On January 28, 2021, the Delaware Court of Chancery (“Court”) decided in Swipe Acquisition Corp. v. Peter M. Krauss et al. Civil Action No. 2019-0509-PAF (Del. Ch. Jan. 28, 2021) that a Delaware choice of law provision did not preclude a party from asserting a claim under the California Securities Act as otherwise would be contrary to California public policy.
The basic fact is as follows. PLI Holdings, Inc. (“PLI”) was a North Carolina corporation owned by the defendants. Plaintiff Swipe Acquisition Corporation (“Swipe”) is a Delaware corporation, physically located in California. PLI, Swipe and defendants executed certain Stock Purchase Agreement (“SPA”), pursuant to which Swipe purchased shares of PLI from defendants. The SPA contained certain representations regarding PLI’s knowledge of anticipated business from its customers. The SPA also contained a provision choosing Delaware law as the governing law.
Swipe, after learning that defendants did not disclose to it that PLI was losing a major customer, brought suit against defendants claiming, among others, breach of California Securities Act, which makes it unlawful for any person to offer or sell a security in this state by means of any communication that includes a material misstatement or omission. Defendants contended that the claim should be dismissed because the choice of law provision in the SPA precluded plaintiff from asserting claim under the California Securities Act.
The Court held that Delaware is generally supportive of choice of law provisions, however, there is a narrow exception, that is if the enforcement of choice of law provisions would be contrary to fundamental policy of a state whose law would apply but for the choice of law provisions.
The Court recognized that it is a California public policy that the enforcement of a choice of law provision must not diminish a plaintiff’s statutory rights. The Court further analyzed that in the absence of the choice of law provision, Swipe could sue under the California Securities Act, but if Delaware law applied, then Swipe would not be able to sue under Delaware Securities Act because there was not a sufficient nexus between Delaware and the transaction contemplated by the SPA. Thus, the Court denied the enforcement of the Delaware choice of law because the enforcement would diminish Swipe’s statutory rights under the California Securities Act.