El Sentido Del Término "Best Efforts" En Los Contratos

P r i v a t e E q u i t y Re p o r t
Volume 2 Number 4 Summer 2002

What’s Inside
Mezzanine Funds: In the Spotlight page 3 Mezzanine Funds: Selected Tax Structuring Considerations page 4 Private Equity in Russia page 6 Guest Column: Mezzanine on the Move in Europe

What Does “Best Efforts” Really Mean?
You are the general partner of a private equity fund, and have just signed a definitivepurchase agreement with respect to the leveraged acquisition of a limited liability company. Now that the contract is signed, you start going through the agreement to determine your obligations pre-and post closing. There is a financing out – your fund will not be obligated to close on the transaction unless it has obtained the necessary debt financing. The seller had asked for a covenant from thefund that it would use its “best efforts” to obtain the financing; you eventually agreed that the fund would use “commercially reasonable efforts” in this regard. Elsewhere, the seller has agreed to use its “best efforts” to operate the business of the LLC in the ordinary course until the closing. That sounds good. Further on, both parties have agreed to use “reasonable best efforts” to satisfythe conditions to closing, including obtaining Hart-Scott-Rodino clearance and some third-party consents. You begin to think about structuring the target following the closing. Should it remain an LLC? You know that the managers of the business have expressed a strong preference for the target to remain an LLC so that they can use the losses it will continue to accrue in the next few years.However, your partnership agreement contains an undertaking from you that you would use your “best efforts” to avoid causing your limited partners to recognize unrelated business taxable income, or “UBTI.” Confused and knowing that you will likely be asked what your fund is obligated to do under these provisions, you call outside counsel. As your lawyer will tell you, even though these differingstandards are utilized frequently by contracting parties in almost all types of commercial agreements, they are not well-tested in the courts. Indeed while some general principles can be gleaned as to how a “best efforts” standard might be interpreted by a court, there is by no means any settled law as to precisely what these two words really mean. Moreover, we are not aware of any case that interprets“commercially reasonable efforts,” or even “reasonable best efforts” as distinct, less stringent standards than “best efforts.” The few cases that have analyzed a contracting party’s behavior in light of a “reasonable best efforts” clause often simply ignore the word “reasonable” and interpret the provision as a “best efforts” standard, rather than some lesser performance standard. And while commonsense would suggest that a single contract, where one section requires “commercially reasonable efforts,” another requires “reasonable best efforts” and a third requires “best efforts” would be construed as imposing differing, and progressively more onerous, performance standards, there is no clear guidance as to how a court would interpret such a contract. Here is a review of some of the moreinteresting case law on “best efforts” clauses and some suggestions as to how to approach these and similar clauses in practice.
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© 2002 Marc Tyler Nobleman / www.mtncartoons.com

page 8 Trendwatch: Mezzanine Funds page 10 Can Transaction Based Insurance Solve Deal Jitters? page 12

“How about if I use commercially reasonable efforts to clean my room?”

letter from theeditor
Against the backdrop of troubling times throughout the business community, we focus in this issue of The Debevoise & Plimpton Private Equity Report on the increasingly popular mezzanine fund as an alternative source of leverage for private equity acquisitions. We look at mezzanine funds from several angles. Jennifer Burleigh spotlights what makes a mezzanine fund different from the...