Court of Chancery Reinforces Section 144’s Protections–and the Need for Faithful Implementation

In an important decision interpreting the new Section 144 of the Delaware General Corporation Law, added by the adoption of SB 21 in 2025, the Court of Chancery last week preliminarily enjoined a proposed recapitalization of Cloudflare, Inc. designed to preserve founder control. In re Cloudflare, Inc. Stockholder Litigation, C.A. No. 2026-0772-JTL (Del. Ch. Oct. 16, 2026). The recapitalization sought to create a new class of voting preferred and nonvoting common stock to secure the founders’ continued control notwithstanding the dilution caused by equity compensation and other corporate uses of its stock. The board formed a special committee to determine whether the recapitalization was in the best interests of Cloudflare and its public minority stockholders. The injunction grant turned on an unusual record that enabled the stockholder plaintiffs to assert that coercive and aggressive behavior of the controlling founders, together with evidence of process issues that included unauthorized backchannel communications and deleted Signal messages, impacted the special committee’s fulfillment of its fiduciary duties.

Nonetheless, Vice Chancellor Laster’s 142 page opinion resolved every statutory question concerning the scope and application of Section 144 in favor of the defendants, affirming that the statute provides “powerful protection for conflicted transactions” and “greater certainty, predictability, and protection against litigation than the common law had provided.” The opinion shut down a host of plaintiff side challenges that sought to rob Section 144 of its intended import, and built on two earlier 2026 Chancery decisions by Vice Chancellor Will that likewise implemented the important new protections of controller conflict transactions promised by the 2025 amendments (here and here).

Several takeaways stand out.

Plaintiffs cannot avoid Section 144 by seeking injunctive relief. Seeking to avoid application of the Section 144 safe harbors, the plaintiffs invoked a statutory exception of “injunctive relief” against “provisions or devices designed or intended to deter, delay, or preclude a change of control or other transaction involving the corporation or a change in the composition of the board of directors.” The Court held that the exception applies only to the “narrow categories” of “defensive measures that would trigger enhanced scrutiny,” that is, “(1) standalone defensive devices like a stockholder rights plan (Unocal), (2) the deal protection measures built into a merger agreement (Revlon), and (3) interference with director election contests (Blasius).” Because the recapitalization is “the type of conflicted controlling stockholder transaction where the General Assembly intended to provide protection against entire fairness review,” the Court held that the exception did not apply, reasoning that the plaintiffs’ reading would let stockholders “sidestep the [statutory] regime by seeking injunctive relief.”

Board determinations of director disinterest receive strong deference. Section 144 provides a “heightened” presumption of disinterestedness for directors of publicly listed corporations who the board has determined satisfy the independence criteria of the listing exchange. The plaintiffs advanced three arguments to circumvent that presumption. They argued that the board’s disinterestedness determination as to the special committee members was itself a breach of fiduciary duty, that the presumption applies only at the pleading stage, and that the plaintiffs had offered sufficient evidence to rebut it. The Court rejected each argument, holding that the plaintiffs’ fiduciary challenge to the board’s disinterestedness determination failed because the information the board allegedly overlooked was not sufficiently material and that applying entire fairness review to that determination would cause “the statute [to] collapse inward upon itself”; that the heightened presumption of disinterestedness applies at all stages of litigation; and that, after the pleading stage, it may only be rebutted by “clear and convincing evidence” that no board could reasonably have determined that the director was disinterested. As the Vice Chancellor explained, the question under the statutory standard is not whether the Court regards the board’s disinterestedness determination as “correct,” but instead “only whether the [board’s] determination was a reasonable one that directors weighing the evidence could have reached”; even where “[r]easonable minds could debate the point,” the statutory presumption requires deference to the directors’ determination. In the course of its opinion, the Court made clear that the oft invoked social and extra boardroom connections among directors claimed to undermine disinterestedness, which had infected some previous Chancery opinions, do not survive the new Section 144 definition of director independence where those connections are not preternatural.

The Special Committee’s understanding of its fiduciary duties remains essential. To obtain safe harbor protection through a special committee, Section 144 preserves the requirement that the committee approve the transaction “in good faith and without gross negligence,” that is, that the committee fulfill the duties of loyalty by acting for a proper purpose, and with due care. The Court rejected the plaintiffs’ gross negligence challenge, including the contention that a fairness opinion blessing the recapitalization was required. But on the preliminary record, the Court found that the plaintiffs had established a reasonable probability of proving at trial that the special committee did not approve the transaction in good faith. That conclusion turned on an extraordinary but preliminary record of unauthorized communications with the controllers, including threats, profanities, and coercive statements by one of the founders; disappearing Signal messages and directors’ deposition testimony that was contradicted by surviving electronic communications; and the company’s announced plan to close the transaction despite a prior commitment to await the Court’s ruling. We will address in a subsequent memorandum the broader implications of this case for how boards document important transactions and use information technology. For now, the decision underscores that special committees must confront conflicts with candor and discipline to obtain Section 144’s safe harbors and must recognize that their duty is to act solely in the best interests of the company and to resist pressure from interested parties (however strong) to deviate from that duty. The decision’s careful and measured treatment of the “good faith” requirement should belie the criticisms leveled by the opponents of the new Section 144 that the statutory safe harbors somehow deviate from Delaware’s historic insistence on protecting stockholder interests in the controller conflict context.

In that regard, the Vice Chancellor reasoned that “placat[ing]” a controller founder’s desire to maintain control may indicate a “controlled mindset” inconsistent with good faith. That said, the opinion admits of the possibility that evidence at trial may demonstrate that acceding to the controller founders’ desires may well be in the best interests of the corporation and all of its stockholders in light of the directors’ view of the value of the founders’ continued leadership and vision. Indeed, new Section 144 aside, the deference inherent in the business judgment rule counsels in favor of judicial respect for the views of disinterested directors on that critical point. As the opinion recognizes, while acceptance of the stockholder plaintiffs’ understandably jaundiced spin on the record may be required at the pleading or preliminary injunction stages, at trial the directors remain free to show that their judgment to support a founder control continuing recapitalization constituted a good faith decision to serve the best interests of the corporation and its minority stockholders.

Safe harbor questions may be tried before courts reach entire fairness. Consistent with its rejection of the plaintiffs’ gross negligence claim, the Court emphasized that its assessment of the special committee’s good faith remained preliminary, without the benefit of live testimony from the directors. Recognizing that the Section 144 safe harbors were designed to avoid the costs and burdens of entire fairness review, the Court concluded there was “good reason to think that the defendants should not be put through the burden of trying an entire fairness case” until it could be determined on a full record whether the safe harbor applied. The Court thus offered the defendants the choice of bifurcating the proceedings and conducting an initial trial focused on whether the special committee approved the transaction in good faith and thereby qualified for safe harbor protection. That innovative ruling is a welcome signal that the Court may seek to resolve safe harbor questions before imposing the burdens of a plenary fairness trial with all the expense, complexities, and uncertainty of an after the fact inquiry into whether a transaction was entirely fair as to both fair dealing and fair price, even where the preliminary record suggests the possibility of the plaintiffs establishing a lack of good faith at trial.

The Cloudflare decision is a faithful interpretation of the amended Section 144 and its promise of greater predictability for transaction planners. Boards that implement the safe harbor procedures with fidelity should be entitled to the statutory protections, especially when conflicted parties respect the duty of a special committee and of the board as a whole to act solely in the best interests of the company and all of its stockholders. And even where a preliminary record suggests that a special committee’s process was imperfect, the safe harbors of Section 144 may be invoked at later stages of litigation before incurring the uncertainty and expense of a plenary trial on the entire fairness of the transaction.