In re Cloudflare: The Section 144 Safe Harbor Remains Strong, but Plaintiffs Pry Open the “Good Faith and Without Gross Negligence” Door a Little Further
The Delaware Court of Chancery recently issued another important decision applying the 2025 safe-harbor amendments to Section 144 of the DGCL (the “Safe Harbor”). The case, In re Cloudflare, Inc. Stockholder Litigation, was one in which Vice Chancellor Laster preliminarily enjoined a recapitalization designed to preserve founder control. The defendants won on every statutory argument, but the plaintiffs still prevailed on one point: They showed a reasonable probability that the special committee did not act “in good faith.” This decision, along with the Delaware Chancery Court’s recent decision in Dodiya v. Franklin,[1] shows where pre-trial challenges in controller or conflicted transactions are likely to be fought. The requirement that the board or committee have acted “in good faith and without gross negligence” is the most fact-intensive requirement for the Safe Harbor to apply—and the one that least lends itself to resolution at the pre-trial stage. The battle lines appear to be forming, and, for the time being at least, this requirement looks to be where plaintiffs’ attorneys will attempt to launch their assault.
Background
The Co-Founder’s Control Problem
Cloudflare’s co-founders, Matthew Prince and Michelle Zatlyn, held a majority of the voting power through ten-vote Class B stock. That control was steadily eroding. Their share peaked at 60% in 2021 and had fallen to 50.3% by June 2026. At historical rates of divestiture and equity issuance, they would have lost majority control by December 2026.
The Special Committee
In October 2025, the board formed a three-member special committee to consider changes to the Company’s capital structure. The board determined that each member was independent and disinterested. However, the plaintiffs challenged those determinations for two of the members:
- One was an executive at an investment fund, a long-time investor in the Company that had made significant profit in its investment. The individual personally had a significant investment in the Company and had co-investment ties with the founders. He also had social ties to Prince: He attended Prince’s wedding, went to a retirement party for Prince’s mother-in-law, stayed overnight at Prince’s homes, and spent a Thanksgiving with Prince and his in-laws.
- The second committee member, a Harvard Business School professor, taught the founders in 2007 and had kept in touch with them. Prince wrote a blurb for his book (one of eight blurbs), and the founders spoke to his classes. Prince also had social ties to the individual. The individual stayed at Prince’s Lisbon home, and Prince invited him to stay on his boat in Croatia.
The Committee Process
On paper, the committee’s process looked strong. The committee hired Potter Anderson & Corroon as counsel and Centerview Partners as banker for the transaction, held eighteen meetings over six months, and produced hundreds of pages of detailed minutes and presentation materials. The preliminary-injunction record, however, showed a number of troubling facts:
- Ephemeral messaging. Committee members, the founders, and allied directors used Signal with auto-delete settings, some set as short as one day. They did so even though they had been warned that litigation was likely, and no one turned off auto-delete until the first litigation hold on June 5, 2026. Chats were titled “CF Special Committee,” “SC,” “Progress Committee,” and a “bus” emoji (interpreted by the court as meaning everyone needed to get “on the bus” to give the founders what they wanted). Defense witnesses denied discussing anything substantive on Signal, but the chat titles, the timing of their creation, and surviving messages showed otherwise.
- A “narrative” from the start. Centerview’s notes reflected a “[n]eed to figure out the narrative and ensure there are ‘gets’ for Matthew/Michelle.” After Prince said he “loved” one structure, the committee pursued only that one. It also discussed what would be “a good fact pattern” for litigation.
- A hand-picked expert. One of the committee members used an AI chatbot to research only the “benefits” of founder control. The committee then retained Professor Sonnenfeld, knowing he favored dual-class structures.
- Backchannels and pressure. At a dinner in Lisbon, one of the committee members told Prince, without authorization, that the committee would get to where the founders were. When the next proposal fell short, Prince sent a late-night barrage of angry texts, threatened to resign, and called the committee member a “liar.” Two directors who were not on the committee then inserted themselves into the committee’s process. The final 40% capital-at-risk term ended up where Prince had said he expected it to land.
The Transaction Terms and Vote
The committee ultimately approved a multi-step recapitalization:
- The founders would exchange each Class B share for one Class A share plus one share of nine-vote preferred stock with only nominal economic value.
- The company would then distribute one new non-voting Class C share for each Class A share.
Together, these steps would let the founders sell their economic interest without meaningfully eroding their control. Because the founders held 50.3% of the vote, approval was never in doubt. Even so, only about 15.6% to 17.7% of the unaffiliated voting power supported the components that went to a vote, and both Glass Lewis and ISS recommended against them. The plaintiffs’ expert estimated that the recapitalization gave the founders a direct benefit of more than $4 billion in liquidity that they could realize without losing control.
The Litigation
Stockholders sued in the Delaware Court of Chancery. They claimed that the founders, as controllers, and the directors breached their fiduciary duties, and they moved for a preliminary injunction. The motion came after expedited discovery (160 plus exhibits and eight fact and three expert witnesses). The question, therefore, was not whether the complaint could survive a motion to dismiss, but whether the plaintiffs had shown a “reasonable probability of success on the merits.” The Court found the other two elements for a preliminary injunction – irreparable harm and the balance of the equities – were easily satisfied because a delay in the recapitalization would not prevent it from occurring, but, if the recapitalization closed, it could not be unwound. The merits would thus be the deciding issue.
The Court’s Key Findings
The bulk of the court’s decision, and the focus of this summary, concerned whether the Safe Harbor protected the recapitalization.
1. The Injunction Exclusion Does Not Apply
The plaintiffs argued that Section 144(d)(6) took the case outside the Safe Harbor entirely. That provision says the statute does not “limit judicial review for purposes of injunctive relief of provisions or devices designed or intended to deter, delay, or preclude a change of control.” The plaintiffs’ theory was that the founders’ loss of majority control would itself be a “change of control,” and that the recapitalization was a device designed to prevent it. The Court found the text ambiguous because both sides offered reasonable readings. It resolved the ambiguity for the defendants based on the jurisprudential backdrop, an article by Hamermesh, Jacobs & Strine,[2] and contemporaneous practitioner commentary. The Court found that the exclusion reaches only traditional enhanced-scrutiny settings, such as rights plans, deal protections, and election interference under Unocal, Revlon, and Blasius—not conflicted controller transactions. Reading it more broadly would let stockholders “sidestep the single-cleansing regime by seeking injunctive relief.” In other words, it would have given plaintiffs’ firms an easy way around the Safe Harbor in any pre-closing challenge to a transaction that touches control.
2. The Board’s Determinations of Disinterestedness Stand
One of the requirements for the Safe Harbor is that the board has determined that each of the committee members is disinterested. The plaintiffs challenged the board’s determination that two committee members were disinterested based on the allegation that the board failed to consider relevant material information. The court explained that a board’s determination as to disinterest is a fiduciary act, and thus subject to challenge based on breach of fiduciary duties. But if the standard of review of that determination is elevated to entire fairness, given the involvement of a conflicted controlling stockholder, that would cause the Safe Harbor to “collapse inward upon itself.”
Drawing on the bifurcated approach under Cornerstone, under which the standard for dismissal of individual directors (exculpation) is separate from the standard of review for the overall transaction,[3] the court held that allegations of board failure to consider material information involved the duty of care and should be measured by concepts of gross negligence. This would require a showing that the board was grossly negligent in failing to consider all material information reasonably available. The court also held that, if the board had been grossly negligent in its determination of disinterest, that would not render the Safe Harbor unavailable, although it would render inapplicable a heightened presumption of disinterest that applies under the Safe Harbor with respect to directors of listed companies that satisfy stock exchange independence rules (discussed further below).
Applying its framework, the Court rejected the challenges to the board’s determination that two committee members were disinterested. For one, the ties the board did not expressly consider were not material, because the board already knew about the core teacher-student relationship. For the other, the board knew about his fund’s investment and his close relationship with the founders. The omitted details did not change that picture.
3. The Heightened Presumption Applies Beyond the Pleadings
The Safe Harbor also requires that the recapitalization have received the requisite special committee approval. That is, the committee must consist of two or more directors determined to be disinterested by the board, and at least a majority of the disinterested directors on the committee must have approved the transaction. The plaintiffs claimed this requirement was not satisfied because two committee members were not independent. The court held that this turned on the impact of the disinterest presumption applicable to listed companies.
Under Section 144(d)(2), when the board of a listed company determines that a director meets stock exchange independence standards (independence from the controlling stockholder), the director is presumed disinterested. That presumption “shall be heightened” and may be rebutted only by “substantial and particularized facts.” The court held that the presumption also applies after the pleading stage, where a challenger must overcome it by clear and convincing evidence. In practice, a court will uphold the board’s determination unless the challenger proves by clear and convincing evidence that no reasonable board, given the information it had, could have found the director disinterested.
4. The Committee Members Were Disinterested
The plaintiffs did not show a reasonable probability that they could rebut the presumption at trial. A reasonable board could readily find one of the committee members disinterested. The other one was a closer case. The court said his social ties “straddle the line” between thin social-circle friendships and compromising ones. Because “[r]easonable minds could debate the point,” the heightened presumption applied.
Having rejected plaintiffs’ challenges, and noting that all three disinterested committee members approved the deal, the court held that the plaintiffs failed to establish a reasonable probability of success in showing at trial that the recapitalization did not receive the requisite special committee approval for the Safe Harbor to apply.
5. The Plaintiffs Are Likely to Show a Lack of Good Faith, but Not Gross Negligence
The Safe Harbor also requires that that the special committee’s authorization of the recapitalization have been made “in good faith and without gross negligence.” The statute does not define good faith or gross negligence, so pre-amendment common law continues to govern both. The clear-and-convincing burden also does not apply to these questions; it applies only to whether a director is disinterested.
On good faith, the court found it reasonably probable that the committee acted under a “controlled mindset” of the kind described in Southern Peru. On that theory, the committee set out to placate the founders rather than to serve the company. The facts described above supported that finding: the narrative-driven start, the hand-picked expert, the backchannels and pressure from Prince, and the involvement of directors outside the committee. The Court also relied on the Signal use. It did not draw a formal adverse inference for spoliation, but it drew inferences from what the record contained and what it was missing. Its reasoning was that, when a party produces weak evidence even though strong evidence should have been available, the court may conclude that the strong evidence would have been adverse.
On gross negligence, the plaintiffs lost. The court held that the committee’s process “has all the outward signs of diligent and careful effort,” and its failure to obtain a fairness opinion was unlikely to amount to gross negligence.
6. The Defendants May Fail to Prove Entire Fairness
Without the Safe Harbor, entire fairness applies, and the defendants bear the burden of proving it. On fair dealing, the Court cited the same process concerns, as well as the lack of a fairness opinion and the unaffiliated stockholders’ opposition. On fair price, the transaction had no price term. The Court therefore weighed the competing expert views: The plaintiffs’ expert estimated a non-ratable benefit to the founders of more than $4 billion of increased liquidity. Taken together, the record gave the plaintiffs a reasonable probability of success.
7. An Injunction, With the Option of a Safe Harbor Mini-Trial
The court enjoined the recapitalization pending trial. It stressed that the injunction “rests on the unique facts of the case.” The Court also recognized that requiring a full entire-fairness trial before deciding whether the Safe Harbor applies would “impose a disproportionate burden on the defendants and run contrary to the statute’s intent.” It therefore gave the defendants a choice. They may elect a prompt, bifurcated trial, ideally within about ninety days, limited to whether the committee acted in good faith, with no experts, limited fact witnesses, and little if any additional discovery. If the Safe Harbor applies, no entire-fairness trial would be needed.
Practical Implications
- “Good faith and without gross negligence” attacks: Going forward, Plaintiffs will likely focus on Section 144’s “good faith and without gross negligence” clause. Cloudflare follows Dodiya, involving the same clause. The elements are fact intensive, and, for listed companies, the standard of proof for plaintiffs at the preliminary-injunction (reasonable probability) or motion-to-dismiss (reasonable conceivability) stage is lower than that required to challenge the disinterestedness element of the Safe Harbor.
- Mini-trials carry a cost: If good-faith trials become a routine step before Safe Harbor protection applies, much of the certainty and early dismissal promised by the 2025 amendments will be lost. A 90-day trial is far better than a full entire-fairness trial, but it is still much more than many planners expected after SB 21.
- For committees and advisors: Running a sound structural process is not enough to benefit from the Safe Harbor. Committees should avoid any appearance of reverse-engineering a result or building a “narrative.” They should keep negotiations inside the committee, shut down backchannels, and keep non-committee directors out of the process. The more the process deviates from what would withstand an entire-fairness challenge, the more it jeopardizes the “good faith” element under the Safe Harbor.
- Ephemeral messaging: Prohibit auto-deleting apps for deal communications from the outset of a controller transaction. Make sure preservation instructions are actually followed.
- The injunction exclusion under Section 144(d)(6) is narrow: The court rejected an expansive interpretation that would have allowed plaintiffs to circumvent the Safe Harbor by seeking injunctive relief in a wide range of controller transactions. The court held the exclusion only applies to the more narrow situation involving the type of deal protections that trigger enhanced scrutiny.
- The presumption of disinterestedness for listed companies is significant: The court held that this presumption applies beyond the pleadings stage, and can only be rebutted by clear and convincing evidence. That imposes a high hurdle for plaintiffs and reinforces the point above that the “good faith and without gross negligence” element will be the element that plaintiffs prefer to challenge.
[1] Dodiya v. Franklin, — A.3d —, —, 2026 WL 2517931, at *1 (Del. Ch. Aug. 26, 2026). See also the Foley alert here.
[2] Lawrence A. Hamermesh, Jack B. Jacobs & Leo E. Strine, Jr., Optimizing the World’s Leading Corporate Law: A Twenty-Year Retrospective and Look Ahead, 77 Bus. Law. 321 (2022).
[3] See In re Cornerstone Therapeutics, Inc., S’holder Litig., 115 A.3d 1173 (Del. 2015).
