Merger and purchase agreements involving Maryland corporations and REITs may be governed by Maryland law. For lawyers accustomed to agreements governed by Delaware or New York law, we are frequently asked to describe key differences that arise under Maryland law so that parties may make informed decisions during negotiations. This is the first post of a multipart series that will describe some common issues that arise in relation to Maryland law.
Merger and purchase agreement covenants often require parties to perform according to open performance terms where one party promises to take a certain action, but the result cannot be guaranteed. Whether the resulting covenant requires "best efforts," "reasonable best efforts," "commercially reasonable efforts" or some other level of effort, open performance terms lead to much handwringing among mergers and acquisitions practitioners. As a result, we are frequently asked whether such terms will be enforced under Maryland law and, if so, to what extent?
Maryland courts have held that "best efforts" and similar open performance terms are enforceable. First Union Nat'l Bank v. Steele Software Sys. Corp., 838 A.2d 404 (Md. App. 2003); see also Baron Financial Corp. v. Natanzon, 509 F. Supp. 2d 501 (D. Md. 2007)(applying Maryland law and interpreting obligation to use "best efforts"); Cover v. Taliaferro, 122 A. 2 (Md. 1923)(requiring promisor to "exercise every reasonable effort"). Predicting how these terms will be interpreted and applied, however, is more complicated. Under Maryland law, if a party fails to achieve a desired result, whether the party nevertheless satisfied an open performance term is largely a subjective inquiry. Absent an agreed upon objective standards, a court will evaluate the particular circumstances to both give meaning to the term and to then determine whether it was satisfied. Resolution of both issues generally falls to the discretion of the finder of fact. Given the subjectivity involved in both steps, contracting parties may try to use objective standards and milestones whenever possible.
But drafting alternative objective standards is often cost prohibitive or near impossible, so parties continue to use open performance terms and negotiate for an acceptable level of effort using common terms. The most commonly utilized terms are "best efforts," "reasonable best efforts" and "commercially reasonable efforts." Practitioners understand these terms on a sliding scale with "best efforts" comprising the most onerous obligation and "commercially reasonable efforts" the least. Given the uneven application of these standards in other jurisdictions, particularly New York, distinguishing among these terms can be important. But drawing distinctions under Maryland law is difficult.
While other jurisdictions hold that the term "best efforts" requires the promisor to do everything possible to achieve a desired result, resulting in a near fiduciary level of obligation of total efforts, Maryland courts reject that view. Instead, Maryland courts hold that "best efforts" requires good faith (an implied covenant in every contract) and diligence on the part of the promisor, but does not require that the promisor give "all of its efforts" or disregard its own interests. Under Maryland law, a party promising to use its "best efforts" may still give reasonable consideration to its own interests and satisfy the standard. While "commercially reasonable efforts" is generally viewed as a lesser standard, the notion that a promisor need not give "all of its efforts" or disregard its own commercial interests is generally at the heart of the relaxed standard. Because Maryland law already reads commercial reasonableness into the term "best efforts," it is likely that a Maryland court would draw little distinction between "best efforts," "reasonable best efforts" and "commercially reasonable efforts." See, e.g., 8621 Ltd. P'ship v. LDG, Inc., 900 A.2d 259 (Md. App. 2005) cert. denied 906 A.2d 943(Md. 2006)(equating the requirement to obtain certain access if it can be "reasonably provided" with "best efforts"). In light of existing Maryland case law, where contracting parties desire a near fiduciary level of obligation, the parties would be advised to define "best efforts" in the context of their agreement. Alternatively, "commercially reasonable efforts" may be all that a Maryland court requires despite a promise to use "best efforts."
In short, open performance terms are enforceable under Maryland law. Ascertaining the meaning of those terms and whether the term has been satisfied, however, requires an examination of the particular circumstances drawing on subjective and objective criteria. Moreover, given the existing case law, it is unlikely that a Maryland court will distinguish "best efforts" from "commercially reasonable efforts." Parties desiring such a distinction should provide clear guidelines or objective criteria in their agreement. As always, individual circumstances may lead to different results and parties negotiating open performance standards should seeking advice from their lawyers and other advisers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
