Delaware Court of Chancery Holds That a Porous Information Wall and Misleading Proxy Defeat Section 144 Safe Harbors at the Pleading Stage

Key Points

• On August 26, 2026, the Delaware Court of Chancery held in Dodiya v. Franklin that the Section 144(a)(1) safe harbor was unavailable at the pleading stage because it was reasonably conceivable that the board was grossly negligent in failing to maintain an information wall against a conflicted, known leaker. 
• Approval by a majority of the disinterested directors is necessary, but not sufficient, for the Section 144(a)(1) safe harbor, which also requires that the board or committee authorize the transaction in good faith and without gross negligence, the Delaware Court of Chancery held in Dodiya. 
• Because it was reasonably conceivable that the proxy statement materially misstated the CEO’s nonparticipation in the process, the Delaware Court of Chancery held in Dodiya that the stockholder vote was not informed for purposes of the Section 144(a)(2) safe harbor. 
• Under Section 144(d)(2), directors of a listed company whom the board has determined to be independent, and who are not parties to the transaction, receive a heightened presumption of disinterestedness that may be rebutted only by substantial and particularized facts, the Delaware Court of Chancery held in Dodiya. 
• The Delaware Court of Chancery held in Dodiya that losing the Section 144 safe harbors did not establish liability, allowing nonexculpated claims to proceed only against the CEO and the executive chairman.

In Dodiya v. Franklin, the Delaware Court of Chancery held that the safe harbors of Sections 144(a)(1) and (a)(2) were unavailable on a motion to dismiss because it was reasonably conceivable that the board was grossly negligent in failing to maintain an information wall against a conflicted, known leaker and that the stockholder vote was materially misinformed. The decision confirms that the amended statute strengthens the presumption of disinterestedness for directors whom the board has determined to be independent. It also shows that approval by a majority of the disinterested directors is necessary, but not sufficient, to secure the Section 144(a)(1) safe harbor, which further requires that the board or committee authorize the transaction in good faith and without gross negligence.

Background

The case arose from the acquisition of a public sweetener company (the company) by an entity (the buyer) controlled by the father of the company’s CEO. Ten days after becoming interim CEO in January 2023, the CEO sent his father’s investment firm a confidential impairment analysis valuing the company at $9.73 per share, at a time when the stock was trading at $3.84 per share. He shared additional confidential information with the firm in March 2023. The buyer then bought millions of shares on the open market, bringing its stake to 19.8%. In June 2023, the buyer proposed to acquire the shares it did not already own for $4.00 per share.

Following the CEO’s recusal from the board’s discussion of the proposal, the board formed a special committee and asked him to sign an undertaking not to participate in the process or share confidential information. He refused and was placed on leave. An audit committee investigation uncovered the leaks, and he resigned as CEO but remained on the board. The board nonetheless later sent him board materials, including special committee materials, and allowed him to attend a meeting at which a special committee report on the proposal was presented. After the special committee negotiated the price up to $4.875 per share, the board approved the merger on the committee’s recommendation. That same day, the executive chairman, who was a special committee member, signed a $1.4 million consulting agreement with the buyer’s acquisition vehicle. The company then sought stockholder approval, and its proxy statement told stockholders that the CEO “did not participate in any activities, meetings, or communications with respect to the [p]rocess” and “did not receive from the Company information with respect thereto.” A majority of stockholders approved the deal, and a stockholder sued.

Holding

The court granted the motion to dismiss in part and denied it in part.

First, the court held that the plaintiff failed to plead facts supporting a reasonable inference that the board lacked a disinterested majority. Because the full board, rather than the special committee, authorized the merger, the court evaluated the board’s composition. Directors of a company whom the board determined to be independent under exchange listing standards, and who are not parties to the transaction, receive a heightened presumption of disinterestedness under Section 144(d)(2). The heightened presumption “may only be rebutted by substantial and particularized facts.” A business relationship that ended a decade earlier, customary director fees, and speculation that the buyer’s controller had recommended a director to the board did not rebut it.

Second, the court held that the “in good faith and without gross negligence” requirement looks at the board’s collective conduct and “extends beyond the formal vote to the fiduciary conduct through which the board or committee informed itself, deliberated, negotiated, and reached its decision.” The court explained that Revlon is not the standard of review for determining whether Section 144(a)(1) is satisfied, though in a change-of-control transaction it informs the objective of pursuing the best price reasonably available. The court noted that by restoring the CEO’s access without safeguards, the board was arguably “recklessly indifferent to the risk that confidential information would reach the buyer.” It was therefore reasonably conceivable that the board’s authorization of the merger was grossly negligent, and the Section 144(a)(1) safe harbor was unavailable at the pleading state.

Third, the court held that it was reasonably conceivable that the proxy’s statement about the CEO’s nonparticipation was a material misstatement, so the vote was not informed for purposes of Section 144(a)(2).

Fourth, the court explained that losing the safe harbors did not establish liability. Only the CEO (who allegedly held a profits interest in the buyer and whose earlier leaks were not cured by a formal recusal) and the executive chairman (because of his consulting agreement) faced reasonably conceivable, nonexculpated claims. The claims against the other directors were dismissed because the alleged failures pointed to breaches of the duty of care, not bad faith, and “a deficient proxy is not synonymous with a disloyal one.”

Takeaways

• Information walls must be enforced, not just announced. Boards should document recusals, cut off a conflicted insider’s access to process materials, and treat a refused confidentiality undertaking as a reason to tighten controls. 
• Proxy descriptions of conflict management must match the record. A single inaccurate assurance about a conflicted insider’s isolation from the process was enough to defeat the stockholder vote safe harbor at the pleading stage. 
• Exculpation still matters. Independent directors remain protected by exculpation even when the safe harbors fail, absent well-pleaded bad faith. 
• Side arrangements with the buyer can taint committee members. Committees should require disclosure of any compensation discussions with a bidder before and throughout the process.

For questions about Dodiya v. Franklin, the Section 144 safe harbors, or conflict safeguards in sale processes, contact Troutman Pepper Locke’s Delaware Court of Chancery Litigation or Mergers + Acquisitions practice groups.