Governing Law and Forum Selection Clauses in M&A: Why Jurisdiction Matters

A governing law clause specifies which jurisdiction's substantive law will be used to interpret and enforce a contract. A forum selection clause specifies where disputes arising under the contract will be litigated or arbitrated. Together, these provisions determine the legal framework and procedural venue for every contractual relationship in a target company's portfolio. In M&A due diligence, the governing law and forum selection of each material contract affect the enforceability of key provisions, the cost and practicality of dispute resolution, and the compliance complexity the acquirer inherits.

Why Governing Law Affects Deal Risk

Governing law is not an administrative detail. It is the lens through which every other provision in the contract is evaluated. The same contractual language can produce different legal outcomes depending on the jurisdiction whose law applies.

Non-compete enforceability. A non-compete clause governed by Texas law faces a different enforceability standard than one governed by California law (where most non-competes are unenforceable). During diligence, the governing law of each employment agreement and consulting contract determines whether the target's restrictive covenants actually protect the business.

Indemnification and limitation of liability. Jurisdictions differ on the enforceability of indemnification caps, consequential damages waivers, and limitation of liability provisions. A clause that is enforceable under Delaware law may face scrutiny under a different state's unconscionability doctrine.

Liquidated damages. The test for whether a liquidated damages provision is enforceable (as opposed to being an unenforceable penalty) varies by jurisdiction. Governing law determines whether the target's liquidated damages provisions in customer and vendor contracts will hold up if challenged.

Implied warranties and mandatory terms. Some jurisdictions impose implied terms that cannot be disclaimed by contract. Consumer protection statutes, implied warranties of merchantability, and mandatory cooling-off periods vary by governing law and can affect the actual terms of the contractual relationship regardless of what the written contract says.

Forum Selection: Where Disputes Get Resolved

Forum selection determines the practical mechanics of dispute resolution, including cost, convenience, procedural rules, and jury availability.

Exclusive vs. Non-Exclusive Forums

An exclusive forum selection clause requires all disputes to be brought in the designated forum, eliminating the counterparty's ability to file suit in a more favorable jurisdiction. A non-exclusive clause identifies a preferred forum but allows either party to bring disputes elsewhere. From the acquirer's perspective, exclusive forum selection in a convenient jurisdiction is preferable because it reduces the risk of defending litigation in unfamiliar or distant courts.

Arbitration Clauses

Many commercial contracts replace court litigation with mandatory arbitration, specifying the arbitration institution (AAA, JAMS, ICC), the seat of arbitration, the number of arbitrators, and the procedural rules. Arbitration clauses affect the acquirer's dispute resolution options, cost structure, and the availability of discovery and appeals.

During diligence, mapping which contracts require arbitration versus litigation, and under which procedural frameworks, informs the acquirer's assessment of dispute resolution costs and outcomes across the portfolio.

Practical Considerations

Cost of distant forums. If the target's contracts designate forums in jurisdictions far from the acquirer's operations, the cost of litigating disputes increases. A portfolio of contracts with forums spread across multiple states or countries creates logistical complexity for the acquirer's legal department.

Jury trial waivers. Some contracts include jury trial waivers alongside their forum selection clauses. Whether these waivers are enforceable depends on the governing law and the forum, adding another variable to the dispute resolution analysis.

Enforceability of the clause itself. Forum selection clauses are generally enforceable, but courts occasionally decline to enforce them when the designated forum is seriously inconvenient, when the clause was not freely negotiated, or when enforcement would contravene public policy. The likelihood of a court honoring the forum selection clause varies by jurisdiction.

Multi-Jurisdiction Complications

A target company with national or international operations will typically have contracts governed by dozens of different jurisdictions. This multi-jurisdiction reality creates several challenges for acquirers.

Compliance divergence. The acquirer must ensure compliance with the target's contractual obligations under each governing jurisdiction's legal standards. What constitutes adequate performance, timely notice, or material breach may vary from contract to contract based on governing law.

Inconsistent enforceability. The same provision type (non-compete, limitation of liability, indemnification) may be enforceable in some of the target's contracts and unenforceable in others, depending solely on the governing law. A provision-level risk assessment requires mapping each provision against its governing law.

Integration complexity. Post-acquisition, standardizing contract terms across the combined entity is complicated when existing contracts are governed by different jurisdictions. Renewal and renegotiation strategies must account for the governing law of each contract.

International governing law. Contracts governed by non-U.S. law introduce additional complexity, including foreign mandatory rules, different interpretation principles, and potentially unfamiliar dispute resolution mechanisms. Contracts governed by the law of jurisdictions where the acquirer has no local counsel or legal infrastructure require particular attention.

What to Extract During Diligence

Systematic extraction of governing law and forum selection provisions across the data room produces a jurisdictional map that serves multiple purposes.

Governing law distribution. A summary of how many contracts are governed by each jurisdiction reveals concentration risk and identifies the jurisdictions where the acquirer needs legal expertise for ongoing contract management.

Forum selection mapping. A map of designated forums by contract materiality shows the acquirer's litigation exposure geography and identifies contracts with forums in inconvenient or unfavorable jurisdictions.

Arbitration inventory. A list of contracts requiring arbitration, with the applicable institution and rules, informs the acquirer's dispute resolution planning and cost budgeting.

Cross-reference with key provisions. The most valuable analysis combines governing law extraction with the extraction of other key provisions, such as clause extraction for non-competes, indemnification, and limitation of liability. This cross-reference reveals which provisions are at risk of unenforceability under their governing law.

AI-powered contract review tools can extract governing law and forum selection provisions from every agreement in the data room simultaneously, producing the jurisdictional map that manual review would require weeks to compile. This extraction enables deal teams to identify jurisdictional risk early in the diligence process and allocate specialist legal resources where they are needed most.

Governing Law in the Purchase Agreement

Diligence findings about the target's governing law landscape also inform the governing law selection for the purchase agreement itself.

Delaware is the default for good reasons. Delaware law is the most common choice for M&A purchase agreements because of its well-developed body of corporate and commercial law, its predictable court system (the Court of Chancery), and the extensive case law on acquisition-related disputes.

Match the complexity to the deal. For transactions involving targets with primarily in-state operations and contracts, the target's home state law may be appropriate. For complex, multi-state transactions, Delaware's neutral and well-developed framework is often the most practical choice regardless of where the parties are located.

Arbitration vs. litigation. Some purchase agreements include mandatory arbitration provisions, particularly in cross-border transactions where the parties want to avoid litigating in each other's home courts. The choice between arbitration and litigation for the purchase agreement itself should be informed by the broader dispute resolution landscape of the target's M&A diligence portfolio.

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