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Thursday, August 16, 2007

TXU's Choice of Law Clause

I was flipping through the TXU merger agreement last night, and I noticed the following choice of law clause in section 9.5 (caps are in the original):

THIS AGREEMENT SHALL BE CONSTRUED, PERFORMED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (EXCEPT TO THE EXTENT THAT MANDATORY PROVISIONS OF TEXAS LAW ARE APPLICABLE), WITHOUT GIVING EFFECT TO ITS PRINCIPLES OR RULES OF CONFLICT OF LAWS TO THE EXTENT SUCH PRINCIPLES OR RULES WOULD REQUIRE OR PERMIT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION.

This clause makes my head hurt (and not because of the caps).  What are the mandatory laws of Texas?  What Texas conflict of laws principles require the application of the laws of another jurisdiction?  I am not sure whose form this is (likely Vinson & Elkins or Simpson, Thacher who are counsel to the buyer), but I suspect if you asked them, you would be greeted with a blank stare.  And a junior associate could spend hours, if not days, researching this issue. 

Variations of this underlined language crept into choice of law provisions at some point and it has stubbornly remained there despite the best efforts of knowledgeable lawyers to eradicate it because of their potential for incongruity.  Former Shearman & Sterling partner Michael Gruson aptly explained why this language is unnecessary and possibly harmful text in his article, Governing Law Clauses Excluding Principles of Conflict of Laws, 37 INT'L LAW. 1023 (2003).  Here, Gruson highlighted the resulting absurdities under New York law if the language of this clause were strictly applied.  For example, depending upon the conflicts of laws wording exclusion, the language may technically requires a court to also exclude the very conflict of laws rules that permit the parties to select a law to govern their agreement as well as to ignore the internal affairs doctrine.  Both would be unwanted results.  And the mandatory provision is just vague drafting:  theoretically all Texas laws are mandatory in some manner.  Accordingly, to avoid such issues, the better practice would have been for Vinson and/or Simpson to draft their clause simply as follows:

Section 8.4 Governing Law. This Agreement, and all claims or causes of action (whether at Law, in contract or in tort) that may be based upon, arise out of or relate to this Agreement or the negotiation, execution or performance hereof, shall be governed by and construed in accordance with the Laws of the State of Delaware.

So much easier, and as Gruson notes an equivalent, clearer result. 

http://lawprofessors.typepad.com/mergers/2007/08/txus-choice-of-.html

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Comments

TXU is a Texas corporation. What I suspect this provision was trying to say is that the actual merger itself is governed by Texas law while the rest of the contract will be governed by NY law. There are other examples of better drafting.

Posted by: Former M&A Lawyer | Aug 16, 2007 9:45:55 AM

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