The Influence of Anglo-Saxon M&A Practice on Contractual Efforts Obligations under Dutch law

For decades, Western European – and certainly Dutch – M&A practice has been influenced by England and, in particular, the United States. One example of this influence is found in the qualification of certain obligations in predominantly English-language share purchase agreements, which are often based on the undertaking to use a certain effort rather than to achieve a specific result.

Efforts Obligations

Contracts frequently contain an obligation of effort, often by explicitly using that term. A typical example in M&A is the selling shareholder undertaking to ensure that, between signing and closing (if these occur on different dates, for instance because the Dutch competition authority must approve the transaction), the target company will continue to conduct its business as usual and in line with past practice.

The extent to which such effort must go is a topic of considerable debate, especially in international M&A practice. Broadly, three types of efforts obligations are distinguished: (i) best efforts, (ii) reasonable efforts, and (iii) commercially reasonable efforts. It is not surprising that combinations of these categories are also now in use.

Best Effort

As the term suggests, the use of ‘best’ is intended to indicate that this is not a standard efforts obligation, but rather a heightened one. The party subject to the obligation must not simply do its best, but must do everything reasonably possible: the party must, in effect, have done all that could reasonably be expected. The American Bar Association has attempted to provide a clear definition in its model stock purchase agreement. According to this model, ‘best efforts’ obligations represent the highest standard, requiring a party to do essentially everything possible to fulfil its obligation, for example by devoting significant management time. It should be noted, however, that the most prominent American court in M&A disputes (the Delaware Supreme Court) takes a less strict approach to the differences between these qualifications: in its view, every efforts obligation is ultimately coloured by reasonableness, even a best efforts obligation.

(Commercially) Reasonable Efforts

In contrast to ‘best efforts’ obligations, ‘reasonable efforts’ obligations require only that the party subject to the obligation makes a reasonable effort. The aforementioned model agreement indicates that ‘reasonable efforts’ is a weaker standard, as no action is required that goes beyond what is normal under the circumstances. The even more diluted form, ‘commercially reasonable efforts’, goes a step further, taking into account whether refraining from certain actions can be justified by commercial disadvantage.

Conclusion

Parties may disagree as to whether, in the given circumstances, the relevant party has indeed made its utmost effort or merely a reasonable effort.

Given Dutch case law on the interpretation of (acquisition) contracts—which, in short, attaches significant value to the literal wording—the precise use of the above terms is of great importance.

In any event, be alert to the category of efforts obligation you are assuming as a party, as the courts will always attach some value to it.

More information?

Please contact Van Till at info@vantill.nl