Best Efforts? Commercially Reasonable Efforts?

Words of caution if you ever use "efforts" clauses instead of unambiguous obligations.

Consider using such clause is the market/industry practice

Use the same terms consistently throughout the agreement

Consider dispute identification mechanism at a sign of dispute or disagreement as to performance

Include temporal limitations and certainty

Consider time frames for efforts including within specific number of days or months from a triggering date or event

Define efforts

Sample definitions in the context of M & A:

• "Efforts that a prudent Person desirous of achieving a result would use in similar circumstances to ensure that such result is achieved as expeditiously as possible on commercially reasonable terms."
• "Efforts that a prudent Person desirous of achieving a result would use in similar circumstances to achieve such result as expeditiously as possible; provided, however, that a Person required to use commercially reasonable efforts under this Agreement will not be required to take actions that would result in a material adverse change in the benefits to such Person of this Agreement and the transactions contemplated hereby or to dispose of or make any change to its business, expend any material funds or incur any other material burden."
• "Efforts consistent with the past practices of similarly situated [INDUSTRY] companies with respect to similarly situated [MATTER]"
• "Efforts consistent with the past practice of [PURCHASER] related to research and development, regulatory approval, commercialization and sales and marketing of similar [PRODUCTS] with similar market potential at a similar stage in development"

Include carve-outs as what efforts clause does not require of covenanting party

• Expense cap in dollar amounts on attorneys' fees and other costs
• Conduct that would reasonably be expected to have a material adverse effect on covenanting party
• Actions that would subject the covenanting party to liabilities
• Actions in contravention of law or regulatory requirements
• Actions that would impact profitability or solvency of the covenanting party
• Fiduciary outs (subject to break-up fee and other deal protections for the buyer)

HSR or other regulatory approvals

• Reverse break-up fee
• Ticking fees that increase based upon length of time it takes to address concerns
• Detailed efforts covenants identifying problematic lines of business or assets to be divested
• Negative covenants of buyer restricting pre-closing acquisition of assets or business or other actions that would exacerbate antitrust problems

Third Party Consents

• Control or specify the timing of pursuing consents, expenses in doing so, and thresholds for closing (must-have consents)
• Consider third party leverages 

Acquisition Financing

• "Buyer  shall, and shall cause its Affiliates to, use commercially reasonable efforts to obtain the Financing on the terms and conditions described in the Financing Letter, including using commercially reasonable efforts to (i) enter into definitive agreements with respect to the Financing (including agreeing to any requested changes to the Financing Letter by the committed lenders in accordance with the related flex provisions), (ii) satisfy (or obtain waiver) on a timely basis of all conditions in such definitive agreements (within buyer's control) and (iii) consummate the Financing contemplated by the Financing Letter at Closing."

NJ Escheat Law in the context of Reverse Triangular Merger

Hypothetical transaction: The target company, the Company, survived the merger and remains as a New Jersey corporation, wholly owned by the Parent, a DE corporation, post-merger. The merger sub created by the Parent for the merger, a New Jersey corporation, merged with and into the Company upon the closing. Assume for the purpose of the analysis, a large percentage of the previous shareholders of the Company were domiciled in New Jersey and a significant number of them have not provided documentation required for the payment of merger consideration.

New Jersey Escheat Law (Title 46, Subtitle 6, Chapter 30B. Unclaimed Property)

These New Jersey statutes provide a procedure by which personal property that is presumed abandoned is transferred to the State of New Jersey as custodian for the absent owner. Property is subject to the custody of the State of New Jersey as unclaimed property if one of the conditions raising a presumption of abandonment (Articles 2 and 5 through 16 of the statutes) exists and one of the other statutorily required conditions (under Section 46:30B-10) is satisfied.

The statutes have the following defined terms that are relevant to an escheat law analysis:

"Administrator" means the Treasurer of the State of New Jersey;
"Apparent owner" means the person whose name appears on the records of the holder as the person entitled to property held, issued, or owing by the holder;
"Domicile" means the state of incorporation of a corporation and the state of the principal place of business of an unincorporated person; and
"Holder" means a person, wherever organized or domiciled, who is the original obligor indebted to another on an obligation (The Company and Parent are deemed to be the holders of the merger consideration under the New Jersey statutes and that the Parent is a Delaware corporation does not prevent the State of New Jersey from reaching out to the Parent for the enforcement of these statutes).

1. Presumption of abandonment
“Stock or other interest in a business association” is presumed abandoned three (3) years after the date of an unpresented instrument issued to pay interest or a dividend or other cash distribution (Article 10; Section 46:30B-31). This section of the NJ statutes is what is considered as the most applicable to the circumstance in terms of the category of the underlying abandoned property. The definition of “business association”  under the statutes includes a corporation.

2. Other condition to be satisfied to subject the property to the custody of the state (basically establishing the nexus to the State of New Jersey):
• The last known address, as shown on the records of the holder, of the apparent owner is in New Jersey (I assume that this should be the case for those previous shareholders of the Company that are known to us as domiciled in New Jersey);
• The records of the holder do not reflect the identity of the person entitled to the property and it is established that the last known address of the person entitled to the property is in New Jersey;
• The records of the holder do not reflect the last known address of the apparent owner, and it is established that (1) the last known address of the person entitled to the property is in New Jersey, or (2) the holder is a domiciliary or a government or governmental subdivision or agency of New Jersey and has not previously paid or delivered the property to the state of the last known address of the apparent owner or other person entitled to the property;
• The last known address, as shown on the records of the holder, of the apparent owner is in a state that does not provide by law for the escheat or custodial taking of the property or its escheat or unclaimed property law is not applicable to the property and the holder is a domiciliary or a government or governmental subdivision or agency of New Jersey;
• The last known address, as shown on the records of the holder, of the apparent owner is in a foreign nation and the holder is a domiciliary or a government or governmental subdivision or agency of New Jersey; or
• The transaction out of which the property arose occurred in New Jersey, and (1) the last known address of the apparent owner or other person entitled to the property is unknown, or (2) the last known address of the apparent owner or other person entitled to the property is in a state that does not provide by law for the escheat or custodial taking of the property or its escheat or unclaimed property law is not applicable to the property, and (3) the holder is a domiciliary of a state that does not provide by law for the escheat or custodial taking of the property or its escheat or unclaimed property law is not applicable to the property.

3. Reporting obligations of holder
A person holding property presumed abandoned and subject to custody as unclaimed property under the statutes must report to the administrator concerning the property (Section 46:30B-46). Forms and other information related to the reporting is found http://www.unclaimedproperty.nj.gov/reporting-info.shtml.

4. Notice to apparent owner (Section 46:30B-49)
Not more than 120 days nor less than 60 days before filing the report required by the statutes, the holder in possession of property presumed abandoned and subject to custody as unclaimed property must send by certified mail, and with return receipt requested, written notice to the apparent owner at the last known address informing the owner that the holder is in possession of property if:

(a) the holder has in its records an address for the apparent owner which the holder's records do not disclose to be inaccurate;
(b) the claim of the apparent owner is not barred by the statute of limitations; and
(c) the property has a value of $50.00 or more.

5. Delivery of property
At the time of the filing of the report, the holder must pay or deliver to the administrator all of the unclaimed property set forth in the report and all accretions thereon unless the owner established the right to receive such property before the property has been delivered or the presumption of abandonment is erroneous (Section 46:30B-57-58).

6. Relief from liabilities  
Upon the payment or delivery of property to the administrator, the State of New Jersey assumes custody and responsibility for the safekeeping of the property. A person who pays or delivers property to the administrator in good faith is relieved of all liability to the extent of the value of the property paid or delivered for any claim then existing or which thereafter may arise or be made in respect to the property (Section 46:30B-61).

Delaware Escheats Law (Title 12, Chapter 11 of the Delaware Code)

The Delaware Code broadly mandates that all property, the title to which has failed and the power of alienation suspended by reason of (a) the death of the owner thereof intestate, leaving no known heir-at-law, (b) the owner having disappeared or missing from the last known address continuously for 5 years or more, or (c) such property having been abandoned, must descend to the State of Delaware as an escheat.

Unlike the New Jersey statutes, which do not limit the definition of “holder” based upon the jurisdiction of organization/incorporation or domicile, the Delaware Code specifically provides that the “issuer of any intangible ownership interest in a corporation, whether or not represented by a stock certificate, which is registered on stock transfer or other like books of the issuer or its agent, shall be deemed a “holder” of such property (Section 1198(7) definition of “holder”).”

Since the obligations to (a) report with respect to the abandoned property and (b) pay or deliver such property under the Delaware Code fall on the “holder” of the property, it does not appear that the Delaware law applies to our circumstance where the issuer corporation is a New Jersey corporation, which is not considered a “holder” under the Delaware Code.

Conclusion: Based upon the interpretation of the applicable sections of the statutes above, after three (3) years from the date the Parent or Company contacted, for disbursement of the merger consideration, the previous shareholders of the Company known to the Company or Parent as domiciled in New Jersey, who have failed to submit the required documentation, the presumption of abandonment arises, which obligates the Company/Parent to (a) report to the Treasurer of the State of New Jersey concerning the property, (b) send written notice to the apparent owner at the last known address informing the owner that the Company/Parent is in possession of property, and (c) deliver to the Treasurer of the State of New Jersey all of the unclaimed property set forth in the report (the pro rata merger consideration for each such shareholder) and all accretions thereon.

Tax - F Reorganization - Deferring Tax Obligations of Target Company's Equity Holders

Under F reorganization (IRC 368(a)(1)(F)), the equity holders of Target first transfer all of their equity interest to a newly formed corporation, Newco. This first step can be accomplished either by a direct transfer in exchange for Newco Stock, or by Newco setting up a new subsidiary that merges with and into Target, with Target equity holders receiving Newco stock in the merger.

Next, Target converts into a Target LLC wholly owned by Newco. These two steps constitute the so-called F reorganization. For tax purposes, after these two steps, Newco is considered to be a continuation of the same corporation as Target, and the assets owned by the Target LLC are treated as being owned by Newco.

Then, Newco sells all of the Target LLC (think of this like an asset holding vehicle) ownership interests to Buyer. Newco's sale of the Target LLC ownership interests to Buyer is treated as a sale of the assets of the Target LLC to Buyer (step up basis for Buyer).

Advantages of this F reorganization includes:

• No physical transfer of assets to Buyer
• No deemed liquidation of Target unlike in other instances where a physical transfer of assets are avoided; that is, Newco may stay alive with the cash proceeds of the sale of the Target LLC ownership interests, thus avoiding tax on the proceeds of the sale from the seller equity holders' perspective
• Newco is able to retain those assets not sold to Buyer without any tax on such assets because during the period in which Target is an LLC wholly owned by Newco, Target LLC is treated as part of Newco and therefore can distribute assets to Newco without tax consequences. Newco then can sell the interests in Target LLC and is treated as selling the assets held by Target LLC.

Ex. Sole member (Seller) of an IA LLC (S corp) plans to sell all of his membership interests therein to Buyer. Seller sets up a DE corp (S corp) as the Newco to retain the sale proceeds therein (not a liquidation, no taxable event). Since S corp IA LLC (Opco) may not have a corporate member-owner, Seller converts IA LLC to IA corporation and Newco immediately elects to treat IA corporation as a qualified S corp (Q-sub) as defined under IRC 1361(b)(3). Seller transfer all of his shares in IA corporation (Q-sub) to Newco (1st step of F reorg). IA corporation converts to a DE LLC (2nd step of F reorg), which terminates the Q-sub election. 

If a Q-Sub election terminates, the former Q-Sub (IA corporation) is treated as a new corporation (DE LLC) acquiring all of its assets (and assuming all of its liabilities) immediately before the termination from the S corporation parent in exchange for stock of the new corporation (to be held by the S corporation parent). (26 C.F.R. 1.1361-5 - Termination of QSub election).

Newco then sells all of its membership interests in the DE LLC to Buyer.