Delaware Court Of Chancery Holds That A Contractual Delaware Choice Of Law Provision Did Not Waive Plaintiff’s Claim Under The California Securities Act – Corporate/Commercial Law

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Delaware Court Of Chancery Holds That A Contractual Delaware Choice Of Law Provision Did Not Waive Plaintiff’s Claim Under The California Securities Act


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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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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