IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

ITG BRANDS, LLC,

Plaintiff,

v.

REYNOLDS AMERICAN, INC. and 

R.J. REYNOLDS TOBACCO 

COMPANY,

Defendants.

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C.A. No. 2017-0129-AGB

MEMORANDUM OPINION

Date Submitted: September 11, 2017 

Date Decided: November 30, 2017

Stephen C. Norman, Matthew F. Davis, and Matthew R. Dreyfuss, POTTER 

ANDERSON & CORROON LLP, Wilmington, Delaware; Robert J. Brookhiser and 

Elizabeth B. McCallum, BAKER & HOSTETLER LLP, Washington, DC; Attorneys 

for Plaintiff. 

Gregory P. Williams, Rudolf Koch, Robert L. Burns, and Matthew D. Perri, 

RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Peter J. 

Biersteker and C. Kevin Marshall, JONES DAY, Washington, DC; Attorneys for

Defendants.

BOUCHARD, C.
1

In the late 1990’s, several major tobacco manufacturers in the United States 

entered into agreements with each of the fifty states in response to claims concerning 

the health risks of smoking. They first entered into separate agreements with four 

states (Florida, Minnesota, Mississippi, and Texas) before entering into a Master 

Settlement Agreement governing the remaining forty-six states. Under each of these 

agreements, the tobacco manufacturers are required to make annual payments based 

on their volume of tobacco product sales in the United States in the year to which 

the payment relates.

The Master Settlement Agreement prohibits a party from transferring any of 

its cigarette products unless the transferee agrees to assume that party’s obligations 

under the Master Settlement Agreement before the transfer occurs. The agreements 

with the other four states (the “Previously Settled States” or “PSS”) that were entered 

into earlier do not contain a similar transfer provision. 

In July 2014, ITG Brands, LLC entered into an Asset Purchase Agreement to 

acquire for approximately $7.1 billion four cigarette brands owned by R.J. Reynolds 

Tobacco Company (“Reynolds Tobacco”), a wholly-owned subsidiary of Reynolds 

American, Inc. (“Reynolds American”) (together, “Reynolds”). To ensure that ITG 

Brands would assume Reynolds Tobacco’s obligations to the Previously Settled 

States as of the closing, in particular its annual payment obligations, the Asset 

Purchase Agreement requires that ITG Brands “use its reasonable best efforts” to 
2

reach agreements with those states with respect to the four cigarette brands that ITG 

Brands contracted to acquire, as follows:

[ITG Brands] shall use its reasonable best efforts to reach agreements 

with each of the Previously Settled States, by which [ITG Brands] will 

assume, as of the Closing, the obligations of a Settling Defendant under 

the PSS Agreement with each such State, with respect to the Acquired 

Tobacco Cigarette Brands, on the same basis as the Settling Defendants 

prior to the Closing.

1

The ITG Brands-Reynolds transaction closed on June 12, 2015 (the 

“Closing”). As of the Closing, however, ITG Brands had not reached an agreement 

to assume Reynolds Tobacco’s obligations under its settlement agreement with 

Florida. Reynolds Tobacco and ITG Brands are now embroiled in litigation in 

Florida state court where Florida is seeking to hold both Reynolds Tobacco and ITG 

Brands accountable for annual payments of approximately $30 million associated 

with post-Closing sales of the four cigarette brands that ITG Brands purchased. ITG 

Brands responded by suing Reynolds in this Court, invoking the Delaware exclusive 

forum provision in the Asset Purchase Agreement.

The parties have filed cross-motions for partial judgment on the pleadings 

over whether ITG Brands’ obligation to use its reasonable best efforts to reach an 

agreement with Florida terminated at the Closing. The resolution of this question 

 

1 Compl. (Dkt. 1) Ex. 1 (Asset Purchase Agreement) F-2 § 2.2. 
3

turns on the meaning of the last four words of the provision quoted above: “prior to 

the Closing.” 

ITG Brands contends that this phrase defines the temporal scope of its 

obligation to use its reasonable best efforts to reach an agreement with Florida to 

assume Reynolds Tobacco’s obligations, and that this obligation terminated when 

the ITG Brands-Reynolds transaction closed in June 2015. Thus, according to ITG 

Brands, it is off the hook for making payments to Florida for post-Closing sales of 

the four cigarette brands it acquired even though it received (and continues to 

receive) the benefit of the sales to which those payments relate. 

Reynolds contends that “prior to the Closing” as used in the foregoing 

provision defines the nature of the obligations that ITG Brands agreed to assume, 

i.e., the same obligations Reynolds Tobacco owed to Florida “prior to the Closing.” 

Thus, according to Reynolds, ITG Brands’ obligation to use its reasonable best 

efforts did not terminate at the Closing and continues until ITG Brands actually has 

made reasonable best efforts to assume the annual payment obligations for postClosing sales of the four cigarette brands it acquired from Reynolds. 

For the reasons explained below, I find that Reynolds’ interpretation is 

supported by the plain language of the Asset Purchase Agreement and that ITG 

Brands’ interpretation is not. Accordingly, Reynolds’ motion for partial judgment 

on the pleadings is granted, and ITG Brands’ cross-motion is denied. 
4

I. BACKGROUND

Unless noted otherwise, the facts in this opinion are drawn from the

allegations in the Verified Complaint that are admitted in defendants’ Answer and 

Verified Counterclaims and documents incorporated therein.2 Any additional facts 

are either not subject to reasonable dispute or subject to judicial notice.

A. Reynolds Tobacco and Other Tobacco Manufacturers Enter into 

Settlement Agreements with the States

In the mid-1990s, a number of states sued Reynolds Tobacco, Lorillard 

Tobacco Company, and other large tobacco manufacturers for publicly 

misrepresenting the addictiveness and health risks of smoking. In 1997 and 1998, 

Reynolds Tobacco, Lorillard Tobacco Company, and other manufacturers (the 

“Settling Defendants”) entered into separate settlement agreements with four states: 

Florida, Minnesota, Mississippi, and Texas (as defined above, the “Previously 

Settled States” or “PSS”). Reynolds Tobacco’s 1997 settlement agreement with 

Florida is referred to hereafter as the “Florida Settlement Agreement.” In November 

1998, Reynolds Tobacco and other tobacco manufacturers entered into a Master 

 

2 See OSI Sys., Inc. v. Instrumentarium Corp., 892 A.2d 1086, 1090 (Del. Ch. 2006) 

(“When there are cross-motions for judgment on the pleadings, the court . . . may consider 

the unambiguous terms of exhibits attached to the pleadings, including 

those incorporated by reference.”). 
5

Settlement Agreement (the “Master Settlement Agreement”) governing the 

remaining forty-six states. 

In the Florida Settlement Agreement, the Settling Defendants collectively 

agreed to pay Florida an initial amount of $750 million, followed by annual 

payments.3 Each Settling Defendant’s annual payments are calculated from a base 

amount “pro rata in proportion equal to its respective Market Share” for that year.4 

The Florida Settlement Agreement and the other PSS settlement agreements have no 

provisions requiring the assumption of settlement payment obligations upon the 

transfer of cigarette brands, nor is there any mechanism for a transferee to join those 

agreements.

Like the PSS settlement agreements, the Master Settlement Agreement 

requires that the manufacturers make annual payments based on their volume of 

sales in the year to which the payment relates.5 Unlike the PSS settlement 

agreements, the Master Settlement Agreement provides in Section XVIII(c) that a 

party may not transfer any of its products covered by the agreement to a nonparty, 

unless the nonparty assumes the party’s obligations under the Master Settlement 

Agreement before the transfer occurs: 

 

3 Compl. (Dkt. 1) Ex. 4. §§ II.B.1-3.

4 Compl. (Dkt. 1) Ex. 4 § II.B.3; 1998 Amend. § 7.

5 Defs.’ Answer and Verified Countercl. (hereafter, “Answer”) (Dkt. 30) ¶ 26; Compl. (Dkt. 

1) Ex. 5 § IX(c). 
6

No Original Participating Manufacturer may sell or otherwise transfer 

or permit the sale or transfer of any of its Cigarette brands, Brand 

Names, Cigarette product formulas or Cigarette businesses . . . to any 

person or entity unless such person or entity is an Original Participating 

Manufacturer or prior to the sale or acquisition agrees to assume the 

obligations of an Original Participating Manufacturer with respect to 

such Cigarette brands, Brand Names, Cigarette product formulas or 

businesses.6

B. The Reynolds-Lorillard Merger and Asset Purchase Agreement 

On July 15, 2014, Reynolds American, the parent of Reynolds Tobacco, and 

Lorillard, Inc., the parent of Lorillard Tobacco Company, entered into a merger 

agreement. To facilitate regulatory approval of the merger, Reynolds American and 

ITG Brands entered into an Asset Purchase Agreement dated as of July 15, 2014 

(“Asset Purchase Agreement”), in which Reynolds American agreed to sell four 

cigarette brands (Winston, Salem, Kool, and Maverick) (the “Acquired Tobacco 

Cigarette Brands”) to ITG Brands for approximately $7.1 billion. Both transactions 

closed on June 12, 2015 (as defined above, the “Closing”).

The Asset Purchase Agreement provides that ITG Brands will assume 

liabilities under the Master Settlement Agreement and the PSS settlement 

agreements. The terms for doing so are detailed in an exhibit to the Asset Purchase 

 

6 Compl. (Dkt. 1) Ex. 5 § XVIII(c). 
7

Agreement entitled “Agreed Assumption Terms,” which is part of the Asset 

Purchase Agreement.

7

 

With respect to the Master Settlement Agreement, Section 2.1 of the Agreed 

Assumption Terms provides that “[a]s required by MSA § XVIII(c), [ITG Brands] 

shall assume, as of the Closing, the obligations of an [Original Participating 

Manufacturer] with respect to all of the Acquired Tobacco Cigarette Brands.”8 With 

respect to the PSS settlement agreements, Section 2.2 of the Agreed Assumption 

Terms imposes an obligation on ITG Brands to use its “reasonable best efforts” to 

reach agreements with each of the Previously Settled States, as follows:

[ITG Brands], with the assistance and cooperation of [Reynolds 

American] and Lorillard in communications and negotiations as 

required by the Agreement, shall use its reasonable best efforts to reach 

agreements with each of the Previously Settled States, by which [ITG 

Brands] will assume, as of the Closing, the obligations of a Settling 

Defendant under the PSS Agreement with each such State, with respect 

to the Acquired Tobacco Cigarette Brands, on the same basis as the 

Settling Defendants prior to the Closing. Provided, however, that such 

agreements shall include terms providing either that any direct-pay 

statute (also known as an equity-fee law or NPM-fee law) of a 

Previously Settled State does not apply to the Acquired Tobacco 

Cigarette Brands or that, if [ITG Brands] is required to make payments 

with respect to Acquired Tobacco Cigarette Brands under a direct-pay 

statute (or any distributor or other party is required to make such 

payments with respect to the Acquired Tobacco Cigarette Brands), 

 

7 Compl. (Dkt. 1) Ex. 1 (Asset Purchase Agreement) A-2 (defining the term “Agreement” 

to include the Asset Purchase Agreement and its “Exhibits”). 

8 Compl. (Dkt. 1) Ex. 1 (Asset Purchase Agreement) F-2 § 2.1.
8

[ITG Brands] will receive a credit against otherwise due payments 

under the PSS settlement equal to the full payments made.9

The term “direct-pay statute” in the second sentence of Section 2.2 refers to 

statutes that impose fees on cigarette sales by tobacco manufacturers that have not 

entered into a settlement agreement with the state. Three of the Previously Settled 

States (Minnesota, Mississippi, and Texas) have direct-pay statutes.

10 Florida does 

not. One purpose of the direct-pay statutes is to compensate the state for the costs 

attributable to cigarette use.11

The Agreed Assumption Terms are addressed in the body of the Asset 

Purchase Agreement in Sections 6.19 and 6.20. Both provisions provide that the 

duties specified in the Agreed Assumption Terms apply “both before and after the 

Closing”:

 “As soon as practicable after the date of this Agreement, and both 

before and after the Closing, each of the Parties shall . . . make all 

such communications with and provide all such information to . . . 

the States . . . and take all such other steps . . . as are necessary 

 

9 Compl. (Dkt. 1) Ex. 1 (Asset Purchase Agreement) F-2 § 2.2.

10 See Minn. Stat. § 297F.24, Miss. Code. Ann. § 27-70-5, Texas Health and Safety Code 

§ 161.603. 

11 See Minn. Stat. Ann. § 297F.24 (“The purpose of this fee is to: (1) ensure that 

manufacturers of nonsettlement cigarettes pay fees to the state that are comparable to costs 

attributable to the use of the cigarettes . . .”); Miss. Code. Ann. § 27-70-1 (“The purpose of 

this chapter is to . . . [p]rotect the tobacco settlement agreement, and funding . . . for 

programs that are funded wholly or partly by payments to this state under the tobacco 

settlement agreement . . .”); Tex. Health & Safety Code Ann. § 161.601 (“The purpose of 

this subchapter is to: (1) recover health care costs to the state imposed by non-settling 

manufacturers . . .”). 
9

and/or expedient for the purposes of . . . obtaining the agreement as 

necessary of the States . . . to the Agreed Assumption Terms.”

12

 “. . . each of the Parties undertakes that from and after the date of 

this Agreement and both before and after the Closing it shall . . . 

adhere fully to and not deviate in any respect from the Agreed 

Assumption Terms including in any communications with any of the 

States . . .”13

 “Each of [ITG Brands] and [Reynolds American] further undertakes 

from and after the Closing, to take . . . all such steps as are necessary 

or expedient . . . to cause the Agreed Assumption Terms, as 

applicable, to become fully effective and binding on each of the 

States.”

14

C. ITG Brands’ Efforts to Join the Settlement Agreements

On July 15, 2014, ITG Brands, Reynolds Tobacco, and Lorillard Tobacco 

Company contacted the Attorneys General of all fifty states, informing them that, 

with respect to the transferred brands, ITG Brands would assume the obligations of 

an Original Participating Manufacturer under the Master Settlement Agreement and 

would attempt to join the PSS settlement agreements in Mississippi, Florida, Texas, 

and Minnesota.15 

In June 2015, ITG Brands joined the Mississippi settlement agreement.16 

 

12 Compl. (Dkt. 1). Ex. 1 (Asset Purchase Agreement) § 6.19 (emphasis added). 

13 Id. § 6.20 (emphasis added). 

14 Id.

15 Answer (Dkt. 30) ¶ 37; Compl. (Dkt. 1) Ex. 6. 

16 Answer (Dkt. 30) ¶ 39; Compl. (Dkt. 1) Ex. 8. 
10

On June 8, 2015, ITG Brands sent letters to Florida, Texas, and Minnesota, 

indicating its willingness to join the PSS settlement agreements governing those 

states.

17

 In its letters to Texas and Minnesota, ITG Brands stated that if no joinder 

was in place when the Closing occurred, ITG Brands would make statutory 

payments on the Acquired Tobacco Cigarette Brands from that point forward.18 ITG 

Brands did not join the Texas and Minnesota settlement agreements before the 

Closing, but alleges that it has been making statutory payments to Texas and 

Minnesota since then.

19

ITG Brands did not join the Florida Settlement Agreement before the Closing 

and has made no payments to Florida since it purchased the Acquired Tobacco 

Cigarette Brands. In December 2015, about six months after the Closing, Florida 

and ITG Brands discussed the possibility of ITG Brands joining the Florida 

Settlement Agreement, but the parties did not reach an agreement.20 On January 11, 

2017, representatives from ITG Brands and Reynolds met with Florida to “discuss 

the potential resolution of the payment issues under the Florida Settlement 

Agreement,” but those meetings were unsuccessful.21 

 

17 Answer (Dkt. 30) ¶ 42; Compl. (Dkt. 1) Exs. 9, 10, 11. 

18 Answer (Dkt. 30) ¶ 42; Compl. (Dkt. 1) Exs. 10, 11. 

19 Compl. (Dkt. 1) ¶¶ 42-43, 45. 

20 Compl. (Dkt. 1) Ex. 14. 

21 Compl. (Dkt. 1) Ex. 15. 
11

Reynolds Tobacco is a defendant in a Florida state court action that was filed 

by the state of Florida. On January 18, 2017, Florida filed a motion seeking to join 

ITG Brands as a defendant and to enforce the Florida Settlement Agreement against 

both Reynolds Tobacco and ITG Brands to recover annual payments for postClosing sales of the Acquired Tobacco Cigarette Brands.

22

 According to the motion, 

Florida “is presently owed more than $45 million and will continue to suffer annual 

losses of approximately $30 million absent the Court’s enforcement of the 

Settlement Agreement it approved and adopted more than 20 years ago.”23 The 

motion also states that “Reynolds made its proportionate share of the annual 

payments under the terms of the Settlement Agreement for nearly two decades, until 

recently when it sold [four] of its most iconic cigarette brands to ITG for $7 billion 

in cash consideration plus ITG’s assumption of certain liabilities.”24

II. PROCEDURAL HISTORY

On February 17, 2017, ITG Brands filed this action asserting five claims for 

injunctive and declaratory relief. That same day, ITG Brands filed a motion for a 

temporary restraining order to enjoin Reynolds from pursuing their claims against 

ITG Brands in the Florida action based on an exclusive Delaware forum provision 

 

22 Answer (Dkt. 30) ¶ 55; Compl. (Dkt. 1) Ex. 16 at 1, 21. 

23 Compl. (Dkt. 1) Ex. 16 at 1. 

24 Id. at 2. 
12

in the Asset Purchase Agreement. The Court granted that motion, in part, on March 

1, 2017. 

On May 16, 2017, ITG Brands filed a motion for partial judgment on the 

pleadings on Count II of its complaint, seeking a declaration that any obligation ITG 

Brands owed to use its reasonable best efforts to reach an agreement with Florida to 

join the Florida Settlement Agreement terminated at the Closing. On June 23, 2017, 

Reynolds filed a cross-motion for partial judgment on the pleadings, seeking a 

declaration that ITG Brands’ duty to use its reasonable best efforts to reach an 

agreement with Florida to join the Florida Settlement Agreement did not terminate 

due to the Closing. 

III. ANALYSIS

A. Legal Standards

This Court will grant a motion for judgment on the pleadings when there are 

no material issues of fact and the movant is entitled to judgment as a matter of law.25 

Judgment on the pleadings “is a proper framework for enforcing unambiguous 

contracts because there is no need to resolve material disputes of fact.”26

 

25 Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199, 

1205 (Del. 1993).

26 Lillis v. AT&T Corp., 904 A.2d 325, 329-30 (Del. Ch. 2006) (internal citations and 

quotations omitted). 
13

“When analyzing a contract on a motion for judgment on the pleadings, this 

Court will grant such a motion only if the contract provisions at issue are 

unambiguous.”27 “Ambiguity does not exist simply because the parties disagree

about what the contract means . . . Rather, contracts are ambiguous when the 

provisions in controversy are reasonably or fairly susceptible of different 

interpretations or may have two or more different meanings.”28

The Asset Purchase Agreement, which includes the Agreed Assumption 

Terms, is governed by Delaware law.29 Under Delaware law, courts are required to 

give unambiguous contract terms their plain meaning, without regard to extrinsic 

evidence.30 Delaware law also “adheres to the objective theory of contracts, i.e., a 

contract’s construction should be that which would be understood by an objective, 

reasonable third party.”31 When interpreting a contract, this Court “will give priority 

to the parties’ intentions as reflected in the four corners of the agreement,” 

construing the agreement as a whole and giving effect to all of its provisions.32

 

27 Cooper Tire & Rubber Co. v. Apollo (Mauritius) Holdings Pvt. Ltd., 2013 WL 5787958, 

at *4 (Del. Ch. Oct. 25, 2013). 

28 Id. (internal citations and quotations omitted). 

29 Compl. (Dkt. 1) Ex. 1 (Asset Purchase Agreement) § 12.12.

30 Norton v. K-Sea Transp. Partners, L.P., 67 A.3d 354, 360 (Del. 2013).

31 Salamone v. Gorman, 106 A.3d 354, 367-368 (Del. 2014) (citing Osborn ex rel. Osborn 

v. Kemp, 991 A.2d 1153, 1159 (Del. 2010)). 

32 Id. (citing GMG Capital Inv., LLC. v. Athenian Venture Partners I, L.P., 36 A.3d 776, 

779 (Del. 2012)). 
14

In interpreting contract language, “[c]lear and unambiguous language . . . 

should be given its ordinary and usual meaning.”33 Courts also may look to the 

grammatical construction of a contractual provision to discern its meaning.34 

B. Reynolds’ Interpretation of Section 2.2 is Supported by the Plain 

Language of the Asset Purchase Agreement

Reynolds contends that the phrase “prior to the Closing” as used in Section 

2.2 of the Agreed Assumption Terms is part of a clause that defines the nature of the 

obligations that ITG Brands agreed to assume with each of the Previously Settled 

States (i.e., the same obligations Reynolds Tobacco had with each of those states 

“prior to the Closing”) and that the phrase thus did not impose a hard stop on ITG 

Brands’ obligation to use its reasonable best efforts to reach an agreement with 

Florida. According to Reynolds, ITG Brands’ obligation to reach an agreement with 

Florida remains in place until ITG Brands actually has expended its reasonable best 

 

33 Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006) (quoting 

Rhone-Poulenc Basic Chem. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1195 (Del. 

1992)). 

34 See, e.g. Paul v. Deloitte & Touch, LLP, 974 A.2d 140, 146 (Del. 2010) (resolving 

grammatical dispute to determine the clear and unambiguous meaning of a contractual 

provision); see also Viking Pump, Inc. v. Liberty Mut. Ins. Co., 2007 WL 1207107, at 17 

n.97 (Del. Ch. Apr. 2, 2007, revised Apr. 13, 2007) (Strine, V.C.) (quoting Wirth & Hamid 

Fair Booking, Inc. v. Wirth, 192 N.E. 297, 300 (1934)) (“[P]unctuation and grammatical 

construction are reliable signposts in the search for contractual intent.”); 11 Williston on 

Contracts § 32:9 (4th ed.) (“Courts often pay attention to grammar and punctuation in 

determining the proper interpretation of a contract.”).
15

efforts to do so. In making this argument, Reynolds primarily relies on the 

grammatical construction and structure of Section 2.2. 

The first sentence of Section 2.2 of the Agreed Assumption Terms provides, 

in relevant part, that: 

[ITG Brands], with the assistance and cooperation of [Reynolds 

American] and Lorillard in communications and negotiations as 

required by the Agreement, shall use its reasonable best efforts to reach 

agreements with each of the Previously Settled States, by which [ITG 

Brands] will assume, as of the Closing, the obligations of a Settling 

Defendant under the PSS Agreement with each such State, with respect 

to the Acquired Tobacco Cigarette Brands, on the same basis as the 

Settling Defendants prior to the Closing.

35

This sentence consists of an independent clause and a dependent clause.36 The 

independent clause, which expresses a complete thought, appears at the beginning 

of the sentence: “[ITG Brands], with the assistance and cooperation of [Reynolds 

American] and Lorillard in communications and negotiations as required by the 

Agreement, shall use its reasonable best efforts to reach agreements with each of the 

Previously Settled States . . .” The dependent clause, which does not express a 

complete thought, comprises the latter part of the sentence: “. . . by which [ITG 

 

35 Compl. (Dkt. 1) Ex. 1 (Asset Purchase Agreement) F-2 § 2.2. 

36 “An independent clause is one that contains a subject and a predicate and makes sense 

standing alone, that is, it expresses a complete thought.” Hamilton v. Werner Co., 268 F. 

Supp. 2d 1085, 1088 (S.D. Iowa 2003) (citing Kenneth G. Wilson, The Columbia Guide to 

Standard American English 243 (1993)). “A dependent clause is a subject-verb 

construction that could not stand alone as a sentence.” Bryan A. Garner, The Redbook: A 

Manual on Legal Style § 1.6(d) (2d. ed. 2006). 
16

Brands] will assume, as of the Closing, the obligations of a Settling Defendant under 

the PSS Agreement with each such State, with respect to the Acquired Tobacco 

Cigarette Brands, on the same basis as the Settling Defendants prior to the Closing.” 

The first, independent clause requires ITG Brands to “use its reasonable best 

efforts to reach agreements with each of the Previously Settled States.” The second, 

dependent clause describes the nature of the “agreements” to be reached. 

Specifically, under the PSS settlement agreements, ITG Brands will assume, as of 

the Closing, the same obligations that the Settling Defendants had prior to the 

Closing.37 In other words, Section 2.2 provides that, when ITG Brands assumes the 

obligations of the Settling Defendants, it will step into the shoes that Reynolds 

Tobacco occupied prior to the Closing. Thus, the phrase “prior to the Closing” is a 

time reference that adds precision to the nature of the obligations that ITG Brands 

agreed to use its reasonable best efforts to assume with each of the Previously Settled 

States. 

This interpretation is consistent with the “nearest-reasonable-referent canon,”

which provides that a modifying phrase “normally applies only to the nearest 

reasonable referent.”

38

 Here, the nearest reasonable referent to “prior to the Closing” 

 

37 As discussed below, the obligation to assume the “same” obligations that the Settling 

Defendants had prior to the Closing is subject to the proviso in the second sentence of 

Section 2.2.

38 Parm v. Nat’l Bank of Cal., N.A., 835 F.3d 1331, 1336 (11th Cir. 2016) (quoting Antonin 

Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 153 (2012)); 
17

is the immediately preceding language “on the same basis as the Settling 

Defendants,” not the phrase “shall use its reasonable best efforts” that appears fifty 

words earlier in a separate clause. 

ITG Brands acknowledges that the nearest-reasonable referent canon is an

accepted canon of contract construction but argues that “on the same basis as the 

Settling Defendants” is not a reasonable referent. I disagree. The phrase “prior to 

the Closing” adds precision to the nature of the obligations that ITG Brands agreed 

to use its reasonable best efforts to assume. By serving as a time reference for the 

language immediately preceding it, the phrase makes clear that ITG Brands will step

into the shoes that the Settling Defendants occupied before the Closing and not as of 

some other point in time.

39

 

 

see also U.S. Fire Ins. Co. v. Kelman Bottles, 538 Fed. Appx. 175, 180 (3d Cir. 2013) 

(same).

39 ITG Brands argues that “Reynolds’ interpretation reads more ambiguity into the contract 

since the term ‘prior to [the] Closing’ is not a specific date and therefore could mean the 

obligations that existed at any time ‘prior to [the] Closing’” and that if “the parties agreed 

that the term ‘prior to [the] Closing’ refers only [to] the scope of the obligations . . . they 

would have used ‘at closing.’” Pl. Reply Br. (Dkt. 54) 10. Use of the phrase “at closing” 

to define the nature of the obligations to be assumed would not be a clear solution, however.

It could be argued that Reynolds American already had transferred the Acquired Tobacco 

Cigarette Brands to ITG Brands “at” the Closing and thus no longer had any obligations 

with respect to those brands. Perhaps the parties could have used somewhat more precise 

language when drafting Section 2.2, such as “immediately prior to the Closing.” No 

principled reason has been advanced, however, why one seriously would think that ITG 

Brands should assume obligations under the Florida Settlement Agreement that existed at 

some earlier point in time but had been modified before the Closing. That is not to say that 

the inclusion of a time reference to define the obligations to be assumed was unnecessary—

such a reference certainly is necessary for precision—but just that the “Court will not 
18

By contrast, the referent ITG Brands proposes is not reasonable and would 

give “unjustifiably expansive modifying power” to the modifier “prior to the 

Closing.”40 ITG Brands asks the Court to find that the phrase “prior to the Closing” 

jumps over the action of the clause in which it appears to modify an action that 

appears fifty words earlier in a separate clause. But it is more natural to give the 

sentence an orderly grammatical sense, in which the independent clause is set forth 

in full and then the dependent clause is set forth in full, rather than finding that “prior 

to the Closing” modifies an action that appears in a separate clause.

Construing the phrase “prior to the Closing” to define the nature of the 

obligations that ITG Brands agreed to assume also is consistent with how the second 

sentence in Section 2.2 operates. That sentence states, as follows: 

Provided, however, that such agreements shall include terms providing 

either that any direct-pay statute (also known as an equity-fee law or 

NPM-fee law) of a Previously Settled State does not apply to the 

Acquired Tobacco Cigarette Brands or that, if [ITG Brands] is required 

to make payments with respect to Acquired Tobacco Cigarette Brands 

under a direct-pay statute (or any distributor or other party is required 

to make such payments with respect to the Acquired Tobacco Cigarette 

Brands), [ITG Brands] will receive a credit against otherwise due 

payments under the PSS settlement equal to the full payments made.41 

 

manufacture an ambiguity where one does not exist.” See, e.g. Julian v. Julian, 2010 WL 

1068192, at *8 (Del. Ch. Mar. 22, 2010). 

40 See U.S. Fire Ins. Co., 538 F. App’x at 180 (explaining that, by overlooking six words 

separating a modifier from its supposed referent, “the District Court gave an unjustifiably 

expansive modifying power to” the modifier).

41 Compl. (Dkt. 1) Ex. 1 (Asset Purchase Agreement) F-2 § 2.2 (emphasis added).
19

The second sentence is a proviso, i.e., “a clause that introduces a condition by the 

word provided.”42 A proviso “conditions the principal matter that it qualifies,” 

which is “almost always the matter immediately preceding.”43 

Here, the proviso makes clear that, if a Previously Settled State has a directpay statute, ITG Brands is entitled to obtain contractual protection against making 

double payments on the Acquired Tobacco Cigarette Brands, i.e., either the state will 

agree to exempt ITG Brands from the direct-pay statute or will give it a credit for 

any payments it makes under the statute. Significantly, the proviso addresses the 

nature of the obligations that ITG Brands agreed to assume with each of the 

Previously Settled States. As such, because the proviso qualifies the immediately 

preceding dependent clause where the phrase “prior to the Closing” appears, it is 

logical to interpret that preceding clause in parallel fashion as also addressing the 

nature of the obligations ITG Brands must seek to assume. ITG Brands has offered 

no substantive response to this point.

Finally, Reynolds asserts that, in addition to the plain language of Section 2.2

itself, Sections 6.19 and 6.20 of the Asset Purchase Agreement support the 

conclusion that ITG Brands’ obligation to use its reasonable best efforts to reach an 

 

42 Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 154 

(2012). 

43 Id. 
20

agreement with Florida did not terminate at the Closing. Those provisions expressly 

require the parties to take action “both before and after the Closing” to comply with 

the Agreed Assumption Terms, in which Section 2.2 appears. Specifically, Section 

6.19 provides, in relevant part, that:

. . . both before and after the Closing, each of the Parties shall . . . take 

all such other steps . . . as are necessary and/or expedient for the 

purposes of . . . (c) obtaining the agreement as necessary of the States 

. . . to the Agreed Assumption Terms.44 

Section 6.20 similarly provides, in relevant part, that: 

. . . each of the Parties undertakes that from and after the date of this 

Agreement and both before and after the Closing it shall . . . adhere 

fully to and not deviate in any respect from the Agreed Assumption 

Termsincluding in any communications with any of the States. . . Each 

of [ITG Brands] and [Reynolds American] further undertakes from and 

after the Closing, . . . to take all such steps as are necessary or expedient 

. . . to cause the Agreed Assumption Terms, as applicable, to become 

fully effective and binding on each of the States.45 

“[W]ell established canons of contract interpretation require courts to read a 

contract as a whole.”46 “In giving sensible life to a real-world contract, courts must 

read the specific provisions of the contract in light of the entire contract.”47 Reading 

 

44 Compl. (Dkt. 1) Ex. 1 (Asset Purchase Agreement) § 6.19 (emphasis added). 

45 Id. § 6.20 (emphasis added). 

46 Am. Legacy Found. v. Lorillard Tobacco Co., 831 A.2d 335, 344 n.37 (Del. Ch. 2003),

aff’d sub nom. Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 731 (Del. 

2006); see also Northwestern Nat’l Ins. Co. v. Esmark, Inc., 672 A.2d 41, 43 (Del. 1996) 

(“Contracts must be construed as a whole, to give effect to the intentions of the parties.”). 

47 Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC, 166 A.3d 912, 913-14 

(Del. 2017).
21

Section 2.2 in light of the “both before and after the Closing” language in Sections 

6.19 and 6.20 of the Asset Purchase Agreement, it makes sense that the reasonable 

best efforts clause in Section 2.2 also was intended to operate beyond the Closing. 

ITG Brands agrees that Sections 6.19 and 6.20 “encompass and provide 

general obligations that cover the Agreed Assumption Terms as a whole” and “make 

plain that [the parties’] communication and other obligations apply ‘both before and 

after the Closing.’”

48

 ITG Brands contends, however, that the provisions do not 

apply to Section 2.2 on the theory that the specific language of Section 2.2 trumps 

the more general language of Sections 6.19 and 6.20. I disagree. 

The rule of contractual interpretation that a “specific provision ordinarily 

qualifies the meaning of [a] general one” logically applies where “specific and 

general provisions conflict.”49 But there is no necessary conflict here. As discussed 

above, the plain language of Section 2.2 of the Agreed Assumption Terms compels 

the conclusion that ITG Brands’ obligation to use its reasonable best efforts to reach 

an agreement with Florida did not terminate at the Closing. As such, this provision 

is entirely consistent with Sections 6.19 and 6.20, which expressly provide, among 

other things, that the parties shall cause the Agreed Assumption Terms to become 

fully effective and binding on each of the States “both before and after the Closing.”

 

48 Pl. Reply Br. (Dkt. 54) 7, 23. 

49 DCV Holdings, Inc. v. ConAgra, Inc., 889 A.2d 954, 961 (Del. 2005).
22

* * * * *

For the reasons explained above, the plain language of Section 2.2 supports 

the conclusion that ITG Brands’ obligation to use its reasonable best efforts to reach 

an agreement with Florida to assume Reynolds Tobacco’s obligations under the 

Florida Settlement Agreement for the Acquired Tobacco Cigarette Brands did not 

terminate due to the Closing.50

C. ITG Brands’ Interpretation of Section 2.2 is Unreasonable

ITG Brands argues that the phrase “prior to the Closing” in Section 2.2 defines 

the temporal scope of its obligation to use its reasonable best efforts to reach an 

agreement with Florida. In making this argument, ITG Brands advances its own 

grammatical construction of the provision and contends that its interpretation is 

supported by other provisions of the Asset Purchase Agreement. ITG Brands’ 

interpretation is unreasonable in my view for essentially five reasons. 

First, ITG Brands’ reading of Section 2.2 is based on the premise that the 

phrases italicized below, which consist of text set off by commas in the first sentence 

 

50 Pointing to the fact that ITG Brands seemed to invite post-Closing negotiations with 

three of the Previously Settled States in letters it sent them a few days before the Closing 

(see Compl. (Dkt. 1) Exs. 9-11), Reynolds argues that ITG Brands’ course of conduct is 

inconsistent with its litigation position concerning the meaning of Section 2.2. I do not 

consider this evidence because course of conduct evidence generally is irrelevant to 

construing an unambiguous contract provision. See Eagle Indus., Inc. v. DeVilbiss Health 

Care, Inc., 702 A.2d 1228, 1233 (Del. 1997) (“In construing an ambiguous contractual 

provision, a court may consider evidence of prior agreements and communications of the 

parties as well as trade usage or course of dealing.”) (emphasis added).
23

of Section 2.2, are “nonrestrictive clauses” that could be taken out of the sentence 

without changing its essential meaning:51

[ITG Brands], with the assistance and cooperation of [Reynolds

American] and Lorillard in communications and negotiations as 

required by the Agreement, shall use its reasonable best efforts to 

reach agreements with each of the Previously Settled States, by 

which [ITG Brands] will assume, as of the Closing, the obligations of 

a Settling Defendant under the PSS Agreement with each such State, 

with respect to the Acquired Tobacco Cigarette Brands, on the same 

basis as the Settling Defendants prior to the Closing.

According to ITG Brands, when these nonessential terms are disregarded, the 

remaining text (in bold above) makes clear that the parties intended for the phrase 

“prior to the Closing” to refer back to the obligation to use reasonable best efforts

and to impose a firm deadline on that obligation. ITG Brands then argues that the 

phrase “on the same basis as the Settling Defendants” tells the parties all they need 

to know about what obligations ITG Brands must seek to assume. Under this theory, 

“prior to the Closing” must be a temporal limitation or it would be surplusage.52

“The cardinal rule of contract construction is that, where possible, a court 

should give effect to all contract provisions.”53 This Court thus must “read a contract 

 

51 Pl. Opening Br. (Dkt. 42) 14-15, 14 n.5; see also Tr. 10 (Sept. 11, 2017). 

52 See Tr. 10-11, 35-36, 38-39, 41, 93 (Sept. 11, 2017).

53 Sonitrol Holding Co. v. Marceau Investissements, 607 A.2d 1177, 1184 (Del. 1992) 

(emphasis in original) (citing E.I. du Pont de Nemours & Co., Inc. v. Shell Oil Co., 498 

A.2d 1108, 1114 (Del. 1985)).
24

as a whole and . . . give each provision and term effect, so as not to render any part 

of the contract mere surplusage.”54

A basic flaw in ITG Brands’ argument is that it would render meaningless 

important qualifications in the language of Section 2.2 italicized above. For

example, the italicized language makes clear that the obligations ITG Brands must 

seek to assume only concern the four “Acquired Tobacco Cigarette Brands” 

(Winston, Salem, Kool, and Maverick) and not any of the brands that Reynolds 

Tobacco retained. This qualification is not already embedded in the phrase “on the 

same basis as the Settling Defendants,” which covers the full universe of Reynolds 

Tobacco’s obligations to the Previously Settled States, including its obligation to 

continue making payments on cigarette brands it retained. This qualification is thus 

essential to define accurately the nature of the obligations ITG Brands must seek to 

assume. Similarly, the italicized language is necessary to ensure that the obligations 

are assumed “as of the Closing” and not as of some other time. Because ITG Brands’ 

proffered construction gives no meaning to these important qualifications, its 

construction of Section 2.2 is unreasonable. 

Second, and related to the first point, adopting ITG Brands’ interpretation of 

Section 2.2 would give unjustifiably expansive modifying power to the modifier 

 

54 Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (quoting Kuhn 

Construction, Inc. v. Diamond State Port Corp., 2010 WL 779992, at *2 (Del. Mar. 8, 

2010)).
25

“prior to the Closing,” as discussed above. Apart from its “nonrestrictive clause” 

theory, ITG Brands offers no rule of construction to warrant interpreting Section 2.2 

in such a strained manner as to find that the phrase “prior to the Closing” jumps over 

the action of the clause in which it appears to modify an action that appears fifty 

words earlier in a separate clause. 

To repeat, it is more natural to give the sentence an orderly grammatical 

reading, in which the independent clause is set forth in full and the dependent clause 

is then set forth in full. When the sentence is read in that manner, the phrase “prior 

to the Closing” serves as a necessary time reference for the language immediately 

preceding it to make clear that, with respect to the Acquired Tobacco Cigarette 

Brands, ITG Brands must seek to assume the obligations Reynolds Tobacco owed 

before the Closing and not at some other time. In that way, the provision achieves 

the obvious objective of having ITG Brands step into the shoes that Reynolds 

Tobacco occupied before the Closing.

Third, if the parties wanted “prior to the Closing” to define when ITG Brands’

duty to use its reasonable best efforts would expire, the parties logically would have 

placed that phrase within the independent clause, close to the action they wanted it 

to modify. For example, the provision easily could have been written to state that 

ITG Brands “shall use its reasonable best efforts, prior to the Closing, . . .” This 

formulation would have mirrored another part of the same sentence providing that 
26

ITG Brands “will assume, as of the Closing, the obligations . . .” There, the parties 

placed a modifier (“as of the Closing”) next to a verb (“will assume”) to define when 

that action would occur, demonstrating that they knew how to place a temporal 

modifier on an action when they wished to do so.

55

Fourth, I am unpersuaded by ITG Brands’ argument that its construction is 

supported by other provisions in the Asset Purchase Agreement using the phrase 

“reasonable best efforts.” According to ITG Brands, Section 6.11(b) of the Asset 

Purchase Agreement “uses both ‘reasonable best efforts’ and ‘prior to the Closing’ 

in exactly the same way as Section 2.2 does.”56 The relevant sentence of Section 

6.11(b) states: “Each of the Parties shall use its reasonable best efforts to identify 

and develop Service Descriptions for all Transitional Services prior to the Closing.” 

This sentence, however, consists of a single clause with a simple structure. It is 

nothing like the first sentence of Section 2.2, where “prior to the Closing” appears 

in a dependent clause fifty words away from the action that ITG Brands suggests it 

should modify. Put differently, the phrase “use its reasonable best efforts” is the 

 

55 See Roseton OL, LLC v. Dynegy Holdings Inc., 2011 WL 3275965, at *10 (Del. Ch. July 

29, 2011) (comparing two contractual provisions and noting that the language of the second 

provision “demonstrates that when the parties intended to make a particular restriction 

applicable to both DHI and its subsidiaries, they knew how to do so and readily could 

accomplish that objective”). 

56 Pl. Rely Br. (Dkt. 54) 3.
27

nearest reasonable referent for “prior to the Closing” in Section 6.11(b), but not in 

Section 2.2. 

The only other provision in the Asset Purchase Agreement that ITG Brands 

makes any effort to discuss is Section 2.02(a), which states, in part, that:

[Reynolds American] will, and will cause each of the other Sellers ... 

to, use its and their reasonable best efforts to obtain any consent 

necessary for the transfer or assignment of any such Transferred Asset 

claim, right or benefit to [ITG Brands] at no cost to [ITG Brands] ... If 

on or prior to the Closing Date any such consent is not obtained, . . . (i) 

at the Closing, the Sellers and [ITG Brands] will enter into one or more 

mutually agreeable Contracts under which [ITG Brands] would obtain 

the benefits and assume the obligations and bear the economic burdens 

associated with such Transferred Asset . . . (ii) after the Closing Date, 

[Reynolds American] will, and will cause each of the other Sellers to, 

continue to use its and their reasonable best efforts to obtain any 

consent necessary . . . 

57

This provision, which draws a distinction between obligations owed “at” and “after” 

the Closing, operates very differently than Section 2.2 of the Agreed Assumption 

Terms. Far from aiding ITG Brands, Section 2.02(a) confirms that there is nothing 

remarkable about having a “reasonable best efforts” obligation extend beyond the 

Closing without a specific end-point.

Fifth, ITG Brands’ interpretation would lead to an absurd result in my view. 

Delaware courts avoid adopting “[a]n unreasonable interpretation [that] produces 

an absurd result or one that no reasonable person would have accepted when 

 

57 Compl. (Dkt. 1) Ex. 1 (Asset Purchase Agreement) § 2.02(a).
28

entering the contract.”58 But here, adopting ITG Brands’ reading of Section 2.2 

would have the nonsensical result of incentivizing ITG Brands to stall its discussions 

with Florida until after the Closing in order to avoid making annual payments tied 

to its own sales of cigarette products.59 

The Master Settlement Agreement and PSS settlement agreements were 

intended to provide each of the states with a continuous stream of annual payments 

for “health care costs that those States had paid for their citizens who smoked.”60 

Those annual payments are based on the volume of cigarette sales that occur in that 

year. The obvious purpose of Section 2.2 was to transfer to ITG Brands the payment 

obligations associated with the Acquired Tobacco Cigarette Brands so that the 

payment obligation runs with the party benefiting from the revenues. In my view, 

no reasonable tobacco manufacturer would have agreed to expose itself to the 

prospect of making annual payments to a Previously Settled State for cigarette 

 

58 Osborn, 991 A.2d at 1160. 

59 The obligation in Section 2.2 applies to each of the four Previously Settled States. The 

perverse incentive to stall, however, is most acute in ITG Brands’ discussions with Florida.

Unlike the three other Previously Settled States, Florida does not have a direct-pay statute 

that guarantees a stream of payments based on cigarette sales volume irrespective of a 

contractual assumption of liability. 

60 Answer (Dkt. 30) ¶ 20. 
29

product revenues it no longer receives by incentivizing an acquiror to stall and run 

out the clock.

61

 

ITG Brands admits that its interpretation would create such “an incentive”62

but argues that Reynolds’ reading of Section 2.2 would lead to two other

unreasonable results. ITG Brands first contends that if a PSS settlement agreement 

were amended post-Closing, it would be joining on terms different from those 

binding other signatories.

63

 As an initial matter, this would not be unreasonable. 

The whole point of the time referent “prior to the Closing” in Section 2.2 is to make 

clear which obligations ITG Brands agreed to use its reasonable best efforts to 

assume, i.e., the same ones that governed “the Settling Defendants prior to the 

Closing.” It is not unreasonable to hold ITG Brands to the bargain it struck.64

 

61 This is the predicament in which Reynolds Tobacco now finds itself. Although ITG 

Brands agrees that Reynolds Tobacco should no longer have any obligations with respect 

to the Acquired Tobacco Cigarette Brands “because sales of those brands were no longer 

included in its volume” (Answer (Dkt. 30) ¶ 27), Florida apparently disagrees. It is seeking 

to enforce the Florida Settlement Agreement against both Reynolds Tobacco and ITG 

Brands for those sales. See Answer (Dkt. 30) ¶ 55; Compl. (Dkt. 1) Ex. 16, 1.

62 Tr. 51. 

63 Pl. Reply Br. (Dkt. 54) 9-13. 

64 ITG Brands’ concern also seems imaginary. If Reynolds Tobacco amended a PSS 

settlement agreement post-Closing in some beneficial way for the brands it retained, it is 

hard to imagine that the state involved would not agree to comparable terms with ITG 

Brands for the brands it acquired. And, if Reynolds Tobacco were to amend a PSS 

settlement agreement post-Closing in some manner that ITG Brands viewed to be adverse, 

ITG Brands undoubtedly would prefer not to be bound to use its reasonable best efforts to 

agree to such an amendment with respect to the Acquired Tobacco Cigarette Brands. 
30

ITG Brands’ second contention is that Reynolds’ interpretation of Section 2.2 

would mean that ITG Brands’ obligation to use its reasonable best efforts would go 

on “potentially forever.”65 This argument is without merit. A duty to use reasonable 

best efforts is not limitless in time but simply requires that one actually expend 

reasonable best efforts, which is a question of fact.

66

 Indeed, as discussed above, 

ITG Brands expressly agreed in at least one other provision of the Asset Purchase 

Agreement (Section 2.02(a)) to use its reasonable best efforts after the Closing and 

thus cannot be heard to suggest that undertaking such an obligation would lead to an 

unreasonable result. 

* * * * *

For the reasons explained above, the plain language of Section 2.2 does not 

support the conclusion that ITG Brands’ obligation to use its reasonable best efforts 

terminated at the Closing, an interpretation I find to be unreasonable. 

 

65 Pl. Opening Br. (Dkt. 42) 17.

66 See Williams Co., Inc. v. Energy Transfer Equity, L.P.,159 A.3d 264, 273 (Del. 2017)

(“reasonable best efforts” covenants impose “an affirmative obligation” to “take all 

reasonable steps to solve problems and consummate the [contemplated] transaction”); 

Lewes Inv. Co. v. Estate of Graves, 2013 WL 508486, at *17 (Del. Ch. Feb. 12, 2013), 

aff’d, 74 A.3d 654 (Del. 2013) (“What constitutes a ‘reasonable time’ is a question of fact, 

dependent on the circumstances of the case.”).
31

IV. CONCLUSION

As explained above, Reynolds’ interpretation of Section 2.2 is supported by 

the plain and unambiguous language of that provision, but ITG Brands’ 

interpretation is not. Accordingly, Reynolds’ motion for partial judgment on the 

pleadings is granted, and ITG Brands’ cross-motion is denied. In holding that ITG 

Brands’ obligation under Section 2.2 to use its reasonable best efforts did not 

terminate due to the Closing, the Court expresses no view on whether or not such 

efforts have been expended, which is a fact question that must be decided on an 

appropriate record. The parties are directed to submit a form of order implementing 

this decision within five business days.

IT IS SO ORDERED.