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The Long Form - July 12, 2022




The Chancery Daily has recently referenced ostensible complications that the Court of Chancery encounters in litigation of commercial disputes. TCD is specifically attuned to the issue based on comments from now-retired Vice Chancellor Slights at the Practising Law Institute's Mergers & Acquisitions 2022: Advanced Trends and Developments program.

VCS discussed two "judicial myths" of transactional practice: (1) that contracting parties negotiate all terms with the objective of documenting their specific agreement and eliminating ambiguity, and (2) that residual ambiguity in contract terms is normally amenable to resolution through review of extrinsic evidence of party negotiations.

Increasingly, it seems we observe the Court struggling to interpret and apply contract terms that depart from standard drafting conventions or function imperfectly in the context of the agreements in which they appear.

Today's edition discusses Pavel Menn v. ConMed Corp., et al., C.A. No. 2017-0137-KSJM, memo. op. (Del. Ch. June 30, 2022) -- a post-trial ruling on selling stockholders' claims that an acquirer breached obligations to make contingent post-closing milestone and earn-out payments for the development of an acquired medical device. Such claims are now commonly asserted in the Court of Chancery, and often involve interpretation of seemingly case-specific contract terms related to the technology at issue or the pathway to commercialization, which may involve regulatory approval.

The ConMed decision is of this type -- and includes a brief glossary describing technology specific to the acquired device. But the Stock Purchase Agreement at issue also includes a less-specialized term in an efforts clause that seems more troubling than any specialized technical terminology: "commercially best efforts."

The Court notes by way of scholarly commentary that the grammatical structure of the term leaves something to be desired. More problematically, the Agreement provides no definition describing what the term requires, and the term evades classification in a hierarchical scheme of efforts clauses.

Seemingly even worse is the interplay of the "commercially best efforts" obligation with requirements of "commercially reasonable determinations" in other provisions in a manner that leads the Court to conclude:

[I]t would not make sense to hold that ConMed breached the commercially reasonable efforts provision by making a commercially reasonable determination to discontinue development of the [device] in accordance with one of the contractually specified exceptions. This cannot be what the parties intended when executing the Agreement.

The Court discusses this "nettlesome issue concerning the nature of the parties' contractual scheme" at pages 86-87 and footnote 443 of the post-trial Memorandum Opinion, linked above.

Subscribers may wish to share the discussion with "transactional designers" -- to use the Court's term -- so they may be inspired to develop less traumatizing linguistic mechanisms to achieve their desired ends.

Thoughts? We always want to hear them! Apropos of that desire, here's an email address for you: thoughts@chancerydaily.com
"Commercially Best Efforts" Interpreted to Require "Best Efforts"
  • The Court found that an acquirer of a medical device did not breach its obligation under a Stock Purchase Agreement to use "commercially best efforts" to maximize milestone and earn-out payments to selling stockholders when it discontinued device development based on safety concerns.
  • ENTERED: Judgment favoring defendant
  • Plaintiff, representative of selling stockholders of a company acquired by defendant, brought breach of contract and implied covenant claims alleging that defendant breached obligations under a Stock Purchase Agreement to make milestone and earn-out payments for the development and commercialization of an acquired medical device.

    Under the terms of the Agreement, defendant agreed to use "commercially best efforts" to maximize milestone and earn-out payments, and sellers could accelerate milestone and earn-out payments if defendant discontinued development of the device. But acceleration did not apply if defendant discontinued development based on a "commercially reasonable determination" that the device "posed a risk of injury to patients." Defendant devoted significant development resources to redress safety concerns with the device, obtained FDA approval for one element of the device, and paid seller three of four scheduled milestone payments, but ultimately discontinued development.

    Sellers asserted that defendant breached its obligation to use "commercially best efforts" to maximize contingent payments and claimed Seller was entitled to accelerate remaining payments; defendant responded that acceleration was not required because development was ceased due to a determination that the device posed a risk to patients.

    The Court rules in defendant's favor in this post-trial Opinion, finding that defendant presented evidence demonstrating that it stopped development after making a "commercially reasonable determination" that the device posed a risk of injury to patients, and that defendant did not breach its "commercially best efforts" obligation, which, in the absence of a contractual definition, the Court found to require "best efforts".
Contract Interpretation; Commercially Reasonable; Commonly Accepted Practice; Evidence; Testimony; Expert Witness; Judicial Estoppel; Inconsistent Statement; Regulatory Agency; Quasi-Estoppel; Equitable Doctrine; Unconscionability; Benefit; Efforts Clause; "commercially best efforts"; Best Effort; Good Faith; Reasonable Effort; Breach of Contract; Best Efforts; Milestone; Earn-Out; Implied Covenant; Exercise Discretion; Express Term; Duplicative Claim
. . . et al.
  • The Supreme Court rejects an interlocutory appeal from a decision that declined to extend the equitable standing doctrine to allow an indirect stockholder to sue derivatively, agreeing with the Court of Chancery's reasoning in its refusal to certify the appeal that immediate review was not warranted despite plaintiffs having raised a novel argument regarding application of a Delaware statute (8 Del. C. § 327).
  • REJECTED: Interlocutory appeal
Interlocutory Appeal; Novel Argument; Statutory Interpretation; 8 Del. C. § 327; Equitable Standing
  • Pro se defendant, managing member of nominal defendant LLCs, appeals the Court of Chancery's order & final judgment memorizing its grant of plaintiffs' motion for default judgment, dissolving nominal defendants, and authorizing the appointed receiver pendente lite to wind up the entities' affairs.
  • APPEALED: Court of Chancery final judgment
NEW BUSINESS
  • Nature of Action: Breach of Contract
  • Plaintiff's Counsel: McCOLLOM D' EMILIO SMITH UEBLER; CLARICK GUERON REISBAUM
  • Entity Defendant(s): Avotres, Inc.
  • Nature of Action: Breach of the Implied Covenant
  • Plaintiff's Counsel: MANNING GROSS & MASSENBURG
  • Entity Defendant(s): Basis Real Estate Capital II, LLC; Big Real Estate Capital I, LLC
[SEALED] John Tuma, et al. v. Prime Power Solutions, C.A. No. 2022-0604, compl. (Del. Ch. July 8, 2022)
  • Nature of Action: Books and Records
  • Additional Plaintiff(s): JOMA Management, LLC
  • Plaintiff's Counsel: SKADDEN ARPS SLATE MEAGHER & FLOM
  • Entity Defendant(s): Prime Power Solutions
[SEALED] PITD, LLC, et al. v. Steven Chan and Tin Drum Holding Co., Inc., C.A. No. 2022-0606, compl. (Del. Ch. July 8, 2022)
  • Nature of Action: Appointment of Custodian
  • Additional Plaintiff(s): AP Square Investments, LLC
  • Plaintiff's Counsel: MONTGOMERY McCRACKEN WALKER & RHOADS
  • Individual Defendant(s): Steven Chan
  • Nature of Action: Breach of Contract
  • Plaintiff's Counsel: RICHARDS LAYTON & FINGER
  • Entity Defendant(s): Pillarstone Capital REIT
[SEALED] Thermo Fisher Scientific PSG Corp. v. Arranta Bio MA, LLC, C.A. No. 2022-0608, compl. (Del. Ch. July 8, 2022)
  • Nature of Action: Breach of Contract
  • Plaintiff's Counsel: ASHBY & GEDDES
  • Entity Defendant(s): Arranta Bio MA, LLC
  • Nature of Action: Stockholder Class Action
  • Plaintiff's Counsel: BERNSTEIN LITOWITZ BERGER & GROSSMANN; SAXENA WHITE; FRIEDMAN OSTER & TEJTEL; KASKELA LAW
  • Individual Defendant(s): Ernest C. Garcia, II; Ernest C. Garcia, III
  • Entity Defendant(s): Carvana Co.
[SEALED] Benjamin Jones, et al. v. Lurin Multi-Family Group II, LLC, C.A. No. 2022-0610, compl. (Del. Ch. July 11, 2022)
  • Nature of Action: Books and Records
  • Additional Plaintiff(s): Dutch Trust
  • Plaintiff's Counsel: FARNAN
  • Entity Defendant(s): Lurin Multi-Family Group II, LLC
  • Nature of Action: Breach of Contract
  • Plaintiff's Counsel: RICHARDS LAYTON & FINGER; LOEWINSOHN DEARY SIMON RAY
  • Individual Defendant(s): Dr. Gary S. Donovitz
  • Nature of Action: Petition for Assignment for the Benefit of Creditors
  • Plaintiff's Counsel: WOMBLE BOND DICKINSON (US); THOMPSON HINE
  • Nature of Action: Breach of Contract
  • Plaintiff's Counsel: POTTER ANDERSON & CORROON; WACHTELL LIPTON ROSEN & KATZ
  • Individual Defendant(s): Elon R. Musk
  • Entity Defendant(s): X Holdings I, Inc.; X Holdings II, Inc.
DAILY HEARING & TRIAL SCHEDULE
(W) = Wilmington; (D) = Dover; (G) = Georgetown; (T) = Telephone; (Z) = Zoom; (C) = CourtScribes

Tuesday, July 12, 2022
09:15 (W) - HBK Master Fund, LP, et al. v. Pivotal Software, Inc., C.A. No. 2020-0165-KSJM; In re Pivotal Software, Inc. Stockholders' Litigation, C.A. No. 2020-0440-KSJM [trial]
10:00 (T) - Robert Davydov v. James H. Roberts, et al. and Granite Construction Inc., C.A. No. 2021-0415-SG
11:00 (W) - Edward Deane, et al. v. Robert A. Maginn, Jr. and New Media Investors II-C, LLC, C.A. No. 2017-0346-LWW
01:00 (G) - Steward Health Care System, LLC, et al. v. Tenet Business Services Corp., et al., C.A. No. 2022-0289-SG
03:00 (T) - Stone Key Group, LLC v. Reid Taradash and Coywolf Capital Partners, LLC, C.A. No. 2022-0240-LWW
03:15 (W) - Zuoli Li v. Xu-Nuo Pharma, Inc., et al., C.A. No. 2021-1019-MTZ

Wednesday, July 13, 2022Supreme Court
10:00 (D) - Matterport, Inc., et al. v. William J. Brown, No. 43, 2022 [William J. Brown v. Matterport, Inc., et al., C.A. No. 2021-0595-LWW (Del. Ch.)]
open. br. - ans. br. - reply br.

11:10 (D) - Lennox Industries, Inc., et al. v. Alliance Compressors, LLC, No. 371, 2021 [C.A. No. N19C-03-045-AML-CCLD (Del. Super.)]
open. br. - ans. br. - reply br.

Court of Chancery
09:30 (Z) - Atlantic NWI, LLC v. The Carlyle Group, Inc., C.A. No. 2021-0944-SG
01:30 (W) - In re P3 Health Group Holdings, LLC, C.A. No. 2021-0518-JTL
01:30 (W) - Apotex, Inc., et al. v. Otsuka Pharmaceutical Co., Ltd., C.A. No. 2022-0291-MTZ
01:30 (T) - In re Oracle Corp. Derivative Litigation, C.A. No. 2017-0337-SG (consol.)
02:00 (T) - Fortis Advisors, LLC v. Johnson & Johnson, et al., C.A. No. 2020-0881-LWW
03:00 (T) - In re AVX Corp. Stockholders Litigation, C.A. No. 2020-1046-SG
CASE ACTIVITY
Plaintiff Menn, representative of selling stockholders of EndoDynamix, brought suit against defendant ConMed, asserting claims for breach of a Stock Purchase Agreement pursuant to which ConMed had acquired EndoDynamix, for failure to make accelerated milestone and earn-out payments that selling stockholders alleged they were owed when ConMed discontinued development of a medical device acquired from EndoDynamix.

Menn and non-party Bookwalter founded EndoDynamix to develop a clip applier used in connection with laparoscopic surgeries to ligate ducts or blood vessels. ConMed conducted diligence on the EndoDynamix clip applier and, in July 2014, entered into the Stock Purchase Agreement with EndoDynamix, some of its stockholders, and Menn as stockholders' representative.

Most consideration to be paid stockholders under the Agreement was contingent on achievement of four development milestones and two financial targets, for which stockholders would receive milestone and earn-out payments.

The Agreement obligated ConMed to "work in good faith" with EndoDynamix and use "commercially best efforts" to maximize milestone and earn-out payments to selling stockholders (Section 4.03(g)), and required ConMed to accelerate payment of milestone and earn-out payments if it permanently discontinued development or sale of the EndoDynamix device other than for defined reasons, including ConMed's "commercially reasonable determination," made in its sole discretion, that the device "posed a risk of injury to patients" (Section 4.03(h)).

The Agreement also provided that Accelerated payments would serve as liquidated damages (Section 4.03(i)) due to indeterminate harm and the difficulty of proving damages for breach, while specifying that ConMed had no obligation to pay liquidated damages in the event it discontinued development for one of the defined reasons. A schedule attached to the Agreement listed safety issues in the device's design that ConMed reserved the right to address through design changes.

ConMed made an up-front payment and three of the four milestone payments -- for successful completion of an animal lab study, the filing of an FDA application, and receiving FDA clearance -- but continued to encounter problems with development, including safety concerns, despite devoting significant resources to address those concerns.

ConMed acquired another company -- SurgiQuest -- that was not an EndoDynamix competitor, but had a development team with experience in clip appliers. ConMed tasked the SurgiQuest team with reevaluating the EndoDynamix device. The team recommended that ConMed scrap the EndoDynamix device and begin developing a new clip applier. In May 2016, ConMed notified selling stockholders that the device posed a risk of injury to patients and that ConMed seriously questioned whether to move forward with development of the device. Shortly after the report, ConMed's board determined to discontinue development.

Sellers brought suit alleging that ConMed breached its obligation to accelerate milestone and earn-out payments, breached its obligation to use "commercially best efforts" to develop and sell the device, and breached the implied covenant of good faith and fair dealing when exercising its discretion under the Agreement. ConMed argued that it was relieved from accelerating payments because it made a commercially reasonable determination that the device posed a risk of injury to patients.

The Court rules in ConMed's favor in this post-trial Opinion, finding ConMed presented evidence demonstrating that it made a "commercially reasonable determination" that the device posed a risk of injury to patients. Although the Court debated over the meaning of the term "commercially best efforts," which was not defined under the Agreement, it found that the term imposed a "best efforts" obligation, and concluded that ConMed had satisfied that obligation. The Court found selling stockholders' implied covenant claims were improperly duplicative of their claims for breach of express obligations to accelerate milestone and earn-out payments and to use "commercially best efforts."
*  *  *  *  *  *  *  *
July 30, 2014 Stock Purchase Agreement


Section 4.03(g) of the Stock Purchase Agreement states:

Buyer and the Company shall work in good faith and use commercially best efforts to maximize payouts for the benefit of the Shareholder Parties pursuant to Section 4.02 and Section 4.03 hereto, including the maximization of net sales of Products.


Section 4.03(h) of the Stock Purchase Agreement states:

In the event that after the Closing Date, . . . (iii) Buyer acquires a business that it will integrate with, or which is competitive with, the Company and following such acquisition Buyer permanently discontinues the development or sale of any of the Clip Applier Products, (iv) Buyer otherwise permanently discontinues the development or sale of any of the Clip Applier Products (other than . . . (z) based on a commercially reasonable determination by the Company or the Buyer in their sole discretion that the use of such Clip Applier Product(s) pose(s) a risk of injury to either patients or surgeons . . . [)] the Representative may, in any case in his sole discretion, upon 20 Business Days prior written notice to Buyer, and the expiration of a 20 Business Day opportunity to cure following such notice, . . . elect to have paid in full by Buyer the sum of (A) all amounts described in Section 4.02 that remain unpaid, which amounts shall be paid on the First Acceleration Payment Date, plus (B) subject to Section 4.03(m), the amounts set forth on Schedule 4.03(h) on the dates set forth on Schedule 4.03(h)[] . . . .


Section 4.03(i) of the Stock Purchase Agreement states:

[N]o payment shall be made to the Representative for the benefit of the Shareholder Parties pursuant to Section 4.03(h) in respect of any Clip Applier Product in the event that at the time any of the delivery of any Acceleration Notice pursuant to Section 4.03(h) the Company or the Buyer have ceased the development or sale of such Clip Applier Product as a result of . . . (b) a commercially reasonable determination by the Company or the Buyer in their sole discretion that the use of such product poses a risk of injury to either patients or surgeons . . . .
*  *  *  *  *  *  *  *
The Court, in a post-trial decision on selling stockholder plaintiffs' claim that the acquirer of sellers' medical device breached its obligation under a Stock Purchase Agreement to make milestone and earn-out payments by discontinuing development of the device, ruled that acquirer complied with an exception to the payment obligation by making a commercially reasonable determination that the device posed a risk of injury to patients, finding acquirer's evidence from several independent sources that the device posed a risk of injury demonstrated that its determination was commercially reasonable.
"Plaintiff does not define what 'commercially reasonable determination' means in this context. Legal dictionaries define 'commercially reasonable' as 'in accordance with commonly accepted commercial practice.' In other contexts, this court has held that 'commercially reasonable' requires a showing that the determination was 'in keeping with prevailing trade practice among reputable and responsible business and commercial enterprises engaged in the same or similar businesses.' When interpreting a 'commercially reasonable period' requirement [in Bardy Diagnostics, Inc. v. Hill-Rom, Inc., et al., C.A. No. 2021-0175-JRS, memo. op. (Del. Ch. July 9, 2021)], Vice Chancellor Slights instructed that, '[l]ike most matters of law that exist in the realm of reasonableness,' the determination of what is a commercially reasonable decision 'is contextual and necessarily fact intensive.' Applying these broad concepts here, this court asks whether [acquirer's] determination that the [device] posed a risk of injury to patients was a determination made in accordance with commonly accepted commercial practices.

The fact that [an independent laboratory] identified an 'Adverse Event' regarding the [device] supports a finding that [acquirer's] determination that the product posed a risk of injury to patients was commercially reasonable. . . . [Independent laboratory], evaluated the safety and efficacy of the [device] for [regulatory] clearance . . . . [Independent laboratory] reported an 'Adverse Event' regarding the [device] directly related to clip closure. The failure that [independent laboratory] identified as an Adverse Event is the same type of safety defect that led to the safety recall of [a competitor's device]. The fact that a similar design flaw resulted in a safety recall of a competitive product supports a conclusion that the determination was commercially reasonable.

The testimony of [acquirer's] expert witness further supports a finding that the determination was commercially reasonable. . . . [Expert's] extensive experience makes his testimony a valuable proxy for commonly accepted commercial practices.

[Expert] testified that he experienced . . . design flaws when using the [product] . . . which . . . increase[d] the risk to patients. [Expert's] testimony persuades the court that [acquirer's] determination that the [device] posed a risk of injury to patients was commercially reasonable.

Moreover, the evidence from [acquirer's] employees supporting the finding that [acquirer] actually made the relevant determination in good faith also supports a finding that the determination was commercially reasonable. [Acquirer's] witnesses . . . represent a diverse array of backgrounds and professional experience. They each, independently, reached the conclusion that the [device] posed a risk of injury to patients. These concerns were then confirmed by [a newly acquired] team, who had extensive experience developing [similar devices]. It is not reasonable to conclude that each witness was being commercially unreasonable in their determination and recommendation. Neither [acquirer] nor any of these witnesses were economically incentivized to scrap the . . . project, for which [acquirer] had paid $9 million and in which [acquirer] invested significant development resources, to develop a totally new product. The only logical conclusion from this testimony is that there were well-recognized business risks of continuing development. This corroborates a finding that the determination was commercially reasonable.

For these reasons, [acquirer] has carried its burden in establishing that it permanently discontinued the development of the [device] based on a commercially reasonable determination that the use of the [device] posed a risk of injury to patients."
The Court, considering selling stockholder plaintiffs' claim that the acquirer of sellers' medical device breached obligations under a Stock Purchase Agreement to make milestone and earn-out payments -- which acquirer argued were excused upon its commercially reasonable determination that the device posed a risk of injury to patients -- rejected sellers' argument that acquirer was judicially estopped from claiming that the device posed a risk by contrary representations to the FDA, noting that whether statements to administrative agencies can result in estoppel appears to be an open question of Delaware law, but concluding that acquirer's representations were not inconsistent.
"Judicial estoppel is an equitable doctrine designed 'to protect the integrity of the judicial process.' Judicial estoppel requires a showing that 'the litigant[] contradict[ed] another position that the litigant previously took and that the Court was successfully induced to adopt in a judicial ruling.'

Plaintiff cites to various federal court decisions holding that judicial estoppel applies to representations made to administrative agencies. The parties did not identify any Delaware decision reaching a similar conclusion. Even assuming that statements made to administrative agencies can supply a basis for estoppel, which appears to be an open issue under Delaware law, Plaintiff's judicial estoppel argument fails because Plaintiff has not proved that [acquirer] gave an inconsistent position to the FDA or that the FDA adopted an inconsistent, prior position. [Acquirer's] representations to the FDA in its two 510(k) applications concerned whether [device] was 'substantially equivalent to the predicate device . . . .' [Acquirer] represented to the FDA that [device] was substantially equivalent to the predicate device and the FDA adopted that representation when it gave the device 510(k) clearance. Here, [acquirer] argues that [device] poses a risk of injury to either patients or surgeons, which is distinguishable from the position that it took before the FDA regarding substantial equivalence to a predicate device. Further, [acquirer's] representations to the FDA only concerned the implantable clips and not [another element of the device], which was also a source of safety concerns . . . ."
The Court, considering selling stockholder plaintiffs' claim that the acquirer of sellers' medical device breached obligations under a Stock Purchase Agreement to make milestone payments -- which acquirer argued were excused by its determination that the device posed a risk of injury to patients -- rejected sellers' argument that quasi-estoppel precluded acquirer from claiming that the device posed a risk based on contrary representations to the FDA, finding that sellers benefitted from acquirer's representations, which led to milestone payments for FDA approvals, and that it would not be unconscionable to allow acquirer to assert a contrary position.
"Quasi-estoppel applies when '[i]t would be unconscionable to allow a [party] to maintain a position inconsistent with one to which [it] acquiesced, or from which [it] accepted a benefit.' The opposing party need not demonstrate reliance on the other litigant's inconsistency. To establish quasi-estoppel, a plaintiff must show that a party 'gained some advantage for [itself] or produced some disadvantage to another' through inconsistent representations. Quasi-estoppel is an equitable doctrine that applies only 'when it would be unconscionable to allow a person to maintain' an inconsistent position.

Plaintiff argues that [acquirer] received a benefit -- clearance to legally market and sell [device] -- from its representation to the FDA that [device] was safe and effective for its intended use. Now, for purposes of this litigation, [acquirer] seeks to reverse course to circumvent its payment obligations under the Agreement, to the disadvantage of [selling stockholders].

Plaintiff's argument ignores that [acquirer] was contractually required to apply for FDA clearance. Plaintiff's argument further ignores that Plaintiff was not disadvantaged by that representation. Rather, the Plaintiff received an advantage from [acquirer] making the FDA 510(k) representations, which triggered the FDA Application Milestone payment and eventually the FDA Clearance Milestone payment. Given that Plaintiff directly benefited from this representation, it is not unconscionable to allow [acquirer] to pursue its position in this litigation."
The Court, considering the meaning of a Stock Purchase Agreement that required an acquirer to use "commercially best efforts" to maximize contingent milestone and earn-out payments to selling stockholders, where the Agreement did not define the level of effort required to satisfy the requirement, found decisions interpreting contracts that required buyers to use "commercially reasonable efforts" to maximize contingent compensation based on contractual definitions unhelpful, and interpreted "commercially best efforts" as having the same meaning as "best efforts."
"The 'commercially best efforts' provision is what is known as an 'efforts' clause. Efforts clauses generally replace 'the rule of strict liability for contractual non-performance that otherwise governs' with 'obligations to take all reasonable steps to solve problems and consummate the' contractual promise. Efforts clauses 'define the level of effort that the party must deploy to attempt to achieve the outcome.'

Often, transactional designers will define benchmarks for the 'commercially reasonable' standard relevant to the efforts clause within the governing agreement. For example, in two recent decisions, this court interpreted provisions requiring a buyer to use 'commercially reasonable efforts' to maximize milestone and earn-out payments post-closing -- [Jeff Himawan, et al. v. Cephalon, Inc., et al., C.A. No. 2018-0075-SG, memo. op. (Del. Ch. Dec. 28, 2018),] and [Neurvana Medical, LLC v. Balt USA, LLC, et al., C.A. No. 2019-0034-KSJM, memo. op (Del. Ch. Feb. 27, 2020)]. In each case, unlike here, the agreement contained a contractual definition -- a 'yardstick' -- by which the court was to measure 'commercially reasonable' efforts. In each case, the court's decision centered on the adequacy of the plaintiff's allegations relative to the specific contractual yardstick. While the efforts provision and context of Himawan and Neurvana are similar to that at issue here, the Agreement lacks any express contractual standard by which to gauge [acquirer's] efforts. In Himawan, the buyer was required to expend the efforts and resources of 'a company with substantially the same resources and expertise.' In Neurvana, the buyer was required to use 'efforts and resources comparable to those which an entity in the medical device industry of similar resources and expertise.' These cases are thus of little help. The court thus turns to other inputs in search of guidance on the meaning of 'commercially best efforts.'

Deal practitioners who draft efforts clauses 'have a general sense of [the] hierarchy' of such clauses. One commonly cited version of this hierarchy places 'best effort' as the highest standard with 'reasonable best efforts,' 'reasonable efforts,' 'commercially reasonable efforts,' and 'good faith efforts' following in descending order. 'Commercially best efforts' provisions are not found on the standard hierarchy. Logically, such provisions would fall between 'best efforts' and 'commercially reasonable efforts.'

Although deal practitioners have some sense of the hierarchy among efforts clauses, courts applying the standards have struggled to discern daylight between them. This court, for example, has interpreted 'best efforts' obligations as on par with 'commercially reasonable efforts.'

Because this court has consistently interpreted 'best efforts' obligations as on par with 'commercially reasonable efforts,' it follows that there is even less daylight between 'best efforts' and 'commercially best efforts' provisions. Indeed, the parties make no distinction in briefing. The phrase 'commercially best efforts' has not been interpreted by a Delaware court, and at least one commentator [in Interpreting and Drafting Efforts Provisions: From Unreason to Reason (Adams)] has questioned whether 'commercially' works as an adverb in this context. This decision, therefore, interprets 'commercially best efforts' as imparting the same meaning as 'best efforts.'

When assessing whether a party has breached an efforts clause in a transaction agreement, '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 counterparty.' This standard applies with equal force to 'reasonable best efforts' and 'commercially reasonable efforts' language. In that context, this court has interpreted 'best efforts' to require 'a party to do essentially everything in its power to fulfill its obligation (for example, by expending significant amounts or management time to obtain consents).'"
The Court, in a post-trial decision on selling stockholder plaintiffs' claim that the acquirer of sellers' medical device breached its obligation under a Stock Purchase Agreement to use "best efforts" to maximize milestone and earn-out payments for development and sale of the device, found that acquirer complied with its obligation, despite having discontinued development of the device, distinguishing other decisions that have found that an acquirer failed to comply with efforts requirements.
". . . [T]he parties based their respective arguments on decisions of this court interpreting efforts provisions in the merger context. In those cases, this court has found a breach of a best-efforts obligation where a party failed to work with its counterpart to jointly solve problems, failed to keep the deal on track, or submitted false data to and refused to cooperate with regulators.

Other decisions of this court have found that a party breached an efforts provision when utilizing a sales force that was too small to achieve the revenue target, expending energy and resources on stimulating an alternative to the deal, or making no effort to sell or market the product.

None of those scenarios are present in this case. [Acquirer] has proven that, after it acquired [device], it was assigned to [a] team of development engineers, manufacturing engineers, regulatory experts, and marketing professionals. It incurred substantial development expenses in connection with the [device]. It did not stop development efforts a few days or even months after signing the Agreement; rather, it continued its development efforts for years. It ultimately made three of the four Milestone Payments, totaling $9 million to Plaintiff.

In the face of these facts, Plaintiff does not and cannot allege that [acquirer] failed to work with its counterparts to jointly solve problems, submitted false data to regulators, stimulated alternatives to [device], or made no effort to develop [device]."
The Court, in a post-trial decision, ruled against selling stockholder plaintiffs on their claim that the acquirer of sellers' medical device breached the implied covenant of good faith and fair dealing under a Stock Purchase Agreement by exercising discretion to stop development of the device in bad faith, finding actions sellers alleged breached implied duties were express obligations that the implied covenant could not be used to override.
"The implied covenant of good faith and fair dealing requires in part that a party vested with discretion under a contract exercise its discretion reasonably, in good faith, and not in an unreasonable or arbitrary way that would destroy the counterparty's right to receive the fruits and benefits which they reasonably expected to receive under the contract. The implied covenant cannot be invoked to override the express terms of the contract. Moreover, rather than constituting a free floating duty imposed on a contracting party, the implied covenant can only be used conservatively 'to ensure the parties' reasonable expectations are fulfilled.' The implied covenant is a limited remedy. Its application is a 'cautious enterprise.'

. . . [T]he [Stock Purchase] Agreement provide[s] that [acquirer] has 'sole discretion' to determine whether the [device] pose[s] a 'risk of injury to either patients or surgeons' (a determination that would excuse [acquirer] from its obligation to pay the Acceleration Payments). Plaintiff claims that [acquirer] breached the implied covenant of good faith and fair dealing by failing to exercise its discretion reasonably and in good faith in two ways: (i) by deciding that [device] posed a safety risk to doctors and patients and (ii) by failing to use commercially best efforts to maximize payments to the Stockholder Parties.

Plaintiff's arguments for breach of the implied covenant, however, duplicate its claims . . . for breach of express contractual provisions to make Acceleration Payments and use commercially best efforts. The implied covenant cannot be used to override express contractual provisions."
"PLEASE TAKE NOTICE that Andrew T Franzone, Defendant, below-appellant, does hereby appeal to the Supreme Court of State of Delaware from [Dennis S. Hersch, et al. v. Andrew T. Franzone and Florence Capital Advisors SPV II, LLC, et al., C.A. No. 2020-1032-SG, order & final j. (Del. Ch. June 1, 2022)] of [t]he Court of Chancery of the State of Delaware, by Sam Glasscock III, Vice Chancellor . . . ."
SUMMARIES OF NEW COMPLAINTS
  • Plaintiff(s): Sean Xinghua Hu
  • Plaintiff's Counsel: McCOLLOM D' EMILIO SMITH UEBLER - Thomas A. Uebler (#5074); CLARICK GUERON REISBAUM - Isaac B. Zaur; Amanda Wong
  • Entity Defendant(s): Avotres, Inc.
  • Nature of Claim(s): Plaintiff, former CEO of defendant Avotres, brought suit seeking declaratory relief concerning his ownership of Avotres stock following the company's termination of plaintiff without cause under the terms of a stock purchase agreement.
    Count 1: Declaratory Judgment
    Count 2 & 3: Breach of Contract
    Count 4: Violation of N.J. Stat. § 34:11-57 et. seq.
    Count 5: Wrongful Retaliatory Discharge under New Jersey Common Law
  • Field of Law: Commercial Law
  • Basis for Jurisdiction: 6 Del. C. § 18-111 - interpretation / enforcement of LLC agreement ; 10 Del. C. § 341 - jurisdiction over matters and causes in equity
  • Plaintiff(s): 35 Claver, LLC
  • Plaintiff's Counsel: MANNING GROSS & MASSENBURG - William B. Larson, Jr. (#5627); Tye C. Bell (#5309)
  • Entity Defendant(s): Basis Real Estate Capital II, LLC; Big Real Estate Capital I, LLC
  • Nature of Claim(s): Plaintiff debtor brought this action against defendant creditors alleging defendants declared a manufactured default, denied plaintiff an opportunity to cure and conducted an unreasonable sale process in an effort to secure plaintiff's collateral real property for themselves at below market value.
    Count 1: Violation of 6 Del. C. § 9-610(b)
    Count 2: Breach of the Implied Covenant of Good Faith and Fair Dealing
  • Field of Law: Commercial Law
  • Basis for Jurisdiction: 10 Del. C. § 341 - jurisdiction over matters and causes in equity
[SEALED] John Tuma, et al. v. Prime Power Solutions, C.A. No. 2022-0604, compl. (Del. Ch. July 8, 2022)
  • Plaintiff(s): John Tuma; JOMA Management, LLC
  • Plaintiff's Counsel: SKADDEN ARPS SLATE MEAGHER & FLOM - Jenness E. Parker (#4659); Lauren N. Rosenello (#5581); Peyton V. Carper (#6646)
  • Entity Defendant(s): Prime Power Solutions
  • Nature of Claim(s): Plaintiff members brought suit under 6 Del. C. § 18-305 seeking books and records of defendant Prime Power Solutions.
  • Field of Law: LLC Law
  • Basis for Jurisdiction: 6 Del. C. § 18-305 - inspection of LLC books and records
  • Preliminary Motions: Motion for expedited proceedings
[SEALED] PITD, LLC, et al. v. Steven Chan and Tin Drum Holding Co., Inc., C.A. No. 2022-0606, compl. (Del. Ch. July 8, 2022)
  • Plaintiff(s): PITD, LLC; AP Square Investments, LLC
  • Plaintiff's Counsel: MONTGOMERY McCRACKEN WALKER & RHOADS - R. Montgomery Donaldson (#4367); Richard G. Placey (#4206)
  • Individual Defendant(s): Steven Chan
  • Nature of Claim(s): Plaintiffs, stockholders of nominal defendant Tim Drum Holding, brought this action seeking appointment of a custodian with broad managerial powers to manage the deadlocked company and asserted derivative breach of fiduciary duty claims against defendant director.
  • Field of Law: Corporation Law
  • Basis for Jurisdiction: 8 Del. C. § 226 - appointment of custodian or receiver of corporation on deadlock or for other cause
  • Preliminary Motions: Motion for expedited proceedings
  • Plaintiff(s): Whitestone REIT Operating Partnership, LP
  • Plaintiff's Counsel: RICHARDS LAYTON & FINGER - Richard P. Rollo (#3994); Melissa A. Lagoumis (#6845)
  • Entity Defendant(s): Pillarstone Capital REIT
  • Nature of Claim(s): Plaintiff, a limited partner of non-party operating company, brought this action against defendant general partner to enjoin defendant's use of a low-trigger poison pill enacted to prevent plaintiff from exercising its redemption right under the partnership agreement.
    Count 1: Breach of Contract
    Count 2: Breach of Fiduciary Duty
    Count 3: Breach Of The Implied Covenant of Good Faith And Fair Dealing
  • Field of Law: Commercial Law
  • Basis for Jurisdiction: 10 Del. C. § 341 - jurisdiction over matters and causes in equity
[SEALED] Thermo Fisher Scientific PSG Corp. v. Arranta Bio MA, LLC, C.A. No. 2022-0608, compl. (Del. Ch. July 8, 2022)
  • Plaintiff(s): Thermo Fisher Scientific PSG Corp.
  • Plaintiff's Counsel: ASHBY & GEDDES - Philip Trainer, Jr. (#2788); Marie M. Degnan (#5602)
  • Entity Defendant(s): Arranta Bio MA, LLC
  • Nature of Claim(s): Plaintiff brought this action for an order of specific performance compelling director's compliance with its non-compete obligations under the parties' supply agreement.
  • Field of Law: Commercial Law
  • Basis for Jurisdiction: 10 Del. C. § 341 - jurisdiction over matters and causes in equity
  • Preliminary Motions: Motion for expedited proceedings
  • Plaintiff(s): Neal Vestal
  • Plaintiff's Counsel: BERNSTEIN LITOWITZ BERGER & GROSSMANN - Gregory V. Varallo (#2242); Mark Lebovitch; Thomas James; SAXENA WHITE - Thomas Curry (#5877); FRIEDMAN OSTER & TEJTEL - Jeremy Friedman; David Tejtel; KASKELA LAW - D. Seamus Kaskela; Adrienne Bell
  • Individual Defendant(s): Ernest C. Garcia, II; Ernest C. Garcia, III
  • Entity Defendant(s): Carvana Co.
  • Nature of Claim(s): Plaintiff stockholder brought putative class claims against defendant Carvana and its founders and controlling stockholders seeking a declaration invalidating certain charter provisions that provide greater voting power to Class B shares owned by defendants and their affiliates than to other stockholders.
    Count 1: Violation of Section 212
    Count 2: Violation of Section 151
  • Field of Law: Corporation Law
  • Basis for Jurisdiction: 10 Del. C. § 341 - jurisdiction over matters and causes in equity
[SEALED] Benjamin Jones, et al. v. Lurin Multi-Family Group II, LLC, C.A. No. 2022-0610, compl. (Del. Ch. July 11, 2022)
  • Plaintiff(s): Benjamin Jones; Dutch Trust
  • Plaintiff's Counsel: FARNAN - Brian E. Farnan (#4089); Michael J. Farnan (#5165)
  • Entity Defendant(s): Lurin Multi-Family Group II, LLC
  • Nature of Claim(s): Plaintiffs, members of defendant Lurin Multi-Family Group, brought this action under 6 Del. C. § 18-305 seeking inspection of company records to investigate the company's failure to pay distributions and the diversion of company funds.
  • Field of Law: LLC Law
  • Basis for Jurisdiction: 6 Del. C. § 18-305 - inspection of LLC books and records
  • Preliminary Motions: Motion for expedited proceedings
  • Plaintiff(s): Biote Corp.
  • Plaintiff's Counsel: RICHARDS LAYTON & FINGER - Richard P. Rollo (#3994); Travis S. Hunter (#5350); Edmond S. Kim (#6835); LOEWINSOHN DEARY SIMON RAY - Alan S. Loewinsohn
  • Individual Defendant(s): Dr. Gary S. Donovitz
  • Nature of Claim(s): Plaintiff brought this action to enforce a Court of Chancery exclusive forum provision of its charter and to enjoin defendant stockholder from prosecuting claims against the company and certain of its fiduciaries in another jurisdiction in breach of the provision.
    Count 1: Breach of Contract
  • Field of Law: Corporation Law
  • Basis for Jurisdiction: 10 Del. C. § 341 - jurisdiction over matters and causes in equity
  • Preliminary Motions: Motion for expedited proceedings, Motion for temporary restraining order
  • Plaintiff(s): SWA (ABC), LLC
  • Plaintiff's Counsel: WOMBLE BOND DICKINSON (US) - Matthew P. Ward (#4471); Morgan L. Patterson (#5388); THOMPSON HINE - Scott B. Lepene
  • Nature of Claim(s): Petitioner assignee brought this action under 10 Del. C. § 7381 for an assignment for the benefit of the creditors of assignor SolarWorld Americas, Inc.
  • Field of Law: Corporation Law
  • Basis for Jurisdiction: 10 Del. C. § 7381 - filing inventory of property assigned
  • Plaintiff(s): Twitter, Inc.
  • Plaintiff's Counsel: POTTER ANDERSON & CORROON - Peter J. Walsh, Jr. (#2437); Kevin R. Shannon (#3137); Christopher N. Kelly (#5717); Matthew A. Golden (#6035); WACHTELL LIPTON ROSEN & KATZ - William Savitt; Bradley R. Wilson; Sarah K. Eddy
  • Individual Defendant(s): Elon R. Musk
  • Entity Defendant(s): X Holdings I, Inc.; X Holdings II, Inc.
  • Nature of Claim(s): Plaintiff social media company brought claims against buyers for breach of the parties' merger agreement, seeking specific performance of buyers' obligation to close. See The Chancery Salvo - Twitter v. Musk: The Opening Salvo
    Count 1: Breach of Contract -- Specific Performance & Injunction
  • Related Actions: Orlando Police Pension Fund v. Twitter, Inc., et al., C.A. No. 2022-0396-KSJM; John Solak v. Twitter, Inc., C.A. No. 2022-0491-KSJM
  • Field of Law: Corporation Law
  • Basis for Jurisdiction: 6 Del. C. § 2708 - choice of law; 8 Del. C. § 111 - interpretation / enforcement of corporate instruments; 10 Del. C. § 341 - jurisdiction over matters and causes in equity
  • Preliminary Motions: Motion for expedited proceedings
WEEKLY HEARING & TRIAL SCHEDULE - July 11 - July 15, 2022
(W) = Wilmington; (D) = Dover; (G) = Georgetown; (T) = Telephone; (Z) = Zoom; (C) = CourtScribes

Monday, July 11, 2022
09:15 (W) - HBK Master Fund, LP, et al. v. Pivotal Software, Inc., C.A. No. 2020-0165-KSJM; In re Pivotal Software, Inc. Stockholders' Litigation, C.A. No. 2020-0440-KSJM [trial]
09:15 (T) - In re Jack Wills, Inc., C.A. No. 2019-0650-PAF
09:30 (T) - David Lockton, et al. v. Thomas S. Rogers, et al. [WinView], C.A. No. 2021-0058-SG
11:00 (T) - Anand K. Chavakula v. DarioHealth Corp., et al., C.A. No. 2021-0030-PAF
01:30 (W) - AIP-CAS Holdings, LLC, et al. v. John Marcaccio, C.A. No. 2022-0578-LWW
01:30 (T) - Drever 1401 Elm Holdco, LLC v. Mt. Pentelicus Devco, LLC, C.A. No. 2022-0162-PAF
03:15 (T) - In re Servatus Corp., C.A. No. 2022-0587-PAF

Tuesday, July 12, 2022
09:15 (W) - HBK Master Fund, LP, et al. v. Pivotal Software, Inc., C.A. No. 2020-0165-KSJM; In re Pivotal Software, Inc. Stockholders' Litigation, C.A. No. 2020-0440-KSJM [trial]
10:00 (T) - Robert Davydov v. James H. Roberts, et al. and Granite Construction Inc., C.A. No. 2021-0415-SG
11:00 (W) - Edward Deane, et al. v. Robert A. Maginn, Jr. and New Media Investors II-C, LLC, C.A. No. 2017-0346-LWW
01:00 (G) - Steward Health Care System, LLC, et al. v. Tenet Business Services Corp., et al., C.A. No. 2022-0289-SG
03:00 (T) - Stone Key Group, LLC v. Reid Taradash and Coywolf Capital Partners, LLC, C.A. No. 2022-0240-LWW
03:15 (W) - Zuoli Li v. Xu-Nuo Pharma, Inc., et al., C.A. No. 2021-1019-MTZ

Wednesday, July 13, 2022Supreme Court
10:00 (D) - Matterport, Inc., et al. v. William J. Brown, No. 43, 2022 [William J. Brown v. Matterport, Inc., et al., C.A. No. 2021-0595-LWW (Del. Ch.)]
open. br. - ans. br. - reply br.

11:10 (D) - Lennox Industries, Inc., et al. v. Alliance Compressors, LLC, No. 371, 2021 [C.A. No. N19C-03-045-AML-CCLD (Del. Super.)]
open. br. - ans. br. - reply br.

Court of Chancery
09:30 (Z) - Atlantic NWI, LLC v. The Carlyle Group, Inc., C.A. No. 2021-0944-SG
01:30 (W) - In re P3 Health Group Holdings, LLC, C.A. No. 2021-0518-JTL
01:30 (W) - Apotex, Inc., et al. v. Otsuka Pharmaceutical Co., Ltd., C.A. No. 2022-0291-MTZ
01:30 (T) - In re Oracle Corp. Derivative Litigation, C.A. No. 2017-0337-SG (consol.)
02:00 (T) - Fortis Advisors, LLC v. Johnson & Johnson, et al., C.A. No. 2020-0881-LWW
03:00 (T) - In re AVX Corp. Stockholders Litigation, C.A. No. 2020-1046-SG

Thursday, July 14, 2022
09:15 (W) - Michael S. Murray v. Thomas D. Murray, et al., C.A. No. 2018-0193-KSJM; Thomas D. Murray, et al. v. Michael S. Murray, et al., C.A. No. 2018-0819-KSJM [trial]
09:15 (W) - Principal Growth Strategies, LLC, et al. v. AGH Parent, LLC, et al. and Platinum Management (NY), LLC, et al., C.A. No. 2019-0431-JTL
11:00 (Z) - Gen BQ JV Holdings, LLC, et al. v. New Generation Health, LLC, et al., C.A. No. 2022-0558-MTZ
01:30 (C) - In re Lawson Products, Inc. Section 220 Litigation, C.A. No. 2022-0270-JTL (consol.)

Friday, July 15, 2022
09:15 (W) - Michael S. Murray v. Thomas D. Murray, et al., C.A. No. 2018-0193-KSJM; Thomas D. Murray, et al. v. Michael S. Murray, et al., C.A. No. 2018-0819-KSJM [trial]
09:15 (W) - Richard Frank v. National Holdings Corp., C.A. No. 2021-0160-MTZ
10:00 (Z) - In re Old CPF, LLC, C.A. No. 2019-0881-JTL
11:00 (T) - NetApp, Inc. v. Albert E. Cinelli, et al., C.A. No. 2020-1000-LWW
01:30 (W) - Gabriel Gliksberg v. Texas Pacific Land Corp., C.A. No. 2021-1063-JTL
03:15 (W) - FPR Limetree, LLC v. Limetree Bay Energy, LLC, et al., C.A. No. 2022-0245-LWW