Reed Smith Client Alerts

The Delaware Court of Chancery, in Swipe Acquisition Corp. v. Krauss, No. 2019-0509-PAF, 2021 WL 282642 (Del. Ch. Jan. 28, 2021), recently declined to enforce a choice-of-law provision in a stock purchase agreement that designated Delaware law as the exclusive law, because the court held that California public policy prohibited a purported waiver of a contractual party’s right to assert a claim under the California Securities Act. The Court of Chancery’s decision in Swipe Acquisition demonstrates that 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). Commercial parties and their advisors should carefully consider the potential that Delaware law, which is often selected as the exclusive law in connection with mergers and acquisitions, may not be enforced based on public policy concerns in light of the court’s reasoning in Swipe Acquisition.

Authors: Brian M. Rostocki Benjamin P. Chapple Alexandria P. Murphy

Background

The plaintiff, Swipe Acquisition Corporation (Swipe), is a Delaware corporation that was formed to acquire a North Carolina corporation headquartered in Nevada and owned by the defendants, specifically, PLI Holdings, Inc. (PLI). On May 30, 2018, Swipe and the defendants executed a stock purchase agreement (the SPA) under which Swipe acquired 100 percent of PLI. Under the SPA, the defendants agreed to provide indemnification for losses resulting from any breach of PLI’s or the defendants’ representations and warranties under the SPA. The SPA included a choice-of-law provision requiring the application of Delaware law to the SPA and any claims relating to the SPA:

This Agreement, and all claims or causes of action (whether in contract, tort or statute) that may be based upon, arise out of or relate to this Agreement, or the negotiation, execution or performance of this Agreement (including any claim or cause of action based upon, arising out of or related to any representation or warranty made in or in connection with this Agreement or as an inducement to enter into this Agreement), shall be governed by, and enforced in accordance with, the internal laws of the State of Delaware, including its statutes of limitations.

2021 WL 282642, at *3 (emphasis added). In May 2019, Swipe asserted that PLI and the defendants had breached their representations and warranties by concealing the loss of an important customer, and Swipe delivered a notice to the defendants of its claim for indemnification. However, the defendants denied Swipe’s indemnification claim.

On June 28, 2019, Swipe filed a complaint in the Delaware 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. The defendants moved to dismiss and argued, among other things, that the Delaware choice-of-law provision constituted a waiver of Swipe’s right to assert a claim under the California Securities Act. The court, in large part, denied the defendants’ motion as to counts 1, 2, and 3, and requested the parties to submit supplemental briefing regarding the defendants’ argument that Swipe could not permissibly rely on California law due to the SPA’s Delaware choice-of-law provision.

The court’s ruling

The Court of Chancery rejected the defendants’ argument based on the allegations in the complaint, and denied the defendants’ request to dismiss Swipe’s claim under the California Securities Act. The court explained that “[u]pholding freedom of contract is a fundamental policy of [Delaware]” and “Delaware law is ‘generally supportive of choice-of-law provisions.’” (quoting Ascension Ins. Holdings, LLC v. Underwood, 2015 WL 356002, at *4, *2 (Del. Ch. 2015). Citing 6 Del. C. § 2708, the court stated:

“Upholding freedom of contract is a fundamental policy of this state.” That contractual freedom also extends to selecting the law that governs the parties’ relationship, which is codified by statute [under 6 Del. C. § 2708]:

The parties to any contract, agreement or other undertaking...may agree in writing that the contract, agreement or other undertaking shall be governed by or construed under the laws of this State, without regard to principles of conflict of laws, or that the laws of this State shall govern, in whole or in part, any or all of their rights, remedies, liabilities, powers and duties....

6 Del. C. § 2708. “At its core, Section 2708 is intended to provide certainty to parties who are subject to jurisdiction in Delaware that their choice of Delaware law governing the construction and enforceability of their contracts will be respected.”

2015 WL 356002, at *4 (citation omitted). The court held that the Delaware choice-of-law provision in 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. Id. at *4–5. The court’s analysis favored the defendants’ argument for dismissal.