Delaware Chancery Enjoins Cloudflare Founder-Control Recapitalization
Delaware Chancery enjoined Cloudflare's founder-control recapitalization, finding the special committee likely failed Section 144's good-faith test and narrowing the statute's injunction exclusion.
Per a Foley & Lardner alert, the Delaware Court of Chancery preliminarily enjoined Cloudflare's multi-step recapitalization, which would have let co-founders Matthew Prince and Michelle Zatlyn sell economic interests without losing voting control, holding that plaintiffs showed a reasonable probability that the special committee did not satisfy Section 144's "in good faith and without gross negligence" condition. Vice Chancellor Laster rejected the other statutory arguments: the Section 144(d)(6) injunction exclusion does not reach conflicted controller transactions, board determinations of a committee member's disinterest are measured by gross negligence rather than entire fairness, and the heightened presumption of disinterest for listed-company directors meeting stock-exchange independence rules applies beyond the pleadings stage, requiring clear and convincing evidence to rebut. Because the recapitalization contained no price term and only roughly 15.6% to 17.7% of unaffiliated voting power supported the voted components (with Glass Lewis and ISS opposing), the court also found a reasonable probability of an entire-fairness failure. Defendants may elect a streamlined, roughly 90-day bifurcated trial confined to good faith. Committee advisers should note the record-building implications: no auto-deleting messaging, no backchannels, no pre-scripted narrative, and a process built to survive entire fairness.