Court Of Chancery Rules Delaware Choice Of Law Does Not Defeat California Securities Law Claim

What happens when a fundamental policy collides with an unwaivable right?  At bottom, that was the question before Vice Chancellor Paul A. Fioravanti, Jr.  in Swipe Acquisition Corp. v. Krauss, 2021 Del. Ch. LEXIS 14.  In that case, the fundamental policy is Delaware's commitment to upholding freedom of contract:"


"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. 

The unwaivable right is found in California's Corporate Securities Law of 1968:

"Any condition, stipulation or provision purporting to bind any person acquiring any security to waive compliance with any provision of this law or any rule or order hereunder is void."

Cal. Corp. Code § 25701.  

The dispute arose from Swipe's purchase of PLI Holdings, Inc.   The Stock Purchase Agreement included a choice of law provision that broadly required that all claims or causes of action be governed by, and enforced in accordance with, the internal laws of Delaware.  The defendant sellers argued that this provision required dismissal of Swipe's claim for securities fraud under California Corporations Code Section 25401. 

After finding that Swipe's complaint adequate pled a violation of Section 25401, Vice Chancellor Fioravanti found the following:

  • Under California law, a party seeking to enforce a choice-of-law clause bears the burden to show that enforcement will not in any way diminish unwaivable statutory rights; and
  • Enforcing the choice of law provision would diminish Swipe's statutory rights.

Notably, the Vice Chancellor found that the fact that Delaware has a securities law does not mean that Swipe is able to assert a claim under Delaware law.   Parties cannot provide for the application of Delaware's securities law by agreement.  Rather,  there must be a sufficient nexus between Delaware and the transaction at issue.  In this case, Swipe was located in California and a "key meeting" took place here.  Further, the record did not reflect that any negotiations took place anywhere else.  

An interesting intellectual exercise is to compare the result in this case with the result in Charney v. Std. Gen., L.P., 2021 Cal. App. Unpub. LEXIS 26 in which a California Court of Appeal found that the plaintiff failed to show that his unwaivable rights under section 25701 would be diminished by enforcing the forum selection clauses.