Best Efforts Clause in Mergers and Acquisitions

A Best Efforts Clause is a contractual provision that requires one or more parties to make all reasonable attempts to fulfill their obligations. While it is commonly found in financing agreements, this clause plays a significant role in Mergers and Acquisitions (M&A) by ensuring that parties work diligently toward completing a transaction. However, it does not guarantee a specific outcome.

Best Efforts in M&A Transactions

In an M&A deal, the Best Efforts Clause obligates the involved parties—typically the buyer and seller—to take all necessary and reasonable steps to fulfill their responsibilities under the agreement. This may include securing regulatory approvals, obtaining financing, or resolving any legal or contractual barriers.

Types of Best Efforts Standards

The term “best efforts” can vary in meaning depending on how it is defined in the contract. There are generally three levels of effort clauses:

1. Best Efforts: The highest standard, requiring a party to do everything within reason to achieve the objective.
2. Reasonable Efforts: A more flexible standard, requiring a party to take actions that are practical and commercially sensible but without excessive hardship.
3. Commercially Reasonable Efforts: This standard is common in business contracts and ensures that parties make efforts that align with standard industry practices.

Application in M&A Transactions

The Best Efforts Clause can apply in various aspects of an M&A deal, including:

• Regulatory Approvals: If an acquisition requires antitrust or government approval, the buyer and seller must exert their best efforts to obtain these approvals in a timely manner.
• Financing: If the deal involves external financing, the buyer may be required to use best efforts to secure funding, though this does not guarantee that financing will be obtained.
• Third-Party Consents: Some transactions require approvals from external stakeholders, such as shareholders or contractual partners. The clause ensures that both parties strive to secure these approvals.

Challenges and Legal Considerations

Despite its intent, a Best Efforts Clause can be ambiguous if not clearly defined in the contract. Courts may interpret the obligation differently depending on the specific wording and context. Some challenges include:

• Enforceability: Courts may assess whether the obligated party genuinely made reasonable efforts or simply used the clause as a loophole to avoid obligations.
• Lack of a Clear Standard: Without precise language defining what constitutes “best efforts,” disputes may arise over whether a party has met its obligations.
• Market and Economic Conditions: External factors, such as economic downturns or regulatory changes, can impact a party’s ability to fulfill its best efforts obligation.

Conclusion

In M&A transactions, a Best Efforts Clause is a critical mechanism to ensure that parties are actively working toward completing the deal. However, because the term is open to interpretation, it is essential to define the expectations clearly within the contract. This clause does not provide a guarantee of success but ensures that both parties remain committed to achieving the desired outcome.

By understanding how the Best Efforts Clause functions, businesses can better navigate M&A agreements and mitigate potential disputes over contractual obligations.