Delaware Court Holds that Claim under California Corporate Securities Law Is Not Waived by Delaware Choice of Law Provision in Stock Purchase Agreement

On January 28, 2021, the Delaware Court of Chancery, in the case of Swipe Acquisition Corporation v. Peter M. Krauss et.al., 2021 Del Ch. Lexis 14, held that a Delaware choice of law provision in a stock purchase agreement must yield to the State of California’s strong public policy that violations of its corporate securities laws are not waivable.

The case arose out of a disputed sale by Krauss and others of PLI Holdings, Inc. to Swipe. Swipe sued Krauss in Delaware for a variety of claims, including violation of the securities antifraud provision of Section 25401 of the California Corporations Code. The defendants countered that the broad Delaware choice of law provision in the stock purchase agreement effectively waived the plaintiffs’ ability to bring such a claim under California securities law.

In assessing this issue, although Vice Chancellor Fioravanti, Jr. noted that upholding freedom of contract is a fundamental policy of Delaware, there was an exception to that policy if enforcement contravened the strong public policy of another state that had a materially greater interest than Delaware as to the particular issue in question. Here, the Vice Chancellor emphasized that Section 25701 of the California Corporations Code provided that “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.” Having found that the defendants failed their burden to show that enforcement would not diminish unwaivable statutory rights under California law and that there was not a sufficient nexus to apply the Delaware Securities Act–no negotiations having occurred in Delaware, in contrast to California–the Vice Chancellor denied the defendants’ motion to dismiss the California antifraud claim.

  This e-Bulletin was prepared by William Ross, of counsel to Hirschfeld Kraemer LLP. Mr. Ross is a member and past co-chair of the Corporations Committee of the Business Law Section of the California Lawyers Association.