Cloudflare: Important Lessons for Conflict Transactions
As discussed in our recent memorandum, the Delaware Court of Chancery’s Cloudflare decision confirms the substantial protections new Section 144 of the Delaware General Corporation Law offers for conflicted transactions while requiring fidelity in implementation. In re Cloudflare, Inc. Stockholder Litigation, C.A. No. 2026-0772-JTL (Del. Ch. Oct. 16, 2026). The Court’s discussion of the preliminary record in that case—which the Court said included pressure tactics from the interested founders outside formal negotiations and attempts to enlist non-committee directors to intervene with the special committee on their behalf—also offers specific lessons for special committee process, board communications, documentation, and preservation of electronic evidence.
During negotiations over a recapitalization that would preserve founder control, according to the Court’s review of the preliminary record, directors and founders created new Signal chats with autodeletion turned on, and either enabled or shortened autodeletion in existing chats. In the Court’s view, everyone anticipated litigation but no one disabled autodeletion until after the first litigation hold was issued, with some defendants failing to disable Signal’s autodeletion function for nearly two weeks after receiving a litigation hold. Use of autodeleting chats increased, the Court observed, after one of the conflicted founders sent a committee member a late-night barrage of expletive-laden and threatening messages. In the Court’s view, surviving messages contradicted testimony that Signal had been used only for coordination. Inferences the Court drew from the record—and its gaps—fed preliminary doubts about the special committee’s good faith. Several lessons emerge:
Keep the committee together—and the record credible. In finding at the preliminary injunction stage that the stockholder-plaintiffs had shown a probability of demonstrating at trial that the committee had not acted in good faith, the Court took note of a committee member’s unauthorized side communications with one of the conflicted founders, as well as the lack of formal records regarding the committee’s response. The decision highlights that there are good reasons for committees to meet as a whole, with their legal and financial advisors present—whether in person or virtually. There is nothing necessarily improper about committee members communicating with the conflicted parties. Nonetheless, conflicted parties may be less likely to make threats or seek private assurances when they understand that the committee’s representative is not acting alone, and that material exchanges will be reported to the full committee and its advisors and minuted. Leaving those exchanges and the committee’s response out of the board record risks creating an incomplete record that plaintiffs and courts may later fill in for themselves—whether or not those gap-fillers are actually accurate.
The full board should respect the special committee and its process. The Court found that one of the conflicted founders enlisted a director who was not on the special committee to intervene in its deliberations, and communications in the record suggested the director tried to do so. Those actions raised questions about whether the special committee was subject to undue pressure. When such communications occur, it is useful for special committees to document them, and the committee’s consideration of them, in its formal record.
Pay the financial advisor fairly whether or not the transaction proceeds. Although the Court raised concerns about aspects of the negotiation process, it also gave a “hat tip” to the compensation agreement with the special committee’s banker. That agreement, while providing incentive compensation if a transaction proceeded, gave the financial advisor meaningful compensation for its work even if a transaction did not close. The Court observed that the structure still gave the banker “a moderate financial incentive to support a recapitalization,” but was “far superior to a fully contingent or even predominantly contingent arrangement.” To be sure, as the Court of Chancery has made clear in other cases, contingent fees charged by investment bankers are customary and do not create disabling conflicts of interest. But given that a special committee’s ability to say “no” is one of its most important leverage tools, ensuring that its financial advisor is fairly paid even when the answer is “no”—for example, by providing for a fairness opinion fee that is payable regardless of the conclusion reached in the opinion—reinforces the integrity of the committee’s process.
AI prompts can become part of the evidentiary record. In this case, documents suggested the committee was told that litigation was “very likely,” that evidence justifying the recapitalization was “inconclusive,” and that retaining an expert would generate “a good fact pattern.” The same day, a member of the special committee used an AI chatbot to identify such an expert, using prompts the Court characterized as one-sided because they focused on the “benefits” of the proposal, but none asked about the potential “downsides.” On that preliminary record, the Court found it reasonably probable that the committee member was using the AI chatbot “to find confirmatory evidence” supporting the controlling stockholders’ position, rather than to find expert advice on what would be in the company’s best interests—while acknowledging that the defendants dispute that reading and that choosing among reasonably probable interpretations of this record is a question for trial. As previously set out in our recent memorandum, AI and the Boardroom, effective corporate governance calls for attention both to AI’s many uses and the risks that come with them. The Court’s opinion is the latest example of how the use of AI and other communication technology expands the pool of contemporaneous, unguarded evidence that stockholder-plaintiffs may try to mine to build a hindsight-driven record. Whether texts, emails, messaging apps, or AI prompts, directors (and officers and corporate advisors) should consider how such communications will be read (or misread) in hindsight.
Set communication rules at the outset and follow them consistently. Several facts in the preliminary record led the Court to draw negative inferences from the directors’ use of Signal’s autodeletion feature, including: the directors increased their use of Signal and shortened deletion periods immediately after receiving threatening messages from one of the conflicted founders; some of the deleted Signal chats involved one of the conflicted founders and extended to the final days of the negotiations; and deposition testimony about the content of the deleted messages was contradicted by surviving messages. The record also reflected that certain defendants did not disable the autodeletion settings for nearly two weeks after receiving a litigation hold. Those facts led the Court to scrutinize the committee members’ credibility and good faith more closely on the preliminary record. Importantly, the Court rejected the argument that it could not draw inferences from missing messages absent a formal spoliation motion: a court “can review the record to assess what inferences the Signal use, together with the associated gaps in the record, supports,” and a party’s failure to produce strong evidence that should have been available can support an inference that the missing evidence would have been adverse. The ruling highlights important considerations for directors about the record that can be left behind when communicating via informal or ephemeral channels. And once preservation obligations arise, directors and officers who use messaging apps or texts should promptly establish protocols governing permitted channels and retention for communications subject to that obligation, including on personal devices. Counsel should identify relevant participants, devices, and channels and confirm that relevant communications can be, and are being, preserved. In litigation, there is often no worse document than the relevant one that no longer exists.
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Good process and sound technology practices reinforce each other. A contemporaneous record that faithfully captures independent deliberation and the reasons for a decision is essential to preserve the protections Delaware law affords, especially when addressing potential and actual fiduciary conflicts. Missing communications and unexplained deletion settings undermine that record and invite judicial second-guessing. That danger is especially acute in the informal, cryptic world of short-form messaging, which is extraordinarily susceptible to misinterpretation. As the Court put it, “Without the defendants’ credibility problems, the court could have concluded that the General Controller Safe Harbor was so likely to apply as to negate the need for injunctive relief.” Disciplined documentation and preservation practices help directors demonstrate that they exercised independent judgment in the interests of the company and its stockholders, and acted in good faith, placing boards in a stronger position to defend their decisions on the merits.
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