Just some things I’ve been meaning to blog about.
First, in Dodiya v. Franklin, VC Will concluded that a take-private involving a conflicted director and conflicted CEO did not satisfy the safe harbors of DGCL 144 and therefore could be the subject of a shareholder fiduciary claim. The case is generally interesting as one of the early interpretations of the new safe harbors, and in particular, the 144(a)(2) safe harbor, concerning the cleansing effect of a shareholder vote. I previously worried that the language of the statute might be read to suggest it had altered the definition of what it means for a shareholder vote to be “fully informed,” i.e., that shareholders could cleanse transactions with less information than they were required to have previously. But VC Will didn’t go that way; instead, she held “Section 144 does not define ‘informed,’ but Delaware common law does,” and relied on prior caselaw in concluding that the proxy was misleading.
Second, this column by Sujeet Indap is a popcorn-worthy report of the trainwreck of a process employed by the Cloudflare board to evaluate a proposal to recapitalize the company in order to extend the founders’ sunsetting control rights. I previously blogged about the case here; the plaintiffs argue that, because they are seeking injunctive relief to block a transaction intended to “deter, delay, or preclude a change of control,” the new safe harbors of DGCL 144 do not apply, and instead, the transaction could only have been cleansed under the old MFW regime.
As I understand it, it is precisely because plaintiffs have a colorable argument that this transaction is outside of DGCL 144’s coverage that they were given access to some discovery. And that is why we know, for example, one member of the special committee turned to a chatbot to obtain justifications for extending control rights without asking for any countervailing arguments, and selected a particular academic to present on dual-class structures because he already knew the academic would speak in support.
All of which would cast doubt on the good faith of the board’s process for approving the transaction, and the disinterestedness of the directors, even if DGCL 144 did apply, much less the stricter standards of MFW.
But the vast majority of cases won’t involve the quirky exception to DGCL 144’s application, i.e., transactions intended to “deter, delay, or preclude a change of control.” Instead, they’ll be ordinary conflict transactions, subject to board-level cleansing, with heightened presumptions of director disinterest. Plaintiff-shareholders will only have access to the materials available under the now-restricted DGCL 220, and courts will evaluate the transactions on the basis of that very limited record. Which means, I suspect, rather a lot of sketchy chatbot transcripts will never see the light of day.
And finally, we have an interesting direct/derivative dispute playing out before VC David in Charter Township of Shelby Fire & Police Retirement System v. Pershing Square Capital Management, L.P. et al., No. 2026-0184 (this particular type of direct/derivative dispute happens to be an ongoing interest of mine). The plaintiffs allege that HHH’s board improperly gave Bill Ackman’s Pershing Square new shares and contractual control rights, without charging him a control premium and in breach of their fiduciary duties. And they also allege that, because the transaction involved a transfer of control, their claims should be treated as direct, rather than derivative.
But, post-transaction, Pershing Square does not have majority voting control, as defined by DGCL 144(e)(2)(a). Which raises an interesting question: Can plaintiffs maintain a direct claim alleging a transfer of control rights, even if, post-transaction, the holder of those rights is not a controller as defined by DGCL 144 for cleansing purposes? (Of course, this case does not present the cleanest set of facts for answering that question, because the plaintiffs also argue that even if Pershing was not given hard control under DGCL 144(e)(2)(a), it was given practical control alongside its 1/3 voting power under 144(e)(2)(c)). I, of course, have argued that “equity issuances might give rise to direct claims even if they did not result in the creation of a new controlling shareholder, so long as they ended up redistributing specific control rights away from the public shareholders,” but either way, this question takes on new significance in light of SB 313, authorizing boards to enter into broad shareholder agreements.
And another thing. New Shareholder Primacy podcast is up! Me and Mike Levin answer a mailbag question about the current mishegoss at the SEC over Rule 14a-8. Here at Apple; here at Spotify; and here at YouTube.
