DealLawyers.com Blog

As we blogged last month, Vice Chancellor Laster preliminarily enjoined Cloudflare’s dual class recapitalization based upon his conclusion that there was a reasonable probability that the board’s special committee may not have acted in good faith.  Yesterday, the Vice Chancellor certified the defendants’ interlocutory appeal from that ruling in order to permit the Delaware Supreme Court to determine the appropriate standard for assessing good faith under the.

In his opinion on the certification application, Vice Chancellor Laster noted that he applied the Disney standard in determining whether the special committee acted in good faith:

In Disney, the Delaware Supreme Court explained that a plaintiff can establish bad faith by proving that a fiduciary intentionally acted “‘with a purpose other than that of advancing the best interests of the corporation.’” In Stone v. Ritter, the high court reaffirmed that principle, stating: “‘A failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation.

He indicated that the defendants seek to apply a different test for establishing bad faith:

The Application seeks to appeal the Good Faith Ruling and claims the court erred in a variety of ways. Although the Application does not say so explicitly, the core issue is whether to overturn the Disney Standard. The defendants argue that a court should only be able to find that directors did not act in good faith if (1) they acted intentionally to harm the corporation, i.e., they acted with malice, or (2) they consciously disregarded known duties, i.e., they engaged in conscious lawbreaking. Those are certainly examples of bad faith—and thankfully rare. But the defendants want those to be the only scenarios in which a lack of good faith exists. The defendants see no role for the Disney Standard’s additional recognition that a fiduciary fails to act in good faith when the fiduciary consciously pursues a purpose other than the best interests of the corporation and its stockholders.

Vice Chancellor Laster acknowledged that a decision that the Disney standard is no longer good law is likely “case dispositive” because the plaintiffs do not have a reasonable probability of establishing that the directors sought to harm the company and its stockholders.

He also said that if this case were not one of the first decisions to interpret the good faith requirement of the Section 144 safe harbors established by SB 21, he would not grant the application. However, he went on to say that “[i]f there were a time for the Delaware Supreme Court to revisit the Disney Standard and move in a different direction, it would be now.” Accordingly, he concluded that it was appropriate to ask the Delaware Supreme Court to address this issue and the related issue of whether good faith must be considered on a director-by-director basis in the transactional context.

Hat tip to The Chancery Daily’s Lauren Pringle for the Vice Chancellor’s opinion, which she posted on her LinkedIn page and hasn’t yet been posted on the Chancery Court’s website.

– John Jenkins