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By Jacob Rund
Tribune Media Co.'s claims that “willful” breaches of its written merger agreement with Sinclair Broadcast Group Inc. caused the $3.9 billion deal to collapse are virtually untested in court.
The alleged breaches happened because Sinclair didn’t exert “reasonable best efforts” to “avoid or eliminate” government roadblocks to completing the merger, Tribune claimed.
“As far as the case law is concerned, there’s very little precedent, and this is a very murky area,” Albert Choi, a University of Virginia Law School professor who specializes in contracts and mergers, told Bloomberg Law in an email.
Tribune called off the combination Aug. 9, the same day it filed a complaint in Delaware Chancery Court.
The Tribune-Sinclair contract contained the phrase “reasonable best efforts” 37 times, including in a clause outlining obligations to pursue station sales if needed. Sinclair’s unwillingness to accept the divestitures offered by the government that would have cleared the deal shows it willfully breached the terms of the contract, Tribune said.
Tribune is seeking $1 billion in damages for its botched sale to Sinclair.
Sinclair refused to follow through with TV station divestitures needed to satisfy regulators, despite agreeing to do so in the merger contract, according to the lawsuit. The Justice Department offered to clear the deal if Sinclair offloaded stations in 10 markets where its services overlapped with Tribune’s, but the Sinclair pushed back.
Potential media market overlap also triggered concerns at the Federal Communications Commission, whose chairman eventually sent the deal to an internal administrative law judge. Tribune claimed that could have delayed FCC approval for years.
Sinclair, in a Aug. 9 written statement, said Tribune’s lawsuit “is entirely without merit,” and that it “fully complied” with its contractual obligations.
The courts “haven’t said much” about the violations of best effort standards, said Afra Afsharipour, a University of California, Davis Law School professor who researches mergers and corporate law.
“Even if you look at the big treatises on the issue, they don’t say a huge amount,” she told Bloomberg Law.
That means the Tribune-Sinclair case “is going to be super facts-specific,” she said. “There’s actually very little in [the complaint] about the law” because there just isn’t a lot of it, she said.
When a case depends on a judge’s interpretation of the facts, it adds uncertainty. “It’s a little bit up in the air,” Afsharipour said. There’s no clarity about “exactly how they are going to hold [Sinclair] accountable for these kinds of actions.”
One of the most notable cases involving “best efforts” language that Delaware courts decided is The Williams Cos. Inc. v. Energy Transfer Equity L.P. That case dealt with allegations that Energy Transfer didn’t exert “commercially reasonable efforts” to obtain a tax opinion necessary for it to buy Williams Companies.
The seller sued to make Energy Transfer stick with the deal, but both the Chancery Court and the state’s Supreme Court ruled in favor of the buyer. The state’s highest court said a suing party isn’t obligated to outline for a judge the steps a company needs to take to finalize a deal.
And in Hexion v. Huntsman Corp. , the Chancery Court said a violation of a “best efforts” clause, through a failure by one company to alert the management of the other to certain issues, could be enough to show breach of contract.
Phrases such as “reasonable efforts,” “commercially reasonable efforts,” and “reasonable best efforts” show up often in merger contracts, but lawyers and judges interpret them differently.
“Lawyers tend to think that you’re essentially obligating parties to a higher level of effort depending on the way the phrasing is constructed,” Afsharipour said. “And ‘reasonable best effort’ tends to be a higher standard among practitioners. But there’s no actual agreement in the case law that says that.”
“The courts seem to actually use the same analysis,” for those various phrases, she added.
Courts have shown that merging companies generally aren’t required to put themselves in a worse position to clear a deal, said Brian Quinn, a Boston College Law School professor who teaches transactional and corporate law.
“One thing that’s clear is the courts are not requiring, with ‘best efforts,’ buyers that commit to exerting those kind of efforts to lose money,” he told Bloomberg Law.
But Tribune isn’t claiming that Sinclair was being forced into a worse position than the merger agreement envisioned, Quinn added. “What Tribune is saying is, ‘Look, you committed to reasonable best efforts to close this transaction and to dispose of the list of stations that we agreed to. But you’re not doing that, and you have willfully breached the contract,’” he said.
Delaware’s Chancery Court is weighing the same question in another case involving a high-profile deal — Anthem Inc.'s failed $48 billion merger with Cigna Corp. The combination was challenged by U.S. antitrust authorities and blocked by a district court judge in February 2017.
That suit and the Tribune complaint are among the few in recent history to deal with claims that a megadeal was upended by one party’s failure to work hard enough to get it to the finish line.
“There have been similar [cases] in the past, so it isn’t totally new, but I can’t remember one that’s as prominent and visible as Cigna’s,” said Donald Baker, co-founder of law firm Baker & Miller PLLC and a former top official in the Justice Department’s Antitrust Division.
This type of claim “certainly isn’t routine,” he told Bloomberg Law.
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