A Delaware court found itself having to hear lengthy evidence to determine the contracting parties’ intentions regarding what the court found to be an ambiguous ‘commercially reasonable efforts’ clause in an acquisition agreement. The clause was outward-facing (objective) which needed evidence of the hypothetical standards and practices of companies in the pharmaceutical industry.

One pharmaceutical company bought another pharmaceutical company. The purchase price was payable partly by instalments upon achieving eight milestones for the development of a new drug. The buyer claimed the first milestone was not completed and that the first instalment of $130 million was not payable.

The agreement included an elaborate ‘commercially reasonable efforts’ definition which in essence required the seller to “use such efforts and resources typically used by biopharmaceutical companies similar in size and scope for the development and commercalisation of similar products at similar developmental stages” taking into account a number of imprecise factors.

The court found that such clauses “define the level of effort that the party must deploy to attempt to achieve the outcome”. Because the test is objective, the seller’s subjective intent or state of mind is irrelevant. This led to a 140 page judgment concerning the efforts made by the seller. The clause called for an abstract and aggregated pharmaceutical industry standard, and not a comparison with actual peer companies because there were no competitors that operated under the same conditions to compare with. The clause called for a hypothetical company approach. Although numerous confounding events took place during the development period, including Covid-19 issues, the court looked at 11 potential typical factors relating to the development of the drug and found that the seller fell short of the typical efforts that a hypothetical company similarly situated would have devoted to the programme.

An outward-facing commercially reasonable efforts clause of this nature will inevitably lead to a dispute when there is a delay. A subjective standard, or carefully thought out objectives standards, needs to be crafted. The standards should reflect specific unambiguous criteria. The more objective and non-specific the standards the less what actually happened to delay the development by the seller will be relevant in deciding whether commercially reasonable efforts were used.

[Shareholder Representatives LLC v Alexion Pharmaceuticals Inc.]