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A Delaware court’s decision to temporarily block Cloudflare’s proposed share restructuring has raised important questions about founder control, board independence and the protections available under the state’s revised corporate law.
On October 16, 2026, Vice Chancellor J. Travis Laster granted a preliminary injunction against a plan that would have allowed Cloudflare co-founders Matthew Prince and Michelle Zatlyn to sell shares without losing their voting control of the company.
The decision is an early test of Delaware’s 2025 corporate law reforms. It also offers lessons for boards and in-house legal teams overseeing transactions involving powerful founders or controlling shareholders.
The ruling does not establish that Cloudflare’s restructuring was unlawful. The court found that shareholders had a reasonable probability of succeeding in their challenge and that allowing the transaction to close before trial could cause harm that would be difficult to reverse. The merits of the dispute remain unresolved.
Why Cloudflare’s restructuring faced a shareholder challenge
Cloudflare went public in 2019 with a dual-class share structure that gave its founders greater voting power than ordinary investors. Class B shares carried 10 votes each, while publicly traded Class A shares carried one vote each.
That arrangement allowed Prince and Zatlyn to maintain control despite owning a smaller share of the company’s total equity.
However, their voting power had gradually declined as they sold shares and Cloudflare issued additional stock. According to the court’s opinion, the founders held approximately 50.3% of the company’s voting power in June 2026.
If share sales and new issuances continued at historical rates, they were projected to lose majority control by the end of 2026.
To address that risk, Cloudflare proposed replacing its dual-class structure with an arrangement involving three classes of common stock and a new class of preferred stock.
The preferred shares would preserve the founders’ voting power, while newly issued nonvoting Class C shares would allow them to sell equity without reducing that control.
The financial benefits could have been substantial. Based on calculations outlined in the ruling, shareholders argued that the restructuring would allow the founders to generate approximately $2.14 billion more in proceeds before losing control than they could under the existing arrangement.
The company’s special governance committee supported the proposal. Its members had considered preserving founder leadership important to Cloudflare’s long-term performance.
Shareholders challenged that position, arguing that the transaction favored the founders at the expense of other investors.
The disagreement became especially clear during Cloudflare’s June 30 shareholder vote. Although the proposals received enough votes to pass, largely because of the founders’ voting power, only 15.6% to 17.7% of the voting power held by other shareholders supported the measures, depending on the proposal.
The court also questioned aspects of the special committee’s work.
Evidence suggested that committee members and advisers may have approached negotiations with the expectation that the restructuring would proceed. The judge pointed to communications involving Prince, interactions between committee members and directors close to the founders, and concerns about whether the committee had negotiated independently.
The opinion also examined the use of Signal messages set to disappear, which raised questions about evidence preservation and the reliability of testimony.
These issues mattered because the court had to assess whether the committee acted in good faith.
The court did not make final findings of misconduct. It determined that the available evidence justified further examination at trial.
Delaware’s revised corporate law offers protection, but with conditions
The decision is significant because it examines amendments to Section 144 of the Delaware General Corporation Law enacted in 2025.
The changes, introduced through Senate Bill 21, created broader statutory protections for certain transactions involving directors, officers and controlling shareholders.
Under the revised law, qualifying transactions can receive protection from legal challenges when specified approval procedures are followed. These include approval by an appropriate committee of disinterested directors or, for certain transactions, informed approval by disinterested shareholders.
The reforms were intended to give companies greater certainty when managing conflicts of interest.
Cloudflare’s case provides an early indication of how those protections may operate in practice.
Importantly, the court accepted several of the defendants’ interpretations of the revised statute. It rejected the shareholders’ argument that the restructuring was automatically excluded from the statutory protections and found that they had not shown a reasonable probability of overcoming the presumption that the committee members were disinterested.
The central concern was different.
Section 144 requires a qualifying committee to act in good faith and without gross negligence. Vice Chancellor Laster concluded that shareholders had presented sufficient evidence to question whether the committee had acted primarily to satisfy the founders rather than advance the company’s interests.
That distinction has consequences for corporate governance.
A board may establish a committee whose members satisfy formal independence requirements. However, the committee’s conduct remains relevant when determining whether a transaction qualifies for statutory protection.
The court also considered whether shareholders could be adequately compensated if the restructuring went ahead before trial. Because the transaction would change Cloudflare’s capital structure and introduce new publicly traded shares, reversing it later could prove difficult.
The judge therefore blocked the transaction pending further proceedings.
Cloudflare’s defendants were given the option of seeking an initial trial focused on whether the statutory safe harbor applies, with the court proposing an expedited schedule.
The ruling leaves open the possibility that the restructuring could ultimately qualify for protection under Delaware law. It does not establish a general rule against founder-controlled companies or dual-class share structures.
What the decision means for boards and in-house legal teams
For US companies, the Cloudflare dispute highlights the importance of how boards assess transactions that provide substantial benefits to founders or other controlling shareholders.
Founder control can offer business advantages. Long-serving founders may bring experience, strategic continuity and a deep understanding of their companies.
Cloudflare’s directors argued that preserving the founders’ influence would support the company’s long-term prospects.
The court acknowledged that directors can legitimately believe continued founder control benefits shareholders. The legal concern arose from whether the committee had reached and acted on that belief in good faith.
This distinction may matter to other founder-led public companies considering changes to voting rights, ownership thresholds or share classes.
For boards, one implication is that establishing an independent committee may be only part of the process. Its members also need to demonstrate that they assessed the company’s interests, considered alternatives and exercised their own judgment.
The Cloudflare ruling also raises questions about how companies measure the financial value of changes to voting rights.
The court noted that Cloudflare’s committee had not obtained a fairness opinion or otherwise analyzed the economic value of the restructuring. It had also not valued the founders’ tax and estate-planning benefits.
That absence became relevant when assessing whether the transaction provided fair value to shareholders who would have less opportunity to benefit from a future loss of founder control.
For in-house counsel, the case highlights several areas of corporate oversight.
One concerns the records created during major board negotiations. The court’s discussion of disappearing Signal messages illustrates how communications practices can complicate litigation, particularly when legal challenges are anticipated.
Another concerns the role of legal teams in supporting independent decision-making. Counsel may need to consider whether a committee has sufficient authority, reliable information and access to advisers to assess a transaction without undue influence from interested parties.
Shareholder voting arrangements also deserve attention. Cloudflare’s restructuring secured the votes needed for approval, but faced substantial opposition from investors outside the founders’ control.
That difference shows why a transaction’s formal approval and its wider shareholder support may warrant separate consideration.
The wider implications should nevertheless be viewed with care.
The injunction rests on the evidence presented in this particular dispute. It does not mean that other founder-led companies will face the same outcome when seeking to preserve voting control.
Rather, the decision shows that Delaware’s revised corporate law continues to require close attention to the conduct of directors overseeing conflicted transactions.
The next stage of the litigation will help determine whether Cloudflare’s restructuring satisfies those requirements.
For corporate legal teams, the immediate significance lies in the relationship between statutory protections and boardroom conduct. Delaware’s reforms may offer greater certainty for companies, but that certainty still depends on how decisions are made, supported and documented.
Source:
Bloomberg Law
