The governing law clause is the section most associates scan past in first-pass diligence. It's in every contract. It's usually three sentences. It almost always says New York, Delaware, or California. The associate flags the unusual provision on page 47 and moves on.
In single-state deals, this approach is defensible. In multi-state transactions — an acquisition of a company with operations in four states, or a commercial agreement between a Connecticut buyer and a Texas supplier with employees across six states — the governing law clause can determine the outcome of the deal's most contentious provisions. Treating it as boilerplate is a diligence failure.
The Three Contexts Where Governing Law Actually Matters
1. Non-Compete Enforceability
The enforceability of non-compete covenants is the most consequential choice-of-law question in M&A diligence. The variance across states is not marginal — it is outcome-determinative.
California does not enforce employee non-competes, full stop. The prohibition under California Business and Professions Code section 16600 is essentially categorical, with limited carve-outs for business sale transactions. Minnesota followed with a near-total ban effective in 2023. North Dakota has long maintained a similar prohibition. At the other end of the spectrum, Georgia, Texas, and Florida have statutes that explicitly permit non-competes with defined parameters around duration, geography, and scope.
In an acquisition of a Delaware-incorporated company whose key technical employees are based in California, a non-compete in the purchase agreement may be unenforceable as applied to the California-based employees regardless of what the governing law clause says. The contract can designate Delaware law, but California courts routinely apply California's substantive prohibition as a matter of public policy when the employee's performance is predominantly in California.
Diligence on an acquisition with key-person risk must map the governing law of each employment agreement and restrictive covenant agreement against the state of performance for each covered employee — not just the state designated in the agreement. These two things can be different, and the difference can be material.
2. Implied Warranties and UCC Article 2
In commercial transactions involving the sale of goods, the implied warranty of merchantability and the implied warranty of fitness for a particular purpose arise under UCC Article 2 unless validly disclaimed. All states have adopted Article 2 with some variation, but the variation matters.
Louisiana, for example, adopted Article 2 but retained its own warranty structure in several respects. A commercial contract for the supply of goods that requires performance in Louisiana should not simply import the New York law disclaimer without confirming that Louisiana's version of Article 2 would recognize it as effective.
More commonly, the issue arises in software and SaaS supply agreements where the vendor's standard form designates a favorable governing law with comprehensive warranty disclaimers. A buyer reviewing a target's vendor contracts in diligence should flag governing law designations that appear designed to maximize the effectiveness of warranty disclaimers — that's a risk that survives closing and falls to the acquirer.
3. Indemnification Cap and Basket Enforcement
The enforceability of indemnification caps and baskets varies less dramatically than non-compete enforceability, but there are meaningful differences in how courts interpret ambiguous indemnification provisions, how they handle the allocation between tort and contract remedies, and whether they permit equitable relief that effectively bypasses the cap.
Delaware's Court of Chancery has developed a substantial body of M&A indemnification law that most sophisticated deal counsel expect and rely on. New York commercial courts similarly offer predictable interpretation of merger agreement indemnification provisions. California's rules around indemnification overlap — particularly the interaction between express contractual indemnification and California's anti-indemnity statute for certain construction and real property contexts — can produce unexpected results if the governing law is California for reasons unrelated to the indemnification structure.
The practical implication for acquirer's counsel: where an acquisition agreement's governing law is not Delaware or New York and the deal size warrants it, confirm that the indemnification provisions — specifically the cap, the basket, the survival period, and the remedy limitations — are enforceable under the designated governing law. Don't assume the provision works as drafted simply because it would work under New York law.
What Governing Law Does Not Resolve
It's worth being precise about scope. The governing law clause controls the substantive law that applies to contract interpretation and enforcement. It does not necessarily control:
- Procedural rules of the chosen forum, which are governed by that forum's procedural law regardless of the governing law designation
- Real property law, which is almost always the law of the state where the property is located, regardless of the agreement's governing law
- Employment statutes, where the state of performance may override the contractual designation for state-law-specific protections (minimum wage, overtime, workers' compensation, anti-discrimination)
- Regulatory compliance obligations, which attach to where the activity occurs, not where the contract says it's governed
We're not saying that a carefully drafted governing law clause doesn't matter — it clearly does, and sophisticated counsel negotiate it deliberately. What we're saying is that the governing law clause does not insulate the deal from all multi-jurisdictional risk, and treating it as a comprehensive conflict-of-laws solution overstates what it actually does.
Diligence Practice: What Actually Needs to Be Extracted
In an M&A diligence context, the governing law flag list should include:
- All material contracts (defined in the disclosure schedule) with governing law designations that deviate from the acquirer's standard — i.e., not Delaware or New York when those are expected
- All employment agreements and restrictive covenant agreements with governing law designations, cross-referenced against the state of performance for each covered employee
- All vendor and supply agreements where the governing law designation appears designed to maximize vendor-favorable warranty disclaimers or limitation-of-liability caps
- Any contract where the governing law clause is absent or unclear — these are not rare, particularly in contracts signed before 2015 by smaller companies
The last item — governing law absent — is more common in startup acquisition diligence than in mature-company deals. A three-year-old company that signed vendor agreements using a template generated by a startup legal platform may have 40 contracts with no governing law designation. Each of those requires an independent choice-of-law analysis to assess enforceability of the material provisions.
The Pattern We See in Diligence Rooms
When we process diligence packages for multi-state deals, the governing law distribution across the document set is almost never what the acquirer expects. The purchase agreement may be Delaware law. The target's three most significant customer contracts may be New York law. But buried in the vendor agreements and the employment agreements are California designations for two key engineers, a Texas designation for the head of sales, and a Massachusetts designation for a supplier relationship that predates the company's current leadership.
No single governing law flag is necessarily a deal-stopper. But the aggregate picture — how exposed is this acquisition to jurisdictions with non-compete limitations, unusual warranty enforcement, or indemnification quirks — requires seeing all the governing law designations in one place, not finding them one at a time over four days of manual review.
That integration across the full document set is what governs the risk picture. And it's what a first-pass associate review, working document by document, reliably misses.