Choice of Law and Venue Clauses in Sale Transactions: Why They Matter

These may be issues that only a lawyer could love, but the choice of law and venue for disputes can have major consequences.

There are 51 different sets of laws in the United States. Each state has its own rules and regulations, and federal law applies across the country. In the modern commercial world, companies have the capacity to do business throughout the entire nation and even the globe. As such, it is common for a business to be acquired by a company from another state or country. In such a scenario, it is necessary for the parties to agree on (1) which jurisdiction's law will govern the agreement—the governing law, and (2) in which jurisdiction any legal proceedings pertaining to the agreement will take place—the venue.

Choosing a Venue: Convenience

First, it is important to note that the governing law and venue are distinct. The courts of one jurisdiction can and regularly do apply the law of another jurisdiction. State courts can apply federal law or the law of any other state, and federal courts can apply the law of any state in addition to federal law. For example, a state court in Oregon can apply Maine law, and a federal court in Florida can apply Colorado law.

The choices of governing law and venue each have different consequences and, thus, should be chosen based on different considerations. Convenience is the primary consideration when choosing the venue. A party based in California will not likely want to fly to New York for hearings or trial, and the same is true of the reverse. Doing so takes time and money. With that said, it is worth noting that because the pandemic caused courts to shut down in-person services and adopt video conferencing, it is possible that physically traveling to a distant courtroom will become less common if not obsolete.

Governing Law: Knowns and Unknowns

The primary consideration when choosing the governing law is the substantive effect it will have on the outcome of disputes. With each state having its own laws, it is possible that the same dispute would reach one resolution under one state's laws and the opposite resolution under another state's laws. Whether it's the admissibility of extrinsic "parol" evidence, or the deadline by which a suit must have been filed, the governing law can be the deciding factor in a lawsuit.

However, when selecting the governing law, parties face the significant challenge of predicting the circumstances and subject matter of disputes that have not yet arisen. Without knowing what the specific facts of a dispute will be, it is impossible to know which jurisdiction's law will lead to a favorable result.

Delaware Law

In practice, the governing law of an M&A transaction is usually either the law of one of the parties' home states or Delaware law. Delaware's case law surrounding corporations and commercial transactions is robust, which, in turn, provides the parties with increased certainty on what the outcome of a dispute will be.

Generally, venue selection and governing law clauses are enforceable. However, if the court finds that there is a strong showing that enforcement of the clauses would be against public interest, they may be voided.