Like Steve Bainbridge and Matt Levine, I’m very entertained by this complaint Albertsons filed against Kroger over the breakup of their merger due to antitrust concerns.
The crux of it is that Kroger promised to make some kind of effort – more on that in a moment – to meet FTC demands in order to clear the deal, Kroger got cold feet and refused to meet those demands, and as a result, the FTC got the deal blocked in court, and now Kroger owes Albertsons damages for its breach.
As Matt Levine points out, one weakness in these kinds of disputes is establishing that Kroger’s recalcitrance was, in fact, the reason for the FTC rejection. For example, not long ago, Anthem sued Cigna with a similar set of allegations, and though the court agreed that Cigna breached the contract, the court also concluded that the deal would have been blocked anyway.
But the part that I’m enjoying is the argument about what, exactly, kind of effort Kroger agreed to make. This is from the complaint:
First, Kroger generally agreed to use “reasonable best efforts” to satisfy all closing conditions “as promptly as reasonably practicable.”
Second, Kroger assumed a more stringent obligation to use its “best efforts”—not limited by any standard of reasonableness—“to avoid, eliminate, and resolve any and all impediments under any Antitrust Law . . . so as to enable the Closing to occur as promptly as practicable.” That “best efforts” provision explicitly required Kroger to divest any assets and make any changes to its operations that were necessary to obtain antitrust approval.
Third, if a regulator threatened or instituted an antitrust challenge, Kroger committed to take “any and all actions” necessary to “eliminate each and every impediment under any Antitrust Law” to closing the Merger….
There was only one caveat to Kroger’s “best efforts” and “any and all actions” obligations: those commitments did not require Kroger to divest more than 650 physical stores.
So the claim here is that Kroger’s “best efforts” to avoid antitrust impediments should be interpreted to include conduct that goes a step beyond its ordinary “reasonable best efforts” to satisfy closing conditions.
Is that plausible? Presumably, Kroger argues something like, are you seriously asking a court to hold that “best efforts” is not implicitly modified by some degree of reasonableness? What, you think the default presumption should be that we agreed to unreasonable efforts? Doesn’t it make more sense to presume parties agree to reasonableness, and then, if you want to hold someone to a standard of unreasonableness, it has to be written right there in the contract? Cf. Alliance Data Sys. v. Blackstone Capital Partners V LP, 963 A.2d 746 (Del. Ch. 2009) (“‘Best efforts’ is implicitly qualified by a reasonableness test—it cannot mean everything possible under the sun.”).
For that reason, Steve Bainbridge argues that Albertsons has the weaker argument, because Delaware historically has treated all “best efforts” clauses as generally similar. Which is no doubt true. For example, here is VC Laster’s opinion in Akorn v. Fresenius Kabi AG:
Deal practitioners have a general sense of a hierarchy of efforts clauses. The ABA Committee on Mergers and Acquisitions has ascribed the following meanings to commonly used standards:
• Best efforts: the highest standard, requiring a party to do essentially everything in its power to fulfill its obligation (for example, by expending significant amounts or management time to obtain consents).
• Reasonable best efforts: somewhat lesser standard, but still may require substantial efforts from a party.
• Reasonable efforts: still weaker standard, not requiring any action beyond what is typical under the circumstances.
• Commercially reasonable efforts: not requiring a party to take any action that would be commercially detrimental, including the expenditure of material unanticipated amounts or management time.
• Good faith efforts: the lowest standard, which requires honesty in fact and the observance of reasonable commercial standards of fair dealing. Good faith efforts are implied as a matter of law.
…
Commentators who have surveyed the case law find little support for the distinctions that transactional lawyers draw. Consistent with this view, in Williams Companies v. Energy Transfer Equity, L.P., the Delaware Supreme Court interpreted a transaction agreement that used both “commercially reasonable efforts” and “reasonable best efforts.” Referring to both provisions, the high court stated that “covenants like the ones involved here impose obligations to take all reasonable steps to solve problems and consummate the transaction.”
Now, that strikes me as possibly simplifying matters for a judge, but also kinda out of step with Delaware’s recent (repeated) insistence that it is an exceptionally contractual jurisdiction. See, e.g. New Enterprise Associates 14 LP v. Rich, 295 A.3d 520 (Del. Ch. 2023). If deal planners claim that they understand these terms to have different meanings to the point where ABA Guidance to lawyers says the terms have different meanings, why would the Delaware judiciary reform the contract to strip those nuances away?
Yet again, if deal planners contract in the shadow of cases like Akorn, can’t we assume they do know that Delaware courts flatten the distinctions among terms, and therefore we should assume that’s the intent?
Maybe that’s even what’s most efficient; after all, we also know that contractual terms are not drafted from scratch; attorneys may cut and paste from different models, and god knows even sophisticated players can make rookie mistakes after things go back and forth a few times in blackline, so maybe Delaware courts are doing everyone a favor by presuming all best efforts clauses are roughly the same, unless someone actually goes out and writes “no this time we really really mean the standard is unreasonableness.”
Except maybe that actually did happen here? Take a look at the language of the merger agreement. As Albertsons pleads in the complaint, there are two different provisions: “reasonable best efforts” to close, and “best efforts” with respect to antitrust. This is what they look like:
Section 6.3 Regulatory Matters
Subject to the terms and conditions of this Agreement (including any differing standard set forth herein with respect to any covenant or obligation, including, with respect to Antitrust Law, as provided below), the Company, on the one hand, and each of Parent and Merger Sub, on the other hand, will cooperate with the Other Party and use (and will cause their respective Subsidiaries to use) its reasonable best efforts to (i) take or cause to be taken all actions, and do or cause to be done all things, necessary, proper or advisable to cause the conditions to the Closing to be satisfied as promptly as reasonably practicable and to consummate and make effective, as promptly as reasonably practicable, the Merger, including taking actions necessary to avoid, eliminate, and resolve any and all impediments under any Antitrust Law with respect to the Transactions, including without limitation preparing and filing promptly and fully all documentation to effect all necessary filings, notifications, notices, petitions, statements, registrations, submissions of information, applications and other documents (including filing any Notification and Report Form required pursuant to the HSR Act within fifteen (15) Business Days following the execution of this Agreement), (ii) obtain promptly all Consents, clearances, expirations or terminations of waiting periods, registrations, authorizations and other confirmations from any Governmental Entity or third party necessary, proper or advisable to consummate the Merger and (iii) defend, contest and resist any Proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the Merger. ….
Without limiting the generality of the obligations of Parent and Merger Sub pursuant to this Section 6.3, Parent agrees to, and will cause its Affiliates to, use best efforts, to take, or to cause to be taken, any and all actions necessary to avoid, eliminate, and resolve any and all impediments under any Antitrust Law with respect to the Transactions…
In addition if any Proceeding is instituted (or threatened) challenging the Merger as violating any Antitrust Law or if any decree, order, judgment, or injunction (whether temporary, preliminary, or permanent) is entered, enforced, or attempted to be entered or enforced by any Governmental Entity that would make the Merger illegal or otherwise delay or prohibit the consummation of the Merger, Parent and its Affiliates and Subsidiaries shall take any and all actions (i) to contest and defend any such Proceeding to avoid entry of, or to have vacated, lifted, reversed, repealed, rescinded, or terminated, any decree, order, judgment, or injunction (whether temporary, preliminary, or permanent) that prohibits, prevents, or restricts consummation of the Transactions and (ii) to eliminate each and every impediment under any Antitrust Law to close the Transactions prior to the Outside Date.
(emphasis added)
I mean, I’ll let the parties do their own briefing but my preliminary read of the contract seems to explicitly contemplate different standards for closing in general, versus antitrust in particular. That’s what it says right there in the beginning.
And another thing: Final Shareholder Primacy podcast of 2024 is up! Mike Levin and I talk about what happened in 2024, and what’s coming in 2025. Here at Apple; here at Spotify; and here at Youtube.