Securities Regulation Daily Wrap Up, FIDUCIARY DUTIES—Del. Ch.: Court enjoins Cloudflare recapitalization meant to entrench founder control, (Oct 19, 2026)

By Anne Sherry, J.D.

The defendants may opt for an initial trial on the issue of special committee members’ good faith.

Cloudflare stockholders won a preliminary injunction against an allegedly unfair share reclassification. While conflicted transactions are protected by safe harbors recently added to DGCL Section 144, those safe harbors are predicated on good faith. Finding a good chance that the defendants will not be able to satisfy entire fairness if the safe harbors are unavailable, the Delaware Court of Chancery concluded that a status-quo-preserving injunction was appropriate. The defendants may opt for bifurcated proceedings to expedite resolution of the question of good faith (In re Cloudflare, Inc. Stockholder Litigation, No. 2026-0772-JTL (Del. Ch. Oct. 16, 2026)).

Share reclassification. Cloudflare’s founders have majority control of the company, but only just. As often happens under dual-class share structures, founder control eroded as the founders divested their Class B shares and the company continued issuing Class A shares. Last October, the board created a special committee to consider changing Cloudflare’s capital structure, which culminated in a share reclassification that was widely rejected by non-founder stockholders (but passed due to the founders’ voting control).

Under the transaction, the founders’ Class B stock would be exchanged for Class A stock and newly issued preferred stock, while each Class A share would be split into one Class A share and one newly issued share of nonvoting Class C stock.

Preliminary injunction standard. A plaintiff seeking a preliminary injunction must demonstrate a reasonable probability of success on the merits and that some irreparable harm will occur in the absence of the injunction.

Irreparable harm existed because if the reclassification were to close, Cloudflare would issue millions of new shares of nonvoting stock to the public, making it effectively impossible to unwind the transaction or craft a reliable damages award.

The balance of equities also favored injunctive relief: granting the injunction would only delay the defendants’ transaction, while denying it would cause the plaintiffs irreparable harm.

Therefore, as long as the plaintiffs could show a reasonable probability of success on the merits, a status-quo-preserving injunction was appropriate.

Statutory safe harbors. The DGCL Section 144 safe harbors, if applicable, would preclude equitable relief or damages. But the court found the plaintiffs had a reasonable probability of demonstrating at trial that the safe harbors did not apply.

Here, the court held that after the pleading stage, a party must overcome Section 144’s heightened presumption of director disinterestedness through clear and convincing evidence. The court crafted a test for doing so: asking whether a reasonable board presented with the same information could have made a determination of disinterestedness—not whether the decision was correct. Under this standard, a court can only reject the board’s determination if the plaintiff proves by clear and convincing evidence that treating the director as disinterested was unreasonable. The plaintiffs failed this test.

However, Section 144 leaves room for stockholder challenge if the committee did not act in good faith and without gross negligence. The plaintiffs cleared this bar by arguing that the committee operated under a controlled mindset, deferring to the founders’ desires rather than negotiating at arm’s length on behalf of the company and all stockholders. There was evidence that the committee focused on finding a capital structure that would meet the founders’ needs and used an AI chatbot to find an expert who would opine that maintaining founder control would be good for the company.

There was also evidence of backchannel communications and outsider involvement. The defendants used the “ephemeral” messaging app Signal extensively and could provide no explanation for shortening the app’s auto-delete settings, thereby destroying evidence after having been told to expect litigation. They further damaged their credibility by reneging on a promise not to close the reclassification transaction until the court ruled. The court could not bless the transaction at the injunction stage, saying it will require a trial to observe the witnesses’ demeanor and credibility.

Success on the merits. Because the plaintiffs showed a reasonable likelihood of success on their argument that the reclassification was not protected by the statutory safe harbor, they could invoke common-law principles to challenge that transaction, and they had a reasonable likelihood of success under those principles.

The parties agreed that if the safe harbor did not apply, entire farness would govern. The plaintiffs offered enough evidence to show a reasonable probability of success as to both procedural and substantive unfairness.

Bifurcated option. Finally, the court recognized that the defendants should not have to try an entire fairness case before knowing whether the safe harbor applies. The court therefore gave the defendants ten days to decide whether to elect bifurcated proceedings, with first a limited trial on the safe harbor issue, focused on the committee’s good faith.

The case is No. 2026-0772-JTL.

Judge: Laster, J.

Attorneys: Ned Weinberger, Brendan W. Sullivan and Ryan C. Stieve (Labaton Keller Sucharow LLP) and Jeremy Friedman, David Tejtel and Alexander M. Krischik (Friedman & Tejtel PLLC) for New England Teamsters Pension Fund and Ronald Mumme. Daniel E. Meyer (Johnson Van Kwawegen LLP) for California Public Employees’ Retirement System, Handelsbanken Fonder AB, Stichting Pensioenfonds ABP and Universities Superannuation Scheme Ltd. Kimberly A. Evans, Lindsay K. Faccenda, Robert Erikson and Daniel M. Baker (Block & Leviton LLP) for Bruce Taylor. Brad D. Sorrels, Andrew D. Cordo, Nora M. Crawford, Leah E. León, Mallory V. Phillips, Amanda L. Day, Ashleigh L. Herrin and Jillian Patterson (Wilson Sonsini Goodrich & Rosati) for Cloudflare, Inc., John Graham-Cumming, Carl Ledbetter, Mark Hawkins and Stacey Cunningham. Ryan D. Stottmann, Alexandra M. Cumings, Nicholas Gottemoller and Elaine M. McCabe (Morris, Nichols, Arsht & Tunnell LLP) for Matthew Prince and Michelle Zatlyn. Michael A. Pittenger, T. Brad Davey, Christopher N. Kelly, Charles P. Wood and Samuel G. Gustafson (Potter Anderson & Corroon LLP) for Karim Lakhani, Katrin Suder and Scott Sandell.

Companies: New England Teamsters Pension Fund; California Public Employees’ Retirement System; Handelsbanken Fonder AB; Stichting Pensioenfonds ABP; Universities Superannuation Scheme Ltd.; Cloudflare, Inc.

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