Good Faith Still Required: Delaware Court of Chancery Enjoins Cloudflare Founder-Control Recapitalization Despite Section 144 Safe Harbor

Key Points

• On October 16, 2026, the Delaware Court of Chancery preliminarily enjoined a recapitalization designed to preserve two founders’ voting control in In re Cloudflare, Inc. Stockholder Litigation, finding a reasonable probability that the special committee did not act in good faith and that the defendants could not then prove entire fairness.
• Disinterested committee approval is necessary but not sufficient for safe harbor protection under Section 144(b)(1) of the Delaware General Corporation Law (DGCL), as the Delaware Court of Chancery’s Cloudflare decision confirms, because the committee must also act in good faith.
• DGCL Section 144(d)(6)(b), which preserves injunctive review of provisions or devices designed to deter, delay, or preclude a change of control, does not let plaintiffs escape the safe harbor for conflicted controller transactions by seeking only injunctive relief, the Delaware Court of Chancery held in Cloudflare.
• Rebutting the heightened presumption of director disinterestedness under DGCL Section 144(d)(2) requires clear and convincing evidence that no reasonable board could have treated the director as disinterested, and the Delaware Court of Chancery found the Cloudflare plaintiffs unlikely to meet that standard for two committee members.
• Among other evidence, advisor notes about crafting a “narrative,” an unauthorized backchannel conversation with a founder, pressure from that founder, and auto-deleting Signal messages supported the Delaware Court of Chancery’s reasonable-probability finding in Cloudflare that the special committee did not act in good faith.

In In re Cloudflare, Inc. Stockholder Litigation, the Delaware Court of Chancery held that stockholders were entitled to a preliminary injunction against a recapitalization by Cloudflare, Inc. designed to preserve two founders’ voting control, because they showed a reasonable probability that the special committee did not act in good faith, which would take the transaction outside the safe harbor in Section 144 of the Delaware General Corporation Law (DGCL), and a reasonable probability that the defendants could not then prove the transaction entirely fair. The decision confirms that disinterested committee approval is necessary, not sufficient, to secure the statute’s protection.

Background

Two of the company’s founders held 10-vote Class B stock representing 50.3% of the voting power. Founder sales and company issuances of one-vote Class A stock were steadily eroding that position. At historical rates, the founders would lose majority control by the end of 2026.

The board formed a three-member special committee and determined that each member was independent and not interested. After 18 meetings over six months, the parties agreed to a two-step transaction:

• Each Class B share would be exchanged for one Class A share plus one share of nine-vote preferred stock. 
• The company would then distribute one nonvoting Class C share for each Class A share. 

The committee obtained a capital-at-risk requirement (ultimately 40% of the founders’ Class A shares only), service requirements, and governance commitments. It did not obtain a fairness opinion or any other valuation.

The founders’ votes supplied stockholder approval. Assuming the founders voted all their shares in favor, only 15.6% to 17.7% of the remaining voting power supported the proposals. Stockholders sued and moved to enjoin closing.

Holding

The court held that the plaintiffs satisfied each element for a preliminary injunction.

Irreparable harm and the equities. Unwinding the recapitalization after closing would be “effectively impossible,” and the court found it unlikely that it could develop a sufficiently reliable damages award. The equities favored relief for two reasons. First, the company could implement the transaction unilaterally, so no third-party deal was at risk. Second, the record provided no credible support for the argument that the founders might leave if the transaction were delayed.

The merits. The court asked whether the safe harbor applied and, if not, whether the plaintiffs were reasonably likely to prevail under entire fairness. The analysis proceeded in four steps.

First, the court rejected the plaintiffs’ reliance on DGCL Section 144(d)(6)(b), which preserves injunctive review of “provisions or devices designed or intended to deter, delay, or preclude a change of control.” The court found that both sides offered reasonable readings, making the provision ambiguous. It then relied on the statute’s jurisprudential backdrop, legislative history, and contemporaneous commentary to resolve the ambiguity. Against that backdrop, the court found the plaintiffs’ reading unreasonable because it would let stockholders sidestep the single-cleansing regime simply by seeking injunctive relief. Adopting the defendants’ reading, the court confined the exclusion to traditional enhanced scrutiny settings, such as stockholder rights plans, deal protections, and interference with director elections. The exclusion does not reach conflicted controller transactions where entire fairness would not apply.

Second, the court upheld the board’s disinterest determinations for two committee members with ties to the founders because the information the board did not consider was not sufficiently material, so Section 144(d)(2)’s heightened presumption applied, and the plaintiffs were not reasonably likely to rebut it with the clear and convincing evidence the court held is required.

Third, the court held that the plaintiffs showed a reasonable probability that the committee did not act “in good faith,” as Section 144(b)(1) requires. The statute does not redefine good faith or gross negligence, so pre-statute case law governs, and the clear and convincing standard does not apply to these questions.

The plaintiffs’ theory drew on the “controlled mindset” described in In re Southern Peru Copper Corp. Shareholder Derivative Litigation, under which a committee considers only options the controller proposes. The court cited record evidence supporting that theory, as well as credibility problems that undercut the defendants’ contrary account:

• Framing the result. Advisor notes referred to the “[n]eed to figure out the narrative.” 
• Adopting the controller’s structure. The committee adopted the structure the lead founder “loved” without presenting him other alternatives its banker had identified. 
• Choosing the expert. When the banker found no consistent link between control and value creation, the committee discussed that engaging an outside expert would be “a good fact pattern.” It then consulted an expert it knew to be supportive of dual-class structures. 
• The backchannel. In an unauthorized conversation, one committee member told the lead founder he expected the committee “was going to be able to get to where [the founders’] proposal was.” 
• Controller pressure. When the next proposal fell short, the founder sent a barrage of texts and threatened to resign. Two noncommittee directors then entered the process, and the final terms landed where the founder expected. 
• Credibility problems. Participants used Signal chats set to auto-delete, and the company reneged on a commitment not to close before the court ruled. 

The court also found a gross negligence claim unlikely to succeed, notwithstanding the lack of a fairness opinion, given that the committee’s process had outward signs of diligence.

Fourth, because entire fairness would apply if the safe harbor failed, the court considered whether the defendants could prove fairness and found a reasonable probability that they could not.

• Process. The court pointed to how the transaction was initiated, the committee’s early focus on the founders’ preferred structure, and its treatment of its capital-at-risk proposal as “a placeholder.” It also cited the backchannel, the involvement of noncommittee directors, the lack of any valuation, and the unaffiliated stockholders’ vote against the proposals. 
• Price. The court noted that the competing experts took “starkly different views.” The plaintiffs’ expert estimated that the founders could liquidate $4.7 billion before jeopardizing majority control, compared with approximately $450 million before the recapitalization. The defendants’ expert acknowledged that the cost of extending control could reach $3.2 billion, but argued that the founders could more than offset that cost by generating incremental stock-price appreciation of between 0.5% and 1.0% annually. 

Section 144 Takeaways

• Committee approval must be given in good faith, and existing case law supplies the test. The heightened presumption protects disinterest determinations, not the committee’s good faith, which plaintiffs need not disprove by clear and convincing evidence. Committees should develop and test alternatives themselves, make firm proposals rather than inviting the controller to set key terms, and avoid adopting the controller’s preferred structure at the outset. 
• A record built for litigation can defeat the safe harbor. Notes about crafting a narrative, and selecting an expert for a favorable “fact pattern,” supported an inference that the committee was justifying a predetermined result. Committees and advisors should choose experts and frame analyses for rigor, not for expected conclusions. 
• Keep the committee walled off. The court cited the unauthorized backchannel, the controller’s pressure, and the involvement of noncommittee directors as evidence that the committee may not have acted in good faith. Committee members should speak with the controller only as authorized, other directors should stay out of the process, and committees should document how they respond to pressure. 
• Ephemeral messaging can jeopardize the safe harbor at the injunction stage. Because good faith turns on credibility, the defendants’ Signal use, and their strained testimony about it, led the court to require live testimony before applying the safe harbor. Boards and controllers should disable auto-delete settings and issue litigation holds when the committee forms. 
• Thorough disinterest determinations carry real weight through trial. A plaintiff must show by clear and convincing evidence that no reasonable board could have treated the director as disinterested. Boards should consider financial, professional, and social ties and document that review. 
• Section 144(d)(6)(b) is narrow. The court held that plaintiffs challenging conflicted controller transactions cannot use it to escape the safe harbor by seeking only injunctive relief. It remains available for rights plans, deal protections, and similar defensive measures. 
• A fairness opinion is not required, but its absence matters if the safe harbor fails. The court found that skipping a fairness opinion was unlikely to show gross negligence. It did weigh the absence of any valuation under entire fairness. Committees in contested controller transactions should consider obtaining a fairness opinion or other economic analysis. 

For questions about Section 144, special committee processes, or conflicted controlling stockholder transactions, contact a member of Troutman Pepper Locke’s Delaware Court of Chancery Litigation or Corporate practice groups.