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Delaware Choice of Law Provision in Stock Purchase Agreement Does Not Eliminate Claim for Fraud under California Securities Act

Swipe Acquisition Corp. v. Krauss, C.A. No. 2019-0509-PAF (Del. Ch. Jan. 28, 2021)

This decision concerned a motion to dismiss a claim for fraud under the California Securities Act, which the defendants argued was waived by a choice of law provision in the parties’ stock purchase agreement (“SPA”) indicating that “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 … shall be governed by, and enforced in accordance with, the internal laws of the State of Delaware, including its statutes of limitations.”

Plaintiff was located in California, and alleges the injury took place there. The only alleged negotiation over the SPA occurred in California. The Court of Chancery noted that California, as a matter of stated public policy written into Section 25701 of its Securities Act, rejects the possibility of waiving the protections of the statute: “Any condition, stipulation or provision purporting to bind any person acquiring any security to waive compliance with any provision of [the California Securities Act] or any rule or order hereunder is void.” California decisional law creates an exception where the choice of law would not diminish the claimant’s statutory rights by providing the same or greater rights. The defendants contended this applied because Delaware also has a Securities Act. 

Consistent with earlier decisions and conflict of laws analyses, the Court concluded that a Delaware choice of law provision, whether it be in a merger agreement or in a stock purchase agreement, does not incorporate every provision of Delaware statutory law into the commercial relationship between the parties. Although Delaware has a Securities Act, it has a limited territorial reach and may not be invoked absent a significantly close relationship with Delaware, which a choice of law clause standing alone does not provide. Plaintiff was allowed to proceed with its California statutory securities fraud claim.

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