Author- Naman malik
To the Point
Under the law of England and Wales, corporate mergers and acquisitions are subject to complex contractual agreements known as covenants that require parties to fulfil closing requirements, like securing regulatory clearances. The standard of effort needed by these agreements, especially the “endeavours” clauses, has significantly increased due to recent Supreme Court and High Court decisions. The law today makes it very evident that a party may be required to go against its own immediate financial interests in order to fulfil the need to exercise “best endeavours,” which calls for a careful, determined, and reasonable attempt to accomplish the deal’s goal. This robust approach is supported by the Supreme Court’s recent reinforcement of the director’s strict fiduciary duty of loyalty, ensuring that human decision-makers are held to a standard of single-minded good faith throughout the entire transaction process.
Use of Legal Jargon
Fiduciary Duty (Directors): The non-contractual, statutory duty, primarily rooted in the Companies Act 2006, requiring directors to act in good faith to promote the success of the company for the benefit of its shareholders.
Specific Performance: An equitable, discretionary remedy ordering a breaching party to perform the precise act required by the contract, most commonly sought in M&A disputes where monetary damages cannot adequately compensate the target shareholders.
Ex Turpi Causa Non Oritur Actio: The legal maxim meaning “no action arises from a dishonourable cause,” underpinning the strict “profit rule” for fiduciaries to prevent temptation and conflicts of interest.
Material Adverse Change (MAC) Clause: A contractual provision allowing deal termination due to an unforeseen, fundamental, and long-term adverse change in the target’s business or financial condition. English courts interpret this with remarkable narrowness.
Contractual Construction: The process by which the court determines the meaning and effect of the contractual terms, interpreting what a reasonable commercial person would have understood the language to mean at the time the agreement was executed.
Informed Consent: The requirement for a director, when pursuing an opportunity or retaining a profit related to their position, to secure the unambiguous agreement of the principal (the company) after providing full and frank disclosure of all relevant facts.
The Proof (Legal Analysis)
The legal certainty in UK M&A is currently defined by two interwoven streams of jurisprudence: the strict contractual interpretation of closing covenants and the equally strict application of directorial duties.
I. The Intensified Standard of Contractual Endeavour
English law treats “endeavours” covenants as a spectrum, not a single concept. The High Court applies the rules of Contractual Construction to discern the parties’ objective intention, but precedent provides a clear understanding of the minimum required effort at each level:
Best Endeavours: The Onerous Obligation The bound party falls under the duty to use “best endeavours” to take all actions that a determined, prudent, and reasonable person acting in their own interest would take in order to accomplish the contractual goal. The historic ruling in Jet2.com Ltd v. Blackpool Airport Ltd established that, if the conduct is commercially reasonable and does not result in financial ruin, the obligated party may be required to compromise its own commercial interests or suffer substantial costs. For instance, a buyer utilising this clause to obtain regulatory permission must aggressively interact with regulators, make concessions that are commercially feasible, and pursue all reasonable options, frequently concurrently.
Reasonable Endeavours: The Balanced Approach The least burdensome criteria, “reasonable endeavours,” allows the party to weigh its own financial prudence and commercial interests against the contractual obligation. It doesn’t demand that the party take every possible course of action; merely a reasonable one. Qualifiers like “commercially prudent” are included, further lowering the threshold and subjecting the goal’s accomplishment to the obligated party’s evaluation of cost and profitability. This distinction is important: if the buyer can demonstrate that they took cost and alternative methods into consideration, the likelihood of a successful breach claim resulting from failure to close under a “reasonable endeavours” covenant is significantly reduced.
II. Fiduciary Duties: The Human Element of Good Faith
Complementing the contractual strictness is the robust law of directors’ duties, which governs the conduct of the human agents throughout the deal.
The Single-Minded Loyalty Principle: In the recent and extremely important decision of Rukhadze and others v. Recovery Partners GP Ltd and another [2025] UKSC 10, the UK Supreme Court unanimously upheld the strict application of the Profit Rule. A director who profits from their role is required by this rule to report that benefit to the corporation. The Supreme Court firmly rejected the “but for” defence, which holds that a disloyal director could retain the earnings because the company would have lost anyhow. This ruling reaffirms that the rule’s main goal is to prohibit fiduciaries from putting their own interests ahead of their obligation of unwavering loyalty.
Implications for M&A: A director who engages in side deals, secret profits, or fails to disclose a potential conflict of interest during the sale process (such as negotiating a personal employment contract with the buyer) may forfeit the entire profit, frequently through a court-ordered Account of Profits, as this ruling makes clear. Getting the company’s fully informed consent before pursuing the opportunity is the only way out.
III. The High Hurdle of the MAC Clause
English courts continue to apply a highly skeptical and narrow interpretation of the Material Adverse Change (MAC) clause. In the UK, a MAC is seen as an emergency escape meant for truly catastrophic and significant changes to the target’s firm, in contrast to some jurisdictions where it is frequently used as a bargaining point. The threshold in Akorn v. Fresenius, a decision deemed persuasive in UK courts, required a fundamental disruption to the business’s capacity to produce long-term earnings, measured in years rather than months. Due to the High Court’s ongoing commitment to this tough criteria, a buyer who simply experiences a fall in the market or “buyer’s remorse” will very probably be unable to activate a MAC provision and will instead have to rely on the much stronger “endeavours” covenants.
Abstract
This article provides an in-depth analysis of the strict interpretation of M&A closing obligations under the law of England and Wales. It first delineates the legal hierarchy of effort, contrasting the highly burdensome “best endeavours” clause, which requires parties to potentially sacrifice immediate commercial interests (as confirmed in the Jet2 case), with the less demanding “reasonable endeavours” standard. The analysis then connects this contractual rigour to the personal accountability of corporate decision-makers, highlighting the UK Supreme Court’s 2025 affirmation of the No-Profit Rule for fiduciaries, thereby ensuring directors adhere to a standard of single-minded loyalty during a transaction. This dual legal pressure, both contractual and fiduciary, creates a robust framework designed to maximise deal certainty and protect shareholder interests from strategic breaches driven by market volatility.
Case Laws
Jet2.com Ltd v Blackpool Airport Ltd [2012] EWCA Civ 417 Principle: Defined the scope of “best endeavours,” holding that the obligated party (the airport) was required to act against its own immediate commercial interest by operating beyond normal hours to facilitate the claimant’s low-cost airline service. The ruling underscores that “best endeavours” demands a high degree of proactivity and potential self-sacrifice, provided the action is commercially sensible.
Rukhadze and others v Recovery Partners GP Ltd and another [2025] UKSC 10 Principle: Affirmed the strictness of the director’s duty to account for profits (the Profit Rule). The Supreme Court unanimously rejected the “but for” defence, confirming that a fiduciary who profits from their position must surrender those profits, regardless of whether the principal (the company) would have secured the profits anyway. This ruling is critical for deterring directorial conflicts of interest during corporate sales.
CPC Group Ltd v Qatari Diar Real Estate Investment Company [2010] EWHC 1535 (Ch) Principle: Illustrated the flexibility of the standard. The High Court examined a clause requiring “all reasonable but commercially prudent endeavours.” The inclusion of the “commercially prudent” qualifier allowed the obligated party greater scope to balance the duty against its own financial interests, demonstrating how specific drafting can mitigate the burden of an endeavours clause.
Re Sellar and others [2023] EWHC 2921 (Comm) (Interim Relief) Principle: Although not a final ruling on the merits, this High Court case highlights the modern trend towards specific performance. The case dealt with complex M&A issues and the court considered the necessity of enforcing the contract to prevent one party from undermining the deal through the failure of an M&A closing condition, showing a modern willingness to intervene in favour of closing.
Conclusion
In order to ensure deal certainty, the English law governing M&A transactions is currently at a peak of stringent enforcement. The courts are closely examining how parties behave in accordance with their contractual covenants, requiring an active commitment to close rather than a passive one. The recent Supreme Court ruling in Rukhadze serves as a sharp humanisation of corporate law for directors, reminding them that the fiduciary responsibility of loyalty is an unchangeable commitment to the company that is unaffected by changes in the market or personal financial temptation. The only trustworthy defences against the powerful remedies of particular performance and account profits in this setting are appropriate legal draughting that precisely defines the scope of endeavours and open commitment to the highest standards of directorial conduct.
FAQs
Q1: What records should a director keep to prove they fulfilled a “reasonable endeavours” covenant? A: A director should maintain comprehensive, contemporaneous records, including internal memos, board minutes, and external correspondence, detailing all courses of action considered and the commercial reasons for pursuing, or rejecting, specific steps. This documentation is crucial to demonstrate the balancing of the contractual duty against the company’s own financial interests.
Q2: If a market crash makes an M&A deal financially unviable for the buyer, can they use a MAC clause to walk away? A: It is highly unlikely under English law. The MAC clause is traditionally interpreted narrowly. A general market decline is usually excluded unless the agreement specifically defines the event as a trigger. The change must be fundamental to the target company’s long-term earning capacity, not just a result of general economic conditions affecting the buyer’s finances.
Q3: How does the “no-profit rule” affect a director who learns of a lucrative opportunity during a sale process? A: If the opportunity arises from the director’s position, the no-profit rule requires the director to treat the benefit as belonging to the company. The only safe route for the director is to fully disclose the opportunity to the board (and often the shareholders) and secure fully Informed Consent before pursuing it personally, even if they resign shortly thereafter.
Q4: Is it safer to use “All Reasonable Endeavours” as a middle ground? A: While often intended as a compromise, “All Reasonable Endeavours” is considered legally uncertain. Some courts have treated it as nearly synonymous with “best endeavours.” To ensure clarity and reduce litigation risk, it is better practice to use either “best endeavours” or “reasonable endeavours” and then expressly define the specific actions required and the limitations (e.g., “up to a cost of £X” or “provided it does not require divestiture of X asset”).
Q5: What is the High Court’s view on “buyer’s remorse” leading to a breach of covenant? A: The court is highly unsympathetic to breaches motivated by “buyer’s remorse”—a simple change in commercial interest. The court interprets covenants to prevent a party from manufacturing a breach or passively allowing conditions to fail simply because the deal is no longer financially attractive. This intentional frustration of the contract is often viewed as a breach of the implied duty of good faith in commercial performance.
