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.


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.

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.”


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 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.



By: Francis G.X. Pileggi, Sean M. Brennecke, Aimee M. Czachorowski, Rolando A. Diaz, Andrew A. Ralli, Andrew J. Czerkawski, Katherine R. Welch, and Fanta M. Toure

Reprinted courtesy of The Delaware Business Court Insider, ALM Media Properties, LLC, which published this on January 3, 2024.

This is the 19th year that Francis Pileggi has published an annual list of key corporate and commercial decisions of the Delaware Supreme Court and the Delaware Court of Chancery, often with co-authors.  This year’s list does not attempt to include all important decisions of those courts that were rendered in 2023, and eschews some of the cases already extensively discussed by the mainstream press or legal trade publications. This list highlights some of the notable decisions that should be of widespread interest to those involved in corporate and commercial litigation or those who follow the latest developments in this area of Delaware law.

Did Delaware Supreme Court Merge the Blasius and Unocal Standards in Recent Decision of Coster v. UIP Cos., Inc.?

          In Coster v. UIP Companies, Inc., 300 A.3d 656 (Del. 2023), the Delaware Supreme Court approved the Court of Chancery’s combination of Unocal’s nexus test with Blasius’s compelling justification requirement, affirming the holding that:  “To satisfy the compelling justification standard, ‘the directors must show that their actions were reasonable in relation to their legitimate objective, and did not preclude the stockholders from exercising their right to vote or coerce them into voting a particular way.”  The Court of Chancery, noting the case’s “exceptionally unique circumstances,” articulated that “in this context, the shift from ‘reasonable’ to ‘compelling’ requires that the directors establish a close fit between means and ends.”  The Delaware Supreme Court agreed, concluding that courts can apply Unocal “with the sensitivity Blasius review brings to protect the fundamental interests at stake—the free exercise of the stockholder vote as an essential element of corporate democracy.”

Did Delaware Supreme Court Merge the Blasius and Unocal Standards in Recent Decision of Coster v. UIP Cos., Inc. | Delaware Corporate & Commercial Litigation Blog (

Supreme Court Clarifies Limits of Judicial Equitable Review of LLC Agreements

          In Holifield v. XRI Investment Holdings LLC, 2023 Del. LEXIS 295 (Del. Sept. 7, 2023), the Delaware Supreme Court upheld an LLC agreement’s incurable voidness provision.  The provision at issue rendered void—not just voidable—any transfers of interest that were in violation of the LLC agreement. The Court emphasized that Delaware law affords parties to alternative entity agreements maximum private ordering and contractual freedom.  Though it rejected the notion that parties must use “talismanic magic words,” the Court concluded that the plain, unambiguous language of the LLC agreement indicated that sophisticated LLC members bargained for an enforceable clause voiding non-compliant interest transfers, incapable of being cured—even by a court of equity.

Supreme Court Clarifies Limits of Judicial Equitable Review of LLC Agreements | Delaware Corporate & Commercial Litigation Blog (

Recent Chancery Decision Clarifies Basis for Judicial Dissolution of LLC

          In In re Dissolution of T&S Hardwoods KD, LLC, 2023 Del. Ch. LEXIS 16 (Del. Ch. Jan. 20, 2023), the Delaware Court of Chancery clarified what kind of allegations seeking the dissolution of an LLC suffice to pass muster under the plaintiff-friendly Rule 12(b)(6) standard.  The allegations reflected a “continuing breakdown” in the relationship of the managers.  Moreover, despite the LLC agreement’s broad, general purpose clause (“engage in any lawful activities”), the Court determined the parties could not carry on their specifically contemplated business.  Also, because the LLC agreement’s buy-sell provision failed to offer the parties an equitable exit mechanism, the action proceeded past the motion to dismiss stage.

Recent Chancery Decision Clarifies Basis for Judicial Dissolution of LLC | Delaware Corporate & Commercial Litigation Blog (

Caremark Claims Allowed to Proceed Against Corporate Officer

          The Court of Chancery denied a motion to dismiss a McDonald’s shareholders’ derivative complaint against a company officer, which alleged that the officer breached his fiduciary duty of oversight.  The officer contended that Caremark fiduciary obligations do not extend to Delaware corporate officers and thus did not apply to him.  But the Court disagreed.  Mincing no words, the Court in In re McDonald’s Corp. Stockholder Derivative Litigation, 2023 Del. Ch. LEXIS 23 (Del. Ch. Jan. 25, 2023) wrote: “This decision clarifies that corporate officers owe a duty of oversight.”

Caremark Claims Against McDonald’s

Who Can Represent a Cancelled LLC in Response to a Petition Seeking a Receiver?

          In In Re Reinz Wisconsin Gasket, LLC, 2023 Del. Ch. LEXIS 194 (Del. Ch. May 8, 2023), after a company’s counsel filed a notice of dissolution and cancellation, the Court of Chancery prohibited a cancelled LLC from “participat[ing] in the process of appointing its own receiver or retain[ing] counsel to do so.”  The petitioner sought to appoint a receiver and nullify the cancellation.  Opposing the petitioner’s requested relief, Delaware counsel entered appearances on behalf of the company.  Though it granted the request, the Court nevertheless invited the parties “to address the puzzle of a dissolved and cancelled entity appearing to litigate the propriety of its cancellation before they submitted proposed receivers.”

          The Court reflected on the lifespan of an LLC, observing that an LLC’s separate, statutory existence continues until the “cancellation” of its certificate of formation.  Once an authorized person files a certificate of cancellation for the company, “its existence as a jural entity ceases.”  Upon the filing of the certificate of cancellation, “a defunct entity may speak only through a receiver to manage litigation or any other outstanding business: the receiver is appointed because there are no other fiduciaries to make decisions for the entity.”  Finding that a non-existent entity could not retain counsel, and considering it a “metaphysical wonder,” the Court determined: “Counsel’s purported representation of a defunct limited liability company is not only puzzling, but impossible.”

Who Can Represent a Cancelled LLC in Response to a Petition Seeking Receiver? | Delaware Corporate & Commercial Litigation Blog (

Delaware Court of Chancery Provides Guidance on Standard for Awarding Mootness Fees

          In the runup to a merger, a shareholder plaintiff challenged the “don’t, ask don’t waive” provisions in the company’s confidentiality agreements with the bidders by contending that the proxy statement contained materially deficient descriptions.  In Anderson v. Magellan Health, Inc., 298 A.3d 734 (Del. Ch. July 6, 2023), following the suit’s commencement, the company (i) waived some of its confidentiality rights and (ii) supplemented its proxy statement, further detailing the “don’t ask, don’t waive” provisions.  The supplemental disclosures mooted the shareholder litigation.  In the wake of the merger, shareholder plaintiff’s counsel petitioned the Court of Chancery for a $1.1 million fee award.  The company challenged the petition’s “eye-popping” size.

          Thoroughly reviewing the jurisprudential shift in M&A strike suits, the Court opined that going forward, “unless a higher authority proclaims otherwise . . . I will award mootness fees based on supplemental disclosures only when the information is material.”  Nevertheless, the Court found it “unjust” to immediately apply that standard: Delaware courts had yet to apply it and neither the company nor the petitioner briefed it.  Using only the “helpful” standard, the Court found the supplemental proxy disclosures “marginally helpful” and, “[p]utting it all together,” awarded plaintiff’s counsel a $75,000 fee.

Delaware Court of Chancery Provides Guidance on Standard for Awarding Mootness Fees | Delaware Corporate & Commercial Litigation Blog (

Fee-Shifting in Section 220 Case Provides Cautionary Tale

          In Seidman v. Blue Foundry Bancorp, 2023 Del. Ch. LEXIS 178 (Del. Ch. July 10, 2023), concerned over a potentially excessive director and management equity incentive plan, a shareholder demanded to inspect the company’s consulting reports and formal board materials in connection with the equity plan pursuant to DGCL § 220. The shareholder asserted purposes of “investigating mismanagement and communicating with Plaintiff’s fellow stockholders regarding any proxy contest or other corrective measures.”  Claiming the shareholder lacked a proper inspection purpose, the company rejected the demand and refused to produce a single document. The Court had a much different view of the matter.

          Emphasizing the exception to the American Rule under which the Court may discretionarily shift fees “where equity requires,” the Court noted: “To capture the sorts of vexatious activities that the bad-faith exception is intended to address, this court employs the ‘glaringly egregiousness’ standard.”  Decrying “overly aggressive litigation strategies” in the books and records context and highlighting the company’s less-than-scrupulous tactics, the Court concluded: “After [the company] declined to produce a single document to Plaintiff, forcing him to commence litigation, [the company] took a series of litigation positions that, when viewed collectively, were glaringly egregious.”  Accordingly, “[j]ustice” required fee shifting to mitigate such “serious ‘vexatious behavior.’”

Recent Chancery Decisions Provide Cautionary Tales in Section 220 Matters | Delaware Corporate & Commercial Litigation Blog (

Chancery Addresses Fiduciary Duty of Disclosure in Context of a Squeeze-Out

          In Cygnus Opportunity Fund, LLC v. Washington Prime Group, 302 A.3d 430 (Del. Ch. Aug. 9, 2023), after an LLC controller and board of managers squeezed-out the minority unitholders, a group of hedge fund plaintiffs challenged certain disclosures in connection with the merger and a preceding tender offer.  The Court of Chancery dove deep into Delaware’s disclosure jurisprudence in the context of what the Court referred to as the “stockholder-action duty.”  Because Delaware law “piggybacks on the federal [securities] disclosure regime,” the Court entertained the notion that “[i]f a controlling stockholder or third party makes a tender offer for the corporation’s shares, then depending on the circumstances, the directors might well have a duty to respond.  To the extent officers owe the same duties as directors, the duty could apply to them as well.”  Though the Court could not “hash these issues out at the pleading stage,”  the plaintiffs stated a “conceivable” claim because the officers disclosed nothing in connection with “a severely underpriced” tender offer.

          Moreover, examining the etymology of the word “fiduciary” and its trust law roots, the Court emphasized that “[t]he duty of disclosure is a context-specific duty, and no Delaware decision holds that fiduciaries do not owe any duty in the context of a transaction in which the fiduciaries unilaterally eliminate their investors from an enterprise.”  Because a squeeze-out is such a transaction, “the duty of loyalty could manifest as an obligation to inform the beneficiary of the material facts surrounding the transaction, regardless of whether or not the beneficiary’s approval is required.”

Chancery Addresses Fiduciary Duty of Disclosure in Context of a Squeeze-Out | Delaware Corporate & Commercial Litigation Blog (

Chancery Court finds collection of bad faith factors enough to keep GoDaddy suit alive

          The Court of Chancery, in IBEW Local Union 481 Defined Contribution Plan & Trust v. Winborne, 2023 Del. Ch. LEXIS 342 (Del. Ch. Aug. 24, 2023), allowed a shareholder derivative suit to survive a motion to dismiss because the plaintiff adequately pled demand futility based on the board’s alleged bad faith overpayment to settle an outstanding company liability.  Reviewing Rule 23.1’s doctrinal pillars, the Court examined the pleading standard required to withstand dismissal for want of “reasonable doubt” as to the board’s ability to properly respond to a pre-suit demand.  Focusing on the second prong of Delaware’s demand futility test, the Court considered whether at least three of the directors faced a substantial likelihood of bad faith liability for approving the settlement.

          Noting that “[c]lairvoyance plays no role,” the Court extensively reviewed the precedent detailing how Delaware measures pleadings-stage fiduciary bad faith. In sum: “Properly understood, the good faith inquiry is a holistic one.”  A court of equity can allow a case to proceed past the pleading stage when the allegations as a whole support an inference of bad faith.  The “constellation of factors”—including an almost $700 million disparity between what the company valued the settlement at and what the company actually paid for it—supported a pleading stage bad faith inference sufficient to pass demand futility review.

Chancery Court finds collection of bad faith factors enough to keep GoDaddy suit alive | Delaware Corporate & Commercial Litigation Blog (

Chancery Rejects Request for Specific Performance to Close Deal

          With a factual background that reads like a Hollywood thriller, in 26 Capital Acquisition Corp. v. Tiger Resort Asia Ltd., 2023 Del. Ch. LEXIS 364 (Del. Ch. Sept. 7, 2023), the Court of Chancery declined to compel an acquisition target to close a busted deal.  The acquirer sought specific performance under a de-SPAC merger agreement.  The Court meticulously weighed the factors supporting specific performance after criticizing the sponsor and its hedge fund majority shareholder’s duplicitous behavior.  Refusing to specifically enforce the merger agreement’s reasonable best efforts clause, the Court concluded that the transaction’s troubling factual backdrop disfavored such a remedy.

The Court of Chancery Declines to Save Belly Up de-SPAC

Chancery rules that Delaware allows grant of 10 votes per-share to “Up-C” CEO

          In Colon v. Bumble, Inc., 2023 Del. Ch. LEXIS 367 (Del. Ch. Sep. 12, 2023), the Court of Chancery upheld the validity of a challenged capital arrangement that layered standard Up-C and dual class voting structures into a “bespoke” capital design.  The share classes’ voting power differed depending on the holder’s identity.  If a separately referenced and defined (outside the charter) “Principal Stockholder” held a class A share, then it carried ten votes per share; otherwise, it carried only one.  And if a Principal Stockholder held a class B share, then it carried ten votes per each class A share into which it could convert; otherwise, it carried only one.  Though the Court noted that its opinion did not consider whether such an identity-based governance regime would pass Delaware’s “twice tested” review of corporate action, it concluded the challenged charter provisions and capital structure complied with the Delaware General Corporation Law.

Chancery rules that Delaware allows grant of 10 votes per-share to “Up-C” CEO | Delaware Corporate & Commercial Litigation Blog (

Section 225 Action Determines That Board Members Were Properly Removed

          In Barbey v. Cerego, Inc., 2023 Del. Ch. LEXIS 379 (Del. Ch. Sept. 29, 2023), after a wholly owned foreign subsidiary launched a tender offer to the shareholders of its Delaware parent, resulting in an inversion, the Court of Chancery upheld as valid the removal of the entire parent board.  A shareholder and ousted director challenged the removal under DGCL § 225, contending that the director’s failure to receive the required notice of the meeting at which the board approved the tender offer rendered the approval thereof and subsequent management change void.  The Court agreed, but nevertheless determined that the plaintiffs failed to draw a sufficient connection between the void meeting and the effect of the tender offer.  Noting that the internal affairs doctrine governed whether the foreign subsidiary enjoyed the authority to independently launch the tender offer without the parent’s approval, the Court concluded that the plaintiffs failed to timely meet their burden, and upheld the board’s removal.

Chancery Determines in Section 225 Action: Board Members Properly Removed | Delaware Corporate & Commercial Litigation Blog (

Entire Fairness Test Applied, But No Damages

          The Court of Chancery in In re Straight Path Communications Inc. Consolidated Stockholder Litigation, 2023 Del. Ch. LEXIS 387 (Del. Ch. Oct. 3, 2023),held that a controlling shareholder drove a not-entirely-fair transaction and breached fiduciary duties he owed to the minority.  Yet, the Court found that the transaction, while unfair under Delaware’s “unified fairness review, considering both price and process,” caused the minority no actual damages.  Nevertheless, finding the controller steered the transaction “in a manifestly unfair manner,” the transaction thus “was not entirely fair.”  Pointing out that a claim for breach of fiduciary duties does not require proving actual damages, the Court awarded the minority class nominal damages.

Unfair Process Incurs Nominal Damages Under Entire Fairness Review

Chancellor “X”s out Twitter investor’s claim he spurred Musk’s social media mind change

          In Crispo v. Musk, 2023 Del. Ch. LEXIS 466 (Del. Ch. Oct. 31, 2023), the Court of Chancery declined to award a mootness fee because the plaintiff shareholder filed an unmeritorious claim.  The decision turned on whether a merger agreement’s lost premium carve-out to its general no third-party beneficiaries clause conferred standing on the shareholder seeking damages for the then-failed merger agreement.  Examining the development of lost premium provisions in the M&A space, the Court detailed the unique relationship between Delaware’s board-centric governance paradigm, merger agreements, and shareholder interests.  Invoking Delaware’s hesitance to confer third-party merger agreement standing on shareholders, the Court found the contractual scheme afforded the shareholder plaintiff no third-party beneficiary status, thus rendering his mooted claim unmeritorious.

Chancellor “X”s out Twitter investor’s claim he spurred Musk’s social media mind change | Delaware Corporate & Commercial Litigation Blog (

Lead Plaintiff Forced to Elect Remedy

          In litigation following a plenary Revlon action (in which the Delaware Court of Chancery awarded damages to a shareholder class after finding the CEO, with a private equity firm’s aiding and abetting, breached his fiduciary duty), in In re Mindbody, Inc., 2023 Del. Ch. LEXIS 575 (Del. Ch. Nov. 15, 2023), the Court concluded that Delaware law permitted the lead hedge fund class plaintiffs, who simultaneously petitioned for appraisal, to elect to receive the merger consideration and class damages remedy.  Because the appraisal-seeking hedge funds shouldered no obligation to “make a binding election as to remedy” before the plenary action’s trial, and the shareholder class included the funds, Delaware precedent allowed them to choose either.  But the Court prohibited a double recovery. If the funds elected to pursue their appraisal petition, they could not receive the class remedy.  Conversely, if the funds elected to receive the class remedy, then the Court would not appraise their shares.

The Court of Chancery Permits Concurrent Plenary Fiduciary and Appraisal Claims

Restrictive Covenants Found Unenforceable

          In Sunder Energy, LLC v. Jackson, 2023 Del. Ch. LEXIS 580 (Del. Ch. Nov. 22, 2023), the Court of Chancery denied a solar power system dealer’s application for a preliminary injunction to enforce restrictive covenants against a former minority member.  The Court found that two of the members surreptitiously procured an amendment to the LLC agreement in breach of their fiduciary duties.  The amendment rendered the resulting minority little more than mere employees and imposed onerous restrictive covenants.  Because the purported majority members breached their fiduciary duties in connection with the amendment, the Court prevented them from enforcing the covenants.  The Court further opined, assuming arguendo their threshold validity, the restrictive covenants failed to “pass muster” under Delaware law.  Reviewing the primary and additional factors governing the enforceability of restrictive covenants, the Court evaluated “all of the dimensions” of the disputed provisions “holistically and in context.”  The Court considered how they operated within the contract as a whole and declined to “tick through individual features of a restriction in insolation, because features work together synergistically.”  With reasonableness as the touchstone, the Court found the “astonishingly broad” restrictions unreasonable and refused to enforce them.

Unreasonable Restrictive Covenants Fail Delaware’s Holistic Review

Rarely Invoked Provision of DGCL Examined

          As one part of a vast, multi-jurisdictional saga between oil giants, in a decision concerning a DGCL provision that is rarely the subject of a judicial decision, the Court of Chancery in Venezuela v. PDC Holding, Inc., 2023 Del. Ch. LEXIS 582 (Del. Ch. Nov. 28, 2023),ordered a wholly-owned Delaware subsidiary to issue a replacement stock certificate to its Venezuelan parent.  The Court detailed the three requirements under section 168 of the DGCL that a shareholder must satisfy to receive a judicially-ordered replacement of a “lost, stolen, or destroyed” stock certificate.  Though the parties did not dispute the typically litigated elements, the subsidiary initially requested the parent post a bond in the neighborhood of $40 billion.  Although the Court lacked power to waive the bond requirement altogether (if the issuer requested one), the Court nevertheless enjoyed discretion to set the amount “based on the circumstances presented in each case.”  After examining the purpose for the bond-as-security requirement and the circumstances surrounding the potential ramifications of reissuing a certificate evincing ownership of the particular shares, the Court found a “nominal, unsecured” bond in the amount of $10,000 appropriate.Chancery Interprets DGCL Section 168 for Replacement Stock Certificate

Andrew J. Czerkawski of the Lewis Brisbois Delaware office prepared this post.

The sponsor of a busted de-SPAC merger asked the Delaware Court of Chancery to order the target to close under the merger agreement’s reasonable best efforts clause, but the Court refused to do so in 26 Capital Acquisition Corp. v. Tiger Resort Asia Ltd., 2023 Del. Ch. LEXIS 364 (Del. Ch. Sep. 7, 2023).


          A Japanese gaming company parent, through its intervening subsidiary, owned a valuable casino in the Philippines.  A New York-based hedge fund purchased and held a small block in the parent.  After the parent failed to launch an IPO, the fund proposed a de-SPAC merger transaction to the parent’s investor relations manager.  Receptive to the idea, the parent engaged the fund in a formal advisory relationship, in which the fund would facilitate and analyze any potential SPAC deal.

          The fund connected with a potential sponsor and pitched the idea.  But before making introductions, the fund demanded and eventually procured a majority economic interest in the sponsor.  In a series of events too lengthy and nuanced to detail here, the fund worked as a “double agent”—convincing the parent with whom the fund had a formal advisory relationship to accept the deal while feeding inside information back to the sponsor in order to make it happen.

          Meanwhile, an ousted former director of the parent challenged his removal in the Philippines and received a favorable ruling.  The Philippine Supreme Court subsequently issued a status quo ante order.  Though the parties could not decisively determine whether consummating the deal would violate the order, the fund nevertheless continued to push the closing.  The target’s management began to suspect the fund’s deception, which the fund denied.

          A month after receiving the status quo order, the ousted director, with the help of the local police, enacted a violent physical takeover of the casino in the Philippines.  Still, the sponsor and the fund “seemed not to care about the fate of the employees and remained laser focused on closing the transaction.”  After the parent failed to retake the casino via judicial process in the Philippines, a politically oriented “dodgy bargain” occurred.  The Philippine executive branch then stepped in and “declared the takeover illegal,” helping the parent regain control.

          After more clandestine scheming with the fund, frustrated with further extension of the merger, the sponsor filed suit in the Delaware Court of Chancery, seeking to force the target to close.


          Delaware law, though “strongly contractarian,” does not categorically require the Court to enforce a reasonable best efforts clause through an order of specific performance.  Rather, granting “[s]pecific performance is a matter of grace that rests in the sound discretion of the court.”  Examining multiple factors, the Court determined that the circumstances disfavored the “extraordinary” remedy of specific performance.

          First, the transaction’s complexity and “associated difficulty of providing meaningful judicial oversight” weighed against ordering the target to close.  The interim steps remaining before closing and the quagmire of factual circumstances counseled against specific performance: preparing audited financial statements; filing a securities registration statement; dealing with the SEC; a foreign gambling corporation; a history of poor internal governance; a physical takeover; likely corrupt political ties; and “exceedingly aggressive” counterparties with “terrible judgment.”

          Second, the operative parties and their assets’ overseas locations, outside the Court’s reach to enforce coercive sanctions, rendered any order compelling the target to close a “nullity.”  The Court opined, “the sun has set on the era in which a nation might send gunboats to enforce a judgment issued by its courts,” also emphasizing that  “Delaware has no blue water navy to send, and the United States Constitution confers authority over international affairs on the federal government, not the several states.”  Acknowledging its own enforcement limitations, the Court further opined, “[t]he court is not dealing with an obstreperous billionaire or other headstrong individual whose body and assets are subject to coercive sanction through the American justice system.  In this case, the defendants are, quite literally, outside the range of the court’s armamentarium.  Firing at such a target just wastes ammunition.”

          Third, the foreign status quo order weighed against ordering the target to close.  If the target did so, it risked violating the foreign high court order, potentially subjecting it to criminal contempt.  Thus, such a consequence counseled against specific performance even under the merger agreement’s reasonable best efforts clause.

          Fourth, the Court considered and thoroughly laid out the sponsor acquiror and its hedge fund majority shareholder’s inequitable conduct.  With no sugar coating, the Court bullet-pointed their duplicitous actions and emphasized that they “acted as partners to gain and exploit their inequitable advantage over” and “engaged in a conspiracy to mislead” the target and its subsidiaries, “the type of conduct that should not be rewarded with a decree of specific performance.”

          Finally, balancing the equities, the Court considered the interests of the acquiror’s unaffiliated shareholders.  But the Court nevertheless determined that its shareholders “cannot truly claim the status of innocent victims.”  Noting that the acquiror’s shareholders “backed” the wrongdoing and “signed up for the ride,” undertaking to “benefit from the gains or suffer the losses that [the sponsor] and his team delivered,” the Court refused to allow the sponsor to “wrap itself in the mantle of its stockholders to pretend that none of the events described in this case ever happened.”  The sponsor and its hedge fund majority stakeholder tried to persuade the Court that “they were justified in doing outrageous things because they were obligated to serve their stockholders.”  But the Court refused to lend this logic any credence: “[t]hat assertion is a perversion of the fiduciary regime.  Fiduciary duties exist to check management misbehavior.  They are not a license for management to misbehave.”


          This decision highlights the extraordinary nature of specific performance as an equitable remedy and the potential factors and circumstances the Court will consider when deciding whether to award it.  Plaintiff acquirors seeking to compel their targets to close highly complex deals involving foreign parties and foreign assets face an uphill battle.

          But, perhaps more importantly, this decision serves as a warning to conflicted financial advisors, deal advocates, and fiduciaries alike, that the Court will not condone surreptitious, conflicted tactics masquerading as serving the shareholders.  The Court will look to the plaintiffs hands and apply the maxim: “he who seeks equity must do equity.”