Delaware Court of Chancery Enjoins Founder-Control Recapitalization Despite Approval by Committee of Disinterested Directors

On October 16, 2026, the Delaware Court of Chancery issued a preliminary injunction in In re Cloudflare, Inc. Stockholder Litigation, Consol. C.A. No. 2026-0772-JTL, barring Cloudflare from closing a recapitalization that would allow the company’s founders to preserve their voting control, even as they sell down their equity. The decision applied the 2025 amendments to Section 144 of the Delaware General Corporation Law (the “Safe Harbor Statute”) on a preliminary injunction record. Notably, the court enjoined the recapitalization despite it being negotiated and recommended by a committee of disinterested directors, based on evidence the committee operated under a “controlled mindset,” thus making it reasonably probable the plaintiffs could show the committee failed to act in good faith (such that defendants could not invoke the Safe Harbor Statute). As a result, entire fairness became the operative standard of review and, under this standard, plaintiffs showed a reasonable probability of success on their fiduciary challenge.

Background

Cloudflare’s two co-founders held majority voting control through high-vote Class B stock. Their voting power had been eroding as they sold shares and as the company issued new Class A stock, and if they continued selling at historical rates, they were projected to lose majority control by December 2026. In October 2025, the board formed a three-member special committee, which negotiated a recapitalization. Under it, the founders would exchange each high-vote share for one low-vote share plus one share of a new preferred stock carrying nine votes (but only nominal equity value), and the company would distribute a new non-voting Class C share for each low-vote share. The founders could then sell substantial equity without losing control. By the plaintiffs’ measure, the recapitalization would enable the founders to generate roughly $2.1 billion in additional sale proceeds without losing control.

The committee unanimously recommended the transaction on May 28, 2026, and the board approved it the next day. At the June 30, 2026 annual meeting, the founders’ majority voting power (approximately 50.3% of the outstanding voting power) carried the stockholders’ approval of the various proposals relating to the recapitalization; excluding the founders’ shares, only 15.6% to 17.7% of the remaining voting power voted in favor, depending on the proposal. Cloudflare stockholders filed suit, alleging the founders breached their fiduciary duties as controlling stockholders by extracting the recapitalization and that the directors breached their fiduciary duties by approving it.

The Court’s Analysis

Statutory Issues Resolved in Defendants’ Favor. The defendants invoked the Safe Harbor Statute, arguing the recapitalization could not be the subject of equitable relief or damages because it was approved by a special committee composed of disinterested directors. The court resolved every contested statutory issue in defendants’ favor, including two key questions. First, the court held that the statute’s carve out for injunctive relief did not prevent application of the Safe Harbor Statute to the recapitalization. Second, the court held that the statute’s “heightened” presumption of disinterestedness—which arises when the board of a listed company determines that a director satisfies the exchange’s independence criteria—continues to apply even after the pleading stage. At trial, rebutting that presumption requires clear and convincing evidence that no reasonable board could have found the director disinterested. At the injunction stage, the plaintiffs needed a reasonable probability of meeting that standard, and their challenges to two committee members—including one based on financial, professional, and social ties to the founders—fell short.

Reasonable Probability That Committee Failed to Act in Good Faith. The court emphasized that, to invoke the Safe Harbor Statute, mere approval by a committee of disinterested directors was not enough; the committee still needed to act in good faith and without gross negligence, and the heightened presumption (applicable to the disinterestedness inquiry) does not apply to the question of whether the committee acted in good faith. Based on the preliminary injunction record, the court found it reasonably probable the plaintiffs could show the committee acted with a “controlled mindset” by seeking to placate the founders rather than serve the company. The record included: (i) contemporaneous advisor notes (the accuracy of which defense witnesses disputed) about crafting a “narrative” and ensuring there were “gets” for the founders; (ii) a committee member’s unauthorized conversation telling one of the founders that he expected the committee to get to where the founders’ proposal was; (iii) a barrage of late-night texts from that founder, including a threat to resign; (iv) intervention by two non-committee directors allied with the founders; and (v) a final economic term that landed where that founder had said he expected.

Use of Signal Chats Undermined Defendants’ Credibility. The founders’ and directors’ extensive use of auto-deleting Signal chats—despite advice to anticipate litigation—also hurt the defendants’ credibility, as did the company’s reversal of its commitment not to close before the court ruled. The court did not make a spoliation ruling, but it drew inferences from what the record contained and omitted. Separately, the court found it unlikely that the plaintiffs could prove gross negligence, even though the committee did not obtain a fairness opinion, so the due care theory did not support injunctive relief.

Entire Fairness. With the safe harbor potentially unavailable, entire fairness would apply, and the defendants would bear the burden of proof. The court found a reasonable probability that they could not prove either fair dealing or fair price. Beyond the same evidence of deference to the founders, the court noted that the committee never obtained a fairness opinion or valued the benefits flowing to the founders, and that the unaffiliated stockholders overwhelmingly withheld support.

Irreparable Harm and Balance of the Equities. The court could not effectively unwind the recapitalization after closing, once new non-voting shares began trading, and it was unlikely to identify a defensible method for measuring damages. The equities favored relief because an injunction would only delay a transaction the company can implement on its own, with no third-party deal at risk. The court also found that the record did not support the defendants’ contention that the founders would leave before trial.

What Happens Next

The court barred the company from closing on the recapitalization, pending a post-trial decision. The defendants have ten days to elect whether to hold a prompt, bifurcated trial, ideally within about ninety days, limited to whether the committee-approval path of the safe harbor was satisfied. That trial would focus on good faith, with likely no expert testimony and little (if any) additional discovery. If the defendants decline, the court will still hold the full trial promptly.

Key Takeaways

• The safe harbor is strong but not automatic. Board determinations of director disinterest are hard to overturn, but a committee’s good faith remains open to challenge, is not subject to the heightened presumption, and can turn on credibility at trial.
• Process discipline is decisive. Backchannel contact with the controller, pressure from the controller, and involvement by non-committee directors can undermine an otherwise well-structured committee.
• Ephemeral messaging carries real litigation risk. Auto-deleting messages about a conflicted transaction can damage witness credibility and support inferences drawn from gaps in the record, even without a spoliation ruling.
• Contemporaneous records matter. Advisor notes and text messages undercut lawyer-drafted minutes and deposition testimony enough to require live credibility determinations at trial.
• Expect injunction risk for control-extending transactions. Because these transactions are hard to unwind and hard to value, plaintiffs can more readily show irreparable harm, especially when the company can implement the deal unilaterally.
• Build a valuation record. Although Delaware law does not require a fairness opinion, the committee’s failure to obtain one or otherwise value the benefits to the founders weighed in the court’s entire fairness analysis. Committees should consider financial analysis or a fairness opinion that addresses the benefits to the controller and the cost to minority holders.