likelihood of liability and does not suffice to establish a breach of fiduciary duty.”

Requirements to Establish that a Majority of the Board Faces a Substantial Likelihood of Personal Liability in Order to Excuse Pre-Suit Demand:

  • A prerequisite for successfully pursuing a derivative claim is to demonstrate that there is no reasonable likelihood that the majority of the board could have exercised its independent and disinterested business judgment in responding to a demand.
  • The corollary to that is that a majority of the board must face a “substantial likelihood of personal liability on a claim-by-claim basis. See footnote 31. That requires allegations of conduct that “is so egregious on its face that the board could not have exercised its business judgment in responding to a stockholder demand to pursue those claims.” In essence, the plaintiff must show, for example, that there is a substantial likelihood of liability of a breach of fiduciary duty by, for example, violating positive law.
  • The Court explained in great detail why those prerequisites were not satisfied here, in part, because the complaint did not allege any specific positive law or specific regulations that were violated. Therefore, there was no substantial likelihood of liability of the directors.

Allegations of False Disclosures to Stockholders:

  • The Court explained the important fiduciary duty of accurate disclosures to stockholders with or without a request for stockholder action. See footnote 155.
  • The Court observed that the issue in this case was not whether the directors breached their duty of disclosure, see footnote 157, but instead whether they breached their more general fiduciary of loyalty and good faith by knowingly disseminating to the stockholders false information about the company.
  • Relying on the Delaware Supreme Court decision in Malone v. Brincat, 722 A.2d 5 (Del. 1998), the Court explained that a directors’ duty of disclosure, absent a request for stockholder action, must still include: (1) reliance; (2) causation and; (3) damages.
  • Malone explained that when shareholder action is absent, the need to show reliance, causation and damages was intended to be consistent with similar federal standards. See footnotes 160 and 161.
  • The complaint in this case failed to satisfy those elements of the disclosure claim and therefore the directors would not face a substantial likelihood of liability for breach of the duty of loyalty in that regard.
  • The Court explained that the complaint in this case did not plead a single fact related to the element of reliance.
  • Moreover, without an allegation of reliance, prior Delaware case law explains that a plaintiff cannot rely on a “rebuttable presumption of reliance”, sometimes described as the “fraud on the market theory.” See footnote 175.
  • Thus, the directors did not face a substantial likelihood of liability for knowingly allowing the dissemination of false information to stockholders.

Failure to Exercise Valid Business Judgment:

  • The Court explained why it is so difficult to establish that pre-suit demand is excused due to the failure to exercise valid business judgment.
  • The board explained the bedrock Delaware corporate law principle that: “A board of directors enjoys a presumption of sound business judgment and its decisions will not be disturbed if they can be attributed to any rational business purpose.” Moreover, the Court will not substitute its own notions of what is sound business judgment and importantly: “rationality is the outer limit of the business judgment rule” which may be the functional equivalent of the waste test. See footnote 183.
  • The Court explained that it cannot reasonably conclude that there was no legitimate business purpose for the disclosures that were alleged to be problematic.
  • In conclusion, the Court reasoned that the plaintiff failed to plead particularized facts to show that the directors’ actions were “so egregious or rational that it could not have been based on a valid assessment of the corporation’s best interests.”
  • Therefore, the motion to dismiss was granted.

POSTSCRIPT: This opinion serves as a primer of the basic prerequisites and the high threshold that must be met to successfully pursue a derivative claim in terms of the specific facts that must be alleged before the Court will allow a claim to proceed against directors.

SUPPLEMENT:  Professor Bainbridge has provided a scholarly analysis of this decision and also kindly quotes from this post. 

A recent Delaware Court of Chancery opinion is useful for commercial litigators who encounter the frequent situation where one party is required to use some variation on the standard of “best efforts” to either sell a product or reach certain revenue milestones, for example, in connection with a joint venture or a post-closing earn-out. In BTG International, Inc. v. Wellstat Therapeutics Corporation, C.A. No. 12562-VCL (Del. Ch. Sept. 19, 2017), the court applied the contractually defined standard of “diligent efforts” to the promotion of a pharmaceutical product, in a post-trial opinion.  This discussion of the contractually defined standard of diligent efforts is at least generally analogous to other cases highlighted on these pages that address the standard of “reasonable best efforts” or “commercially best efforts” or the like, to perform certain tasks or to reach certain goals.  Due to the relative paucity of cases thoroughly analyzing these types of standards, this case will likely be useful to many readers.

Background: This case involved a distribution agreement between two pharmaceutical companies. BTG was the larger company and agreed to promote, distribute and sell a drug called Vistogard, that the smaller Wellstat did not have the resources to promote, distribute and sell.  After extensive negotiations, the parties agreed to a contractual definition of “diligent efforts” which BTG was required to employ in order to reach various sales goals for Vistogard.  In addition, the parties were required to work together to formulate and finalize a business plan that would describe the details for promoting, distributing and selling Vistogard.

Key Findings: The court found that BTG failed to hire a sufficient number of sales representatives and failed to devote other resources to sell Vistogard, but instead focused most of its efforts and resources on a completely different product in a different division of the company – – with instructions from the CEO to keep the costs flat related to Vistogard and not to increase the resources that were necessary to implement the business plan.

The court found that BTG failed to comply with the contractually defined standard of “diligent efforts” and also breached the agreement by not complying with the business plan that required certain resources, including a sufficient number of sales representatives, to be devoted to the sale of Vistogard.

Legal Analysis: The court provides a useful discussion of the elements of a claim for breach of contract and for awarding damages. The court also took the rare step of shifting fees due to bad faith litigation tactics, and explained its reason for doing so.

The court recited the familiar elements for breach of contract: (1) the existence of a contract, whether expressed or implied; (2) the breach of an obligation imposed by that contract; and (3) the resultant damage to the plaintiff.

BTG took the aggressive approach of filing a declaratory judgment action seeking a declaration that it had not breached the contract. In response, Wellstat asserted a counterclaim for breach of contract. In sum, the court treated the DJ action as a defensive tactic, which failed, in part because Wellstat did not breach the agreement such that it would have excused a performance of BTG.

This 60-page decision provides extensive detailed factual background which is necessary to fully appreciate the court’s thorough analysis. For purposes of this relatively short overview however, the key points in the analysis are based on the court’s finding that BTG failed to devote the necessary resources for Vistogard – – and instead prioritized the sale and promotion of other products of BTG other than Vistogard.  In addition to failing to comply with the contractual definition of diligent efforts, BTG also breached the agreement by failing to comply with the business plan that required a minimum amount of resources to be devoted to the sale and promotion of Vistogard.

The court also discussed principles applicable to claims for breach of contract damages. The basic remedy for breach of contract should give the non-breaching party “the benefit of its bargain by putting the party in the position it would have been but for the breach.” See footnote 170.  Expectation damages require the breaching party to compensate for the reasonable expectation of the value of the breached contract.  These damages are to be measured “as of the time of the breach.” See footnote 172.

Although expectation damages should not act as a windfall, the “injured party need not establish the amount of damages with precise certainty when a wrong has been proven and injury established. Doubts about the extent of damages are generally resolved against the breaching party.” See footnotes 173 through 175.

Moreover the court noted that: “Public policy has led Delaware courts to show a general willingness to make a wrongdoer bear the risk of uncertainty of a damages calculation where the calculation cannot be mathematically proven.” See footnote 175.

The court concluded by taking the unusual step of shifting fees due to bad faith litigation conduct, which included the need during the litigation for Wellstat to file a motion to compel before BTG complied with its discovery obligations, as well as BTG presenting a misleading demonstrative exhibit at trial. See footnotes 216 through 218.

SUPPLEMENT: The Delaware Supreme Court, by Order dated June 11, 2018, affirmed this decision with the exception of one minor point regarding the start date when pre-judgment interest will accrue.

The Delaware Supreme Court recently analyzed, for the first time, a common contractual standard in business agreements.  The legal meaning of the phrase “commercially reasonable efforts” does not enjoy clarity in the law. Lawyers and jurists alike should be excused if they view the law on this topic as not entirely self-evident.  The split decision of the Delaware Supreme Court in the case styled The Williams Companies, Inc. v. Energy Transfer Equity, L.P., Del. Supr., No. 330, 2016 (Mar. 23, 2017), proves the point. The Delaware high court decision in this matter featured a vigorous dissent from the Chief Justice in opposition to the majority’s affirmance of the Court of Chancery’s decision. The majority opinion was based on different reasoning than the trial court applied.

The background facts were included in the Court of Chancery’s opinion in this matter that was highlighted on these pages previously. The foregoing hyperlink also features links to scholarly commentary on this topic by the esteemed Professor Stephen Bainbridge. (The dissent of the Chief Justice will not be covered in this modest blog post, although those interested in this topic may want to read it, because it may provide ideas for opposing arguments on the topic, and in the future when a new majority exists on the Delaware Supreme Court, perhaps the reasoning in the dissent will garner a majority of votes.)

For now, the majority’s restatement of the latest Delaware law in connection with interpreting the meaning of the phrase “commercially reasonable efforts” includes the following important principles.  

Important Legal Principles Explaining the Legal Meaning of “Commercially Reasonable Efforts”:

Although the Delaware Supreme Court affirmed the post-trial opinion of the Court of Chancery, based on different reasoning, Delaware’s high court explained three errors in the Chancery decision, and in doing so the Supreme Court elucidated the correct principles of law applicable to an understanding of the phrase “commercially reasonable efforts.”

First, the Supreme Court explained that the Court of Chancery took an “unduly narrow view” of the decision in Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008).  The Delaware Supreme Court emphasized in this opinion that it agreed with Chancery’s Hexion decision, which was highlighted on these pages. The Supreme Court quoted extensively from the Hexion opinion, and described that the buyer in the Hexion case required financing to complete a transaction.  The Court of Chancery in Hexion held that the agreement required action to the extent that such action was “both commercially reasonable and advisable to enhance the likelihood of consummation of the financing . . ..”  (Hexion, 965 A.2d at 749.) The Supreme Court in Williams quoted with approval the reasoning in the Hexion case even though the Hexion case involved a standard of “reasonable best efforts”–and not commercially reasonable efforts. See footnote 16 and accompanying text in the Williams decision for related analysis.

The Supreme Court in Williams also observed that in the Hexion case, after the buyer developed a more substantial concern about the solvency of a combined entity after the deal closed, the buyer “was then clearly obligated to approach the seller’s management to discuss the appropriate course to take to mitigate the solvency concerns.” Instead, the buyer in Hexion chose not to approach the seller’s management, and the court in Hexion reasoned that such a “choice alone would be sufficient to find that the buyer had knowingly and intentionally breached its covenants under the merger agreement.”  Hexion, 965 A.2d at 750.

The second error that the Supreme Court determined that the Court of Chancery made in the Williams case was the trial court’s focus on the absence of any evidence to show that Energy Transfer Equity, L.P. (ETE) caused the law firm to withhold the opinion that was a condition precedent to closing.  This is so, explained the Supreme Court, because there was evidence recognized by the Court of Chancery from which it “could have concluded that ETE did breach its covenants,” including evidence that ETE did not direct the law firm to engage more fully with counsel for the opposing party in the transaction in an attempt to negotiate any issues.

The third error the Supreme Court found with the Chancery opinion involved shifting of the burden of proof.  The Supreme Court in Williams ruled that “once a breach of a covenant is established, the burden is on the breaching party to show that the breach did not materially contribute to the failure of a transaction.”  See footnote 54. (Of course, one might note that an adjudication that a party was in breach is not usually made until after trial).  Moreover, the Supreme Court emphasized that a plaintiff “has no obligation to show what steps the breaching party could have taken to consummate the transaction.”

Nonetheless, the Supreme Court affirmed the decision of the Court of Chancery (just barely), because the end result in its post-trial opinion would have been the same even if the Court of Chancery applied the proper burden of proof – – in light of a footnote in the Chancery opinion noting that Williams did not present sufficient facts at trial to prevail even if the burden of proof were correctly applied.

Bottom Line: If you have a case that involves an issue of the meaning or application of the phrase “commercially reasonable efforts,” your first step is to read this opinion.  The next step is to determine how the facts of your case compare to the facts in this decision.

SUPPLEMENT: Scholarly commentary on this decision and the topic of “commercially reasonable efforts” in general, is provided by friend of the blog, Professor Stephen Bainbridge, whose scholarship is often cited in Delaware court opinions.

In an expedited deal litigation matter, in The Williams Companies, Inc. v. Energy Transfer Equity, L.P., C.A. No. 12168-VCG (Del. Ch. June 24, 2016), the Court of Chancery denied a request to enjoin Energy Transfer Equity, L.P. (“ETE”) from evading a deal based on its inability to obtain a tax opinion that was a condition precedent to closing on a deal with The Williams Companies, Inc. Although the facts of this case are somewhat sui generis, the legal principles addressed should have broader application, not only for deal litigation but contract litigation in general.

The court’s discussion of the concept of “commercially reasonably efforts” and “reasonable best efforts” is useful to remember. The court distinguished the two prior Chancery opinions in Hexion, highlighted on these pages previously, and WaveDivision Holdings, highlighted on these pages, in part because, on a factual level, in both of those cases the Court of Chancery found, unlike in the instant case, that a party took affirmative steps, in violation of the relevant cooperation clause, to thwart a condition to closing such as using commercially reasonable efforts, or reasonable best efforts, to obtain financing or to obtain the consent of a third party to the deal.

Short Overview of the Basic Facts

After the merger agreement between the parties was entered into, the energy market, and the value of the assets in the transaction, experienced a precipitous decline. Since a part of the consideration for Williams was $6 billion in cash, which ETE would have to borrow against its devalued assets to obtain, the proposed transaction quickly because financially unattractive to ETE as the buyer. Thus, ETE was looking for an exit from the merger agreement, although initially it had been an ardent suitor of The Williams Companies.

One of the key facts of the case was that a condition precedent to consummation of the merger was the issuance of an opinion by the tax attorneys for ETE at the law firm of Latham & Watkins. The firm was specified in the agreement, and in its sole discretion, was to issue an opinion as a prerequisite to closing, to the effect that the transaction “should” be treated as a tax free exchange under Section 721(a) of the Internal Revenue Code. Although Latham initially, at the time the agreement was signed, expected to be able to issue that opinion, after the agreement was signed something changed. Based on the effect of changing market conditions and reduced value of the stock on the tax impact, Latham disclosed that it was no longer able to issue such an opinion. One of the claims that Williams maintained against ETE was that it failed to use “commercially reasonable efforts” to secure the Latham opinion and, therefore, materially breached its contractual obligations.

The court approached the inability of ETE to obtain the Latham opinion with skepticism, amid claims that it was a ruse to allow it to back out of the deal in light of the downturn in the energy market which made the deal financially problematic. Another important fact is that the court found that the person at ETE in charge of tax issues did not accurately read or understand the terms of the deal at the time the agreement was signed, and both he and the Latham firm only realized there was a problem in issuing a the tax opinion after the agreement had been signed. Curiously there were six different tax opinions presented at trial by independent experts and tax experts connected with the deal. Some of those opinions were contradictory.

Money Quote

Notwithstanding the court’s initial skepticism and the motive that ETE had to avoid the closing, a few money quotes from the court have application far beyond this case. For example, the court reasoned that:

“Just as motive alone cannot establish criminal guilt, however, motive to avoid a deal does not demonstrate lack of a contractual right to do so. If a man formerly desperate for cash and without prospects is suddenly flush, that may arouse our suspicions. Nonetheless, even a desperate man can be an honest winner of the lottery.”

Court’s Holding

The court explained in its 58-page post-trial opinion, issued the same week that the trial ended, that Delaware is a contractarian state, and recognizes and respects provisions in contracts that favor specific performance in case of breach. But conditions precedent to a transaction must be enforced as well. The request of Williams to force the court to consummate the deal with ETE would force ETE to accept the risk of substantial tax liability which the parties did not contract for.

Key Issues

Among the key issues the court had to consider was whether the Latham firm determined “in good faith” that it was unable to issue the tax opinion. Williams argued that Latham reached a conclusion that it could not issue the opinion in bad faith and for reasons other than its best legal judgment, in order to please its client. That relates to the argument that ETE persuaded Latham not to issue the necessary opinion, which, if true, would be a breach by ETE of the requirement that it use commercially reasonable efforts to obtain the opinion.

The court articulated the issue as whether Latham determined in “subjective good-faith” that it could issue the necessary opinion which was a condition precedent to closing. The court observed that Latham was a law firm of “national and international repute” and that is was at the very least a blow to the reputation of the firm and its tax partners that they had preliminarily advised that the deal would qualify for certain tax treatment, but had to backtrack in a way that “caused the ‘deal to come a cropper.’”

Among the six different tax experts who testified at trial about the ability to issue the necessary tax opinion that was a condition precedent, one tax law professor testified that “no reasonable tax attorney could agree with Latham’s conclusion,” but another professor testified that the conclusion of Latham that it could not issue the opinion was appropriate. Other law firms argued that although the conclusion of Latham was correct, the reasoning for that conclusion was different.

In its analysis of subjective good-faith, the court observed that it was a “substantial embarrassment to Latham” that it was not able to issue the opinion despite its initial view that it could do so, and that the reputational effects outweighed any benefit of an unethical deference to the interests of its client because “while this deal is, certainly, a lunker, Latham has even bigger fish to fry.” The court also noted a blog post from one of the Wall Street Journal’s blogs that Latham & Watkins had been a clear loser on the deal regardless of who won the litigation. See footnote 122.

Legal Principles Discussed

The court observed that the phrase “commercially reasonable efforts” was not defined in the agreement, and that even though the phrase has been addressed in other cases – – “the term is not addressed with particular coherence in our case law”. The phrase has also been articulated as “reasonable best efforts” which has been described as “good-faith in the context of the contract at issue.” Citing Hexion Specialty Chemicals Inc. v. Huntsman Corp., 965 A.2d 715 (Del. 2008), the court found that the phrase “commercially reasonably efforts” in the agreement in this case required the purchaser, ETE, to submit itself to a “objective standard to ‘do those things objectively reasonable to produce the desired’ tax opinion in the context of the agreement reached by the parties.”

The court found that the argument by Williams regarding burden of proof was wrong, and that the buyer, ETE, did not have the burden to “prove a negative.” That is, it did not need to show that its lack of more forceful action, or that a specific action taken, was the reason that Latham did not render a tax opinion. The court similarly distinguished the holding in WaveDivision Holdings, LLC v. Millennium Digital Media Sys., LLC, 2010 WL 3706624 (Del. Ch. Sept. 17, 2010). See footnote 130.

Regarding the court’s reasoning about why ETE did comply with its obligation to use commercially reasonable efforts, the court explained why the arguments of Williams were rejected. Williams argued that ETE:

“. . . generally did not act like an enthusiastic partner in pursuit of consummation of the Proposed Transaction. True. The missing piece of Williams’ syllogism is any demonstration that the Partnership’s activity or lack thereof, caused, or had a materially effect upon, Latham’s current inability to issue the [tax opinion].”

Thus, one may read the above quote as suggesting that “not being enthusiastic about closing a deal” is insufficient to breach a duty to use commercially reasonable efforts. The missing part of Williams’s syllogism described by the court is a key fact that distinguished both the Hexion case and the WaveDivision case because the non-performance allegation and the lack of best efforts allegation – – even if true – – did not contribute materially to the failure of the goal to which the “efforts clause” was directed. See footnotes 122 and 123 and accompanying text.

Postscript: Courtesy of The Chancery Daily, we understand that this decision has been appealed to the Delaware Supreme Court. The Court of Chancery facilitated this option by noting in an Order that accompanied the opinion that pursuant to Rule 54(b), this ruling was appealable although it did not conclude all issues at the trial court level.

Supplement: The venerable Professor Bainbridge provides professorial commentary on the use of the phrase “commercially reasonable efforts” and variants, and observes how common it is to use this phrase, and its variations, without definition and without precision. We are also grateful that the good professor links to yours truly and this post in his discussion.

Second Supplement: In a more recent transcript ruling, in a separate case, another vice chancellor addressed the standard of “commercially reasonable efforts” in the context of a motion to dismiss, as opposed to the post-trial findings in the Williams case. In the matter styled:WP CMI Representative LLC v. Roche Diagnostics Operations Inc.,  C.A. No. 11877-VCL (transcript)(Del. Ch. July 14, 2016), the money quote is found at page 56 of the above-linked transcript ruling when the court explains that a reasonable inference that the parties’ interests are aligned can be defeated when the party with the duty to act in a commercially reasonable manner, does “… something that wasn’t originally contemplated and which has the effect of causing the milestone not to be hit….” In that context, it might be “reasonably conceivable” [under Rule 12(b)(6)] that the change in behavior that was  not originally contemplated or not consistent with past practice, may be a change that was not commercially reasonable.

In the case of Snow Phipps Group LLC v. KCAKE Acquisition, Inc., C.A. No. 2020-0282-KSJM (Del. Ch. April 30, 2021, modified  June  2021), the court reviewed a topic of importance in deal litigation and one that has been the subject of many blog posts on these pages: an analysis of when reasonable best efforts or commercially reasonable efforts, which are deemed equivalent standards, have been satisfied.  This decision found that reasonable best efforts were satisfied in the context of obtaining financing–and found no MAE in the context of the pandemic. Also notable in this decision is the discussion of the “prevention doctrine.”

This 125-page decision, authored by newly-appointed Chancellor Kathaleen St. J. McCormick while she was still a Vice Chancellor, has already been the subject of much commentary by practitioners and others. See, e.g., the overview that appeared on Harvard Law School’s Corporate Governance Blog (on which yours truly has published multiple articles in the past.)  In part because I prefer not to duplicate extensive existing commentary, I simply want to highlight a few key issues addressed in the opinion that have widespread applicability to corporate and commercial litigators.

A prior Chancery decision in AB Stable VIII LLC v. Maps Hotels and Resorts One LLC (Del. Ch. Nov. 30, 2020), was another magnum opus of epic length that addressed similar issues, such as reasonable best efforts, and similarly did not find an MAE in the context of the pandemic.

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Court of Chancery recently ruled, on an issue of first impression, that The We Company’s management did not have the authority to unilaterally preclude a director faction from accessing the office space provider’s privileged information in a dispute over a Japanese investment group with a controlling interest in the matter of In re WeWork Litigation, C.A. No. 2020-0258-AGB, opinion issued (Del. Ch. Aug. 21, 2020).

Chancellor Andre Bouchard’s Aug. 21 opinion ordered We Co. to quickly produce privileged information relating to the circumstances under which management abruptly replaced a specially-appointed two-director committee that had sued investor SoftBank Group Corp. and its ally, SoftBank Vision Fund with a new committee that had agreed to drop the suit.

Delaware law on its head

“It is the board of directors of a corporation—not management—that has the ultimate responsibility for overseeing the affairs of the corporation under 8 Del. C. § 141(a)” but in claiming the right to shield company privileged information from a warring board of directors, “management turns these bedrock principles of Delaware law on their head,” the Chancellor wrote.

He said a special committee of the We Company’s board of directors formed in October 2019 had investigated the circumstances of SoftBank’s proposal to help stave off the company’s liquidity crisis by instituting corporate reforms and investing $3 billion in a stock buy that never transpired.

The special committee, on behalf of We Company, charged in its April Chancery suit, that investors SoftBank and SoftBank Vision Fund breached a contract to use their best efforts to consummate the $3 billion stock buy tender offer; but one month later the company recruited two new temporary directors to form a new special committee to undo the original committee’s work.

New vs. Old Committee

The original committee’s members opposed a motion by the new committee to dismiss their suit and sought information on how the new committee was established and how it may have been influenced by the company’s management, the Chief Executive Officer of which was chosen by SoftBank, he said.  Their suit did not seek access to the new committee’s legal advice.

The Chancellor said in Kalisman v. Friedman, Vice Chancellor J. Travis Laster elaborated on the fundamental principle of Delaware law that a director’s right to information is essentially unfettered in nature,” and “directors of Delaware corporations are generally entitled to share in legal advice the corporation receives.”  Kalisman v. Friedman WL 1668205 (Del. Ch. Apr. 17, 2013).

Kalisman said one exception to that principle is that “a board or a committee can withhold privileged information once sufficient adversity exists between the director and the corporation such that the director could no longer have a reasonable expectation that he was a client of the board’s counsel.”

No exceptions here

But in this case, the board made no decision to withhold privileged information from the special committee after analyzing whether those directors had a “reasonable expectation that [they were] a client of the board’s counsel.”  Instead, “management made that decision unilaterally” he said.

“Directors of a Delaware corporation are presumptively entitled to obtain the corporation’s privileged information as a joint client of the corporation” he said in ordering production, “and any curtailment of that right cannot be imposed unilaterally by corporate management untethered from the oversight and ultimate authority of the corporation’s board of directors.”