Background
Cloudflare’s founders held high-vote stock but faced losing majority voting control as they sold shares and the company issued additional low-vote stock. A special committee approved a recapitalization intended to preserve founder control. Stockholders alleged that the founders extracted an unfair deal and that the directors breached their fiduciary duties.
The Court of Chancery preliminarily enjoined the recapitalization pending final disposition. Applying the good-faith standard associated with Disney, the court concluded that plaintiffs had shown a reasonable probability of proving at trial that the committee acted to placate the founders rather than to advance the best interests of Cloudflare and all its stockholders. The defendants sought certification of an interlocutory appeal.
The Court’s Holding
The court certified an interlocutory appeal on two issues: whether the Disney standard remains viable, such that fiduciaries lack good faith when they consciously pursue a purpose other than the corporation’s and stockholders’ best interests; and whether good faith in the transactional-justification context must be evaluated collectively or director by director.
Vice Chancellor Laster explained that both issues could materially affect the case. If bad faith were limited to malice or conscious lawbreaking, plaintiffs’ injunction-stage theory would fail and the statutory controller safe harbor could become case-dispositive. Clarifying whether the analysis is collective or individualized would also govern how the parties present evidence and how the court evaluates good faith at trial.
The court declined to certify the defendants’ other arguments, finding that they did not present substantial issues of material importance. Certification was only a recommendation; the Delaware Supreme Court retained discretion whether to accept the appeal.
Key Takeaways
- The court recommended immediate appellate review of the continuing vitality of the Disney good-faith standard under Delaware’s controller safe-harbor statute.
- The court also certified whether transactional good faith should be assessed collectively for a committee or individually for each committee member.
- The preliminary injunction remained an interlocutory ruling based on a reasonable probability of success, not a final finding that the committee acted in bad faith.
Why It Matters
The appeal could define the reach of Delaware’s statutory protections for conflicted controller transactions. A ruling limiting bad faith to malice or conscious lawbreaking would narrow judicial review of special-committee conduct and could end this litigation without trial.
The decision also highlights the distinction between reviewing a transaction and imposing personal liability. Supreme Court guidance on collective versus individualized review could shape the evidence, litigation strategy, and adjudication of future safe-harbor disputes.