Legal Updates

In the absence of any other consent, a commitment to raise funds for the company is a commitment of ‘best effort’ and not a commitment to a result

June 9, 2020

An adviser hired for the purpose of raising funds for a possible crowd financing in the U.S. was demanded to return shares received as consideration after the crowdfunding platform terminated the agreement with the company due to a breach of its regulations and after the company did not meet the agreed capital raising target.
The Court accepted the claim in part and held that the advisor should return only part of the shares even though the company prevented the advisor from meeting the raising target. Israeli contracts law recognizes two types of undertakings: outcome and ‘best efforts’. A 'Best efforts’ undertaking does not include a defined outcome, but the duty for making an effort to act for a specific purpose. A ‘best efforts’ undertaking is not breached if the result is not achieved, but only to the extent that no effort was made as required, for example as a result of the negligence or incompetence of the obligor. Here, the agreement included a 'best efforts’ undertaking that the advisor must devote "his full energy, ability, knowledge and experience to provide the services and perform them with loyalty and a high professional level", side-by-side with an outcome undertaking requiring the raising target to be met by a certain date. Some of the funds raised were deposited with an intermediary contrary to the law and regulations in the US platform, resulting in termination of the contract with the company. As a result, the contract with the advisor was also terminated by the company and the company did not meet the recruitment target on time. The field of legal advice and compliance with foreign law to the platform's regulations is not under the responsibility of the adviser and therefore he did not breach the duty of 'best effort' because he did promote the crowdfunding in the US, especially in the field of public relations, and even led to an increase in company value. As for the outcome undertaking, the company did not meet the raising target inter alia due to the fact that the company rushed to terminate the agreement with the advisor and prevented him from completing the task. However, it the advisor also had a part in the actions that led to the non-compliance with the raising target and therefore he was ordered to return only part of the company shares received as consideration for the services.