Delaware Chancery Dismisses KnowBe4 Take-Private Challenge

On May 27, 2026, Chancellor Kathaleen McCormick of the Delaware Court of Chancery issued a memorandum opinion in Le Clair v. KnowBe4, Inc., C.A. No. 2024-1143-KSJM, granting defendants’ motions to dismiss all claims arising from Vista Equity Partners’ $4.6 billion acquisition of KnowBe4, Inc. The decision is notable for its treatment of two key issues: (1) the standard for pleading the existence of a stockholder control group, and (2) the cleansing effect of an informed, uncoerced stockholder vote under Corwin v. KKR Financial Holdings LLC where entire fairness would otherwise apply due to director-level conflicts. 125 A.3d 304 (Del. 2015). The opinion reinforces the importance of robust procedural protections — including a fully empowered special committee and a majority-of-the-minority vote — in similar M&A transactions involving director-level conflicts.

Background

KnowBe4, Inc. (“KnowBe4”) is a Delaware corporation, headquartered in Florida, that provides cybersecurity awareness training solutions. CEO Sjoerd Sjouwerman founded the company in 2010 and held 4.2% of KnowBe4’s voting power as of the record date. KKR Knowledge Investors L.P., an affiliate of KKR & Co. Inc. (together, “KKR”) and Elephant Partners (together with certain affiliated funds, “Elephant”) separately invested in KnowBe4 through a series of private financing rounds between 2016 and 2020. As of the record date, KKR held 26.4% of KnowBe4’s voting power, and Elephant held 37.5%, with each entity having separate board designees. Vista Equity Partners (“Vista”) first acquired preferred shares from KKR, Elephant, and another institutional investor in March 2021 for $300 million, giving Vista 2.8% of KnowBe4’s voting power. Following Vista’s investment, KnowBe4 completed an IPO and adopted a dual-class stock structure with Class A shares (one vote per share) and Class B shares (ten votes per share).

Between May and June 2022, Vista met separately with KKR’s board designee, Elephant’s board designee, and Sjouwerman to discuss the company’s business and a potential sale. No discussions regarding economic or other terms of a potential transaction took place during these meetings. On June 28, 2022, the board met to discuss the conversations with Vista, and outside counsel advised the board regarding potential conflicts of interest. Elephant’s and KKR’s board designees each disclosed that their respective firms might not sell all of their holdings, and Sjouwerman similarly disclosed that he and management might retain a portion of their equity.

The board formed a Special Committee on July 5, 2022, comprising three directors — Gerhard Watzinger, Kevin Klausmeyer, and Shrikrishna Venkataraman. On July 11, 2022, the board executed a Unanimous Written Consent formally establishing the Special Committee and the scope of its authority, including authorizing it to consider, evaluate, recommend, reject, or approve any strategic transaction. Critically, the board conditioned any transaction on dual MFW protections: prior approval by the Special Committee and a majority-of-the-minority stockholder vote. Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”).[1]

The Special Committee retained Potter Anderson as its independent legal counsel and Morgan Stanley as its financial advisor. The Special Committee then oversaw an active sale process, authorizing Morgan Stanley to contact potential financial sponsors. Morgan Stanley ultimately contacted 16 parties excluding Vista; nine executed NDAs, eight met with management, and two submitted diligence requests, but no party other than Vista submitted a bid. The Special Committee limited the involvement of KKR and Elephant in the sale process, and directed that neither KKR nor its designee would participate in the Special Committee’s negotiations with Vista.

After extensive negotiations, during which the Special Committee countered Vista’s initial $24.00 per share proposal, the parties agreed on a price of $24.90 per share. Vista conditioned the transaction on KKR, Elephant, and Sjouwerman (the “Rollover Stockholders”) collectively rolling over equity worth approximately $682 million — that is, exchanging their existing shares for equity in the post-merger entity rather than receiving the per-share cash merger consideration. The Rollover Stockholders executed separate support agreements committing to vote for the merger. Vista and the Rollover Stockholders also down-converted their Class B shares to Class A shares before the record date, surrendering their superior voting power.

On January 31, 2023, stockholders overwhelmingly approved the merger: 99.8% of the majority shares voted in favor, and 99.0% of the minority shares voted in favor — 98.9% of Class A stockholders approved; and 100% of Class B stockholders approved. The merger closed the following day, on February 1, 2023.

The Litigation

Former stockholders filed suit alleging three counts: (1) that KKR, Elephant, and Sjouwerman formed a control group and breached their fiduciary duties in connection with the merger; (2) that the director defendants breached their duty of loyalty by approving the merger while laboring under conflicts of interests; and (3) that KnowBe4 breached an equal-treatment provision in its certificate of incorporation, which required that Class A and Class B shares be treated equally in any acquisition. Plaintiffs did not advance arguments on the equal-treatment claim in briefing, thus waiving that claim.

The Decision

As to the control group allegations (Count I), the court applied the “legally significant connection” standard from Sheldon v. Pinto Technology Ventures, L.P. and found that plaintiffs failed to allege either meaningful historical ties or transaction-specific connections among the purported control group members sufficient to support a reasonable inference of an actual agreement to work together. 220 A.3d 245, 251–52 (Del. 2019). The court rejected arguments that concurrent rollover decisions, early-stage meetings with Vista, separate support agreements, and the board’s adoption of MFW protections established a legally significant connection, and dismissed Count I.

As to the director fiduciary duty claims (Count II), the court assumed that entire fairness applied based on director-level conflicts — specifically, because Sjouwerman rolled over his shares and three other directors were alleged to be dual fiduciaries for the Rollover Stockholders. However, the court held that where entire fairness applies due to board conflicts rather than a conflicted controller standing on both sides of the transaction, a fully informed, uncoerced stockholder vote can “cleanse” the transaction and restore business judgment review under Corwin v. KKR Financial Holdings LLC. The court rejected all five categories of alleged disclosure deficiencies advanced by plaintiffs — concerning the Special Committee’s conflicts, Morgan Stanley’s conflicts, KKR’s rollover participation, Kevin Mitnick’s (former director and close friend of Sjouwerman holding 31% of the voting power of unaffiliated stockholders) support agreement, and the Special Committee’s alleged favoritism of Vista — and concluded that the stockholder vote was fully informed and uncoerced. Business judgment review accordingly applied, and Count II was dismissed.

Practical Takeaways

Le Clair offers several important lessons for boards, special committees, and private equity sponsors navigating take-private transactions with equity rollovers. The decision is particularly significant for its rigorous application of the control group pleading standard and its reaffirmation of the cleansing power of a fully informed stockholder vote where entire fairness applies due to board-level — rather than controller-level — conflicts.

The control group pleading standard remains exacting. The court’s application of the Sheldon v. Pinto Technology Ventures, L.P. “legally significant connection” standard confirms that plaintiffs face a demanding burden in establishing that nominally independent stockholders constitute a control group. Absent a written or formal agreement, a plaintiff must plead “an array of plus factors” — including historical ties and transaction-specific connections — sufficient to support a reasonable inference of an actual agreement to work together toward a shared goal. Le Clair, at *20. The court assessed these allegations holistically but found each category of evidence independently insufficient. As to historical ties, the court emphasized that the law requires a “long, well-documented history of coordinated investments” demonstrating that parties have previously “operated in tandem.” Id. at *21–22. Elephant was “nascent” at the time of its initial investment, made its first KnowBe4 investment three years before KKR, and the two firms made four separate and independent investments in KnowBe4 versus only one joint investment. The court contrasted these facts with cases like Garfield v. BlackRock Mortg. Ventures, LLC, 2019 WL 7168004 (Del. Ch. Dec. 20, 2019), which involved a ten-year history of co-investment, and In re Hansen Med., Inc. S’holders Litig., 2018 WL 3025525, at *7 (Del. Ch. June 18, 2018), where alleged group members coordinated investments in at least seven companies over 21 years and declared themselves a group to the SEC. Similarly, the mere existence of an investors’ rights agreement was insufficient where plaintiffs did not allege that KKR and Elephant worked in tandem to negotiate that agreement or exercised their rights under it.

Separate, parallel economic interests do not establish a control group. The court’s treatment of the transaction-specific connections is equally instructive. The “concurrent” decisions by Elephant, KKR, and Sjouwerman to roll over their stock were characterized as “a quintessential example of parallel economic interests” that did not independently establish a legally significant connection. Le Clair, at *25. The court observed that the timing of rollover decisions is “typically driven by the deal itself, not the group members,” and noted that documents incorporated by reference reflected divergent approaches: Elephant maintained a fixed sale percentage, while KKR varied its rollover amount. Id. at *25. Five early-stage meetings between Vista and the alleged control group members — only one of which involved all three parties — occurred before any substantive merger negotiations and reflected no more than parallel interests. The decisions to enter into separate support agreements similarly reflected “an alignment of interests,” not a legally significant connection. Id. at *27. Institutional investors and management who independently make similar economic decisions in connection with a transaction can take comfort in this holding, particularly when their investment histories involve separate, independent investments, and when their transaction-level behavior reflects individual rather than coordinated decision-making.

Adopting MFW protections is not a concession of controller status. Perhaps the most practically significant aspect of the control group analysis is the court’s explicit rejection of the argument that the board’s decision to adopt MFW protections constituted a “concession” that the stockholders formed a control group. The court reasoned that, as a policy matter, MFW incentivizes boards to adopt procedural protections when negotiating deals that involve potential controller conflicts, and that “[d]eeming the decision to adopt MFW protections as a concession concerning the existence of a conflicted controller would disincentivize their use.” Id. at *28. Boards should not hesitate to implement these prophylactic safeguards out of concern that doing so will be used against them in future litigation. This holding is significant because it removes a potential chilling effect on the voluntary adoption of minority-protective deal structures in transactions where controller status is uncertain or contested.

A fully informed, uncoerced stockholder vote can cleanse transactions subject to entire fairness due to board-level conflicts. The court’s treatment of Count II provides an important reaffirmation of the doctrine that, where entire fairness applies because of director-level conflicts — rather than because a conflicted controller stands on both sides of the transaction — either a fully empowered, independent special committee or a fully informed, uncoerced stockholder vote can cleanse the transaction and restore business judgment review. The court cited Salladay v. Lev for the principle that under Corwin, “‘absent a looming conflicted controller,’ approval by a fully informed, un-coerced vote of disinterested stockholders can cleanse the transaction—even where entire fairness would otherwise apply.” 2020 WL 954032, at *8 (Del. Ch. Feb. 27, 2020). This is a critical doctrinal distinction: The availability of vote-based cleansing turns on the source of the conflict. Where the conflict arises from director self-interest (here, equity rollovers by the CEO and dual-fiduciary status of directors affiliated with rollover stockholders), the stockholder vote provides a viable path to dismissal. A well-structured vote — here, one that included four separate voting conditions and produced overwhelming approval (99.0% of minority shares) — places a significant burden on plaintiffs to identify material disclosure deficiencies.

Quarantining rollover stockholders from the sale process can be critical. The Special Committee’s decision to exclude KKR, Elephant, and their designees from participating in the committee’s negotiations with Vista proved significant to the outcome on multiple levels. Most directly, the court relied on this quarantine in rejecting the Morgan Stanley disclosure claim. Plaintiffs argued that the proxy statement should have disclosed Morgan Stanley’s approximately $200 million in KKR stock and $350 million in KKR portfolio companies. Distinguishing the Delaware Supreme Court’s decision in City of Dearborn Police & Fire Revised Retirement System v. Brookfield Asset Management Inc. — which involved a controller squeeze-out where the financial advisor had a nearly half-billion-dollar holding in the controller itself — the court emphasized that KKR was “neither a controller nor a counterparty” but rather a minority stockholder that rolled over its shares. 314 A.3d 1108 (Del. 2024); Le Clair, at *40. Because KKR “did not participate in the Special Committee process,” Morgan Stanley’s financial ties to KKR were immaterial. Id. at *41. The lesson is clear: Quarantining conflicted stockholders not only protects the integrity of the negotiation process but also materially limits the disclosure obligations associated with the financial advisor’s relationships.

Proxy statement disclosure obligations have practical limits. The court’s treatment of the five disclosure claims collectively establishes important boundaries on what proxy statements must disclose in the context of a take-private transaction. Several principles emerge:

First, as to Special Committee member conflicts, the court reaffirmed that “a director’s independence is not compromised simply by virtue of being nominated to a board by an interested stockholder” and that “ordinary past business relationships, board nominations, and board service” are “insufficient to cast doubt on a director’s independence.” Id. at *37. Where a director holds investments in funds managed by a rollover stockholder, both the overall rollover and the size of the director’s stake in the rollover stockholder would need to be sufficiently sizeable to create conflicting economic incentives; generalized allegations that such investments exist do not suffice. The court’s reasoning suggests that directors who passively hold investments in a fund managed by a transaction participant are not thereby conflicted absent specific allegations connecting the size of the investment to an incentive to act disloyally.

Second, preliminary rollover estimates that changed during negotiations need not be separately disclosed when the proxy statement described the evolution of the rollover in detail. The court found that stockholders knew from the proxy statement that KKR’s rollover amount was fluid and that KKR would potentially roll over its entire equity stake. Because early estimates were contingent on other factors — including the ultimate acquisition price — they would not have “altered the total mix of information.” Id. at *43. This holding provides meaningful guidance to parties in transactions where rollover amounts are negotiated in parallel with the deal price.

Third, accurately labeling a stockholder as “unaffiliated” under a defined term in the proxy statement is not misleading, even if that stockholder had personal relationships with insiders. The court rejected the claim that Mitnick was improperly characterized as an “Unaffiliated Stockholder,” finding that the proxy statement’s characterization was “true and complete” because Mitnick met the defined term’s criteria. Id. at *44. Moreover, the court found that the Special Committee’s efforts to secure a support agreement from a large unaffiliated stockholder were not unseemly and did not alter the total mix of information available to stockholders. This holding suggests that proxy statements need not caveat defined-term classifications with subjective assessments of personal relationships.

Fourth, preliminary, speculative indications of interest from parties that never bid need not be disclosed. The court held that “[i]n the usual case, where a board has not received a firm offer or has declined to continue negotiations with a potential acquirer because it has not received an offer worth pursuing, disclosure is not required.” Id. at *47. Plaintiffs could not “plead a disclosure claim because they disagree with the Special Committee’s assessment of indications of interest.” Id. As the court emphasized, Delaware law “does not require a play-by-play description of every consideration or action taken by a Board.” Id. at *48. This reaffirmation is particularly useful for special committees running competitive sale processes, as it confirms that the failure of competing bidders to emerge does not create a disclosure obligation to detail every preliminary contact.

Process matters: the anatomy of a successful defense. Finally, Le Clair illustrates the cumulative importance of deal process in securing dismissal. The KnowBe4 transaction featured a series of procedural protections that, taken together, formed a robust defense: (i) the board conditioned the transaction on MFW’s dual protections from inception; (ii) the Special Committee was fully empowered with authority to reject any transaction; (iii) the Special Committee retained independent counsel and an independent financial advisor; (iv) the conflicted stockholders were quarantined from the sale process; (v) the Special Committee ran a broad market check, contacting 16 alternative parties; (vi) the transaction was subject to four separate stockholder votes, including a majority-of-the-minority condition; and (vii) the Rollover Stockholders surrendered their superior voting power by down-converting their Class B shares before the record date. Private equity sponsors and boards structuring similar transactions would be well-served to adopt a comparable constellation of procedural safeguards.

1The MFW framework provides that a transaction involving a conflicted controller may receive business judgment review if conditioned from inception on both the approval of a fully empowered, independent special committee and a majority-of-the-minority stockholder vote.(go back)