In a recent letter ruling, Vice Chancellor Fioravanti held that a stock purchase agreement’s choice of law provision did not bar the plaintiff from asserting securities fraud claims under the California Securities Act.
The stock purchase agreement’s choice of law provision said that Delaware law would govern the agreement and “all claims or causes of action (whether in contract, tort or statute).” The plaintiff, which was located in California, brought a claim under the California Securities Act, which includes provisions barring the waiver of any of the statute’s protections. A judicial exception to this non-waiver provision has been created that requires a party asserting a choice of law provision to show that its “enforcement will not in any way diminish the plaintiff’s unwaivable statutory rights” by “showing the foreign forum provides the same or greater rights than California.”
The defendants asserted that because Delaware has a blue sky statute substantially similar to California’s statute, Delaware provided the same or greater rights to the defendant. This Morris James blog says that the Vice Chancellor rejected that argument:
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.
The Vice Chancellor cited prior Delaware case law holding that that a choice-of-law provision was not sufficient to permit a claim under the Delaware Securities Act unless “a sufficient nexus exists between Delaware and the merger transaction at issue.” He noted that the agreement was negotiated in California, and that the only connection that the parties and the transaction had to Delaware was that the buyer and one of the defendants were organized under Delaware law.
VC Fioravanti concluded that this was insufficient to establish the nexus required to permit application of the Delaware Securities Act, and therefore held that that the choice of law provision could not be read to preclude the plaintiff from asserting claims under the California Securities Act.
– John Jenkins