Delaware Court Enjoins Cloudflare Recapitalization Over Special Committee Good Faith Concerns
A preliminary injunction against a recapitalization aimed at maintaining two founders’ voting control in In re Cloudflare, Inc. Stockholder Litigation was issued by the Delaware Court of Chancery on October 16, 2026. The court found a reasonable probability that the special committee did not act in good faith and that defendants could not then prove entire fairness. The ruling establishes that approval by a disinterested committee is required yet alone insufficient to secure safe harbor protection under Section 144(b)(1) of the Delaware General Corporation Law (DGCL).
Two founders held 10-vote Class B stock representing 50.3% of the voting power. Founder sales and company issuances of one-vote Class A stock were steadily eroding that position. At historical rates, the founders would lose majority control by the end of 2026. To counter this, the board formed a three-member special committee. Over the course of six months across 18 meetings, the participants settled on a two-step transaction: every Class B share was to be swapped for a single Class A share alongside one share of nine-vote preferred stock, which would then be succeeded by a distribution granting one nonvoting Class C share per Class A share. The founders’ votes supplied the necessary stockholder approval, while only 15.6% to 17.7% of the remaining voting power supported the proposals.
Court Grants Preliminary Injunction to Block Closing
Stockholders sued and moved to enjoin closing, satisfying each element for a preliminary injunction. The court determined that reversing the recapitalization post-closing would prove practically impossible and expressed skepticism regarding its ability to formulate an adequately dependable damages award. The equities favored relief because the company could implement the transaction unilaterally, leaving no third-party deal at risk, and the record provided no credible support for the argument that the founders might leave if the transaction were delayed.
Addressing the merits, the court declined the plaintiffs’ invocation of DGCL Section 144(d)(6)(b), which maintains injunctive review for measures or devices intended to deter, delay, or prevent a change in control. The court held that the provision does not let plaintiffs escape the safe harbor for conflicted controller transactions by seeking only injunctive relief. Instead, the exclusion is confined to traditional enhanced scrutiny settings like stockholder rights plans and deal protections. However, while the court upheld the board’s disinterest determinations for two committee members under DGCL Section 144(d)(2), it concluded that the plaintiffs showed a reasonable probability that the committee failed to act in good faith.
Evidence of a Controlled Mindset and Vulnerabilities in Committee Process
The court pointed to several factors supporting its finding that the special committee did not act in good faith. Advisor notes referred to the need to figure out a narrative, and the committee ultimately adopted the structure the lead founder “loved” without presenting him with other alternatives identified by its banker.
Because the safe harbor failed, the court evaluated entire fairness and found a reasonable probability that defendants could not prove it, citing the initiation process, lack of valuation, and unaffiliated stockholders’ vote against the proposals.
