Choice of Law Provision Did Not Waive Plaintiff’s Claim

Bizar Male

In Swipe Acquisition Corp. v. Krauss, CA No. 2019-0509-PAF, 2021 WL 282642 (Del. Ch. Jan. 28, 2021), the Delaware Court of Chancery held that California public policy prohibited a purported waiver of a contractual party’s right to assert a claim under the California Securities Act by reason of a Delaware choice of law provision in the parties’ stock purchase agreement.  Delaware courts will not enforce a choice of law provision if it would be contrary to a fundamental policy of the state whose law would apply but for the choice of law provision (here, California).  California law prohibits contractual waivers of the California Securities Act unless the party seeking to enforce the waiver can show that it will not diminish the plaintiff’s statutory rights under California law.  The Court held that because the plaintiff could not assert a claim under the Delaware Securities Act (due to a lack of nexus with Delaware), and none of the plaintiff’s other claims would provide the same as or greater rights than its California Securities Act claim, enforcing the choice of law provision would be contrary to California’s public policy.  Swipe Acquisition thus further defines the contours of a party’s ability to waive its rights under the California Securities Act by way of a choice of law provision.

PLI Holdings, Inc. (“PLI”) was a North Carolina corporation headquartered in Nevada and entirely owned by the defendants.  Plaintiff Swipe Acquisition Corporation (“Swipe”) is a Delaware corporation that was formed to acquire PLI.  On May 30, 2018, PLI, Swipe and the defendants executed a Stock Purchase Agreement (“SPA”) whereby Swipe acquired 100% of PLI.  The SPA included the following relevant provisions: (1) representations and warranties about the Company’s knowledge of anticipated business from its customers; (2) an indemnification provision requiring defendants to indemnify losses resulting from any breach of the representations or warranties by the Company or defendants; and (3) a choice of law provision requiring the application of Delaware law.  In May 2019, Swipe delivered a notice of its claim for indemnification asserting that PLI and defendants had breached their representations and warranties by concealing the loss of an important customer.  Defendants denied Swipe’s indemnification claim.

Swipe then filed a complaint in the Court of Chancery asserting four causes of action: (1) breach of contract; (2) indemnification for breach of the representation and for fraud; (3) common law fraud; and (4) violation of the California Securities Act.  Defendants moved to dismiss, arguing (among other things) that the Delaware choice of law provision effected a waiver of Swipe’s right to assert a claim under the California Securities Act.

The Chancery Court held that the Delaware choice of law provision of the SPA could “reasonably be construed to waive the right to assert any non-Delaware law claims relating to the SPA, which would include” a claim under the California Securities Act.  However, the Court then then noted that, regardless, Delaware recognizes a “narrow exception” to the enforceability of choice-of-law provisions.  Delaware courts will not enforce a choice of law provision if it would be contrary to a fundamental policy of the state whose law would apply but for the choice of law provision.

After holding that the plaintiff had adequately pled a claim under the California Securities Act, the Court analyzed whether waiver of the claim would be contrary to California’s public policy.  The Court noted that under California law a litigant seeking to enforce a choice-of-law provision must show that “the foreign forum provides the same or greater rights than California.”  The Chancery Court therefore analyzed whether enforcing the choice of law provision would diminish the plaintiff’s California statutory rights.  The defendants argued that the plaintiff’s statutory rights would not be diminished because the Delaware and California Securities Acts are substantively identical.  However, the Court held that the plaintiff could not assert a claim under the Delaware Securities Act because under the facts alleged there was not “a sufficient nexus” between Delaware and the merger transaction at issue to permit application of the Delaware Securities Act.  Thus, the Court concluded that, because none of the plaintiff’s other claims would provide the same or greater rights than its California Securities Act claim, enforcing the choice of law provision would be contrary to California’s public policy.

Swipe Acquisition affirms the standard under Delaware law for enforcing a choice of law provision and elucidates the Court of Chancery’s view on California public policy with respect to California Securities Act claims.  Parties should be cognizant when including a Delaware choice of law provision that doing so will not bar California securities law claims unless the plaintiff could instead plead a Delaware securities law claim, and such a provision may also be ineffective at barring claims based on other states’ securities laws as well.


Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.
National Law Review, Volume XI, Number 55

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