A Delaware court has granted a preliminary injunction in the case of In re Cloudflare, Inc. Stockholder Litigation (C.A. No. 2026-0772-JTL). This ruling affects the company’s capital structure and the control held by its founders, Matthew Prince and Michelle Zatlyn. The decision is significant as it may alter the future governance of Cloudflare and the rights of its stockholders.
The case centers on a dispute between Cloudflare’s founders and a group of stockholders. The stockholders argue that the founders breached their fiduciary duties by proposing a recapitalization plan that would unfairly benefit them at the expense of other shareholders. The court's ruling highlights the ongoing tensions between controlling stockholders and minority shareholders in corporate governance.
Background
Cloudflare, Inc. is a technology company founded by Matthew Prince and Michelle Zatlyn, who currently serve as CEO and President, respectively. The company has been highly successful, providing services that enhance web security and performance. However, issues arose when the founders' control over the company began to diminish due to their divestiture of shares and the issuance of new shares to employees and for corporate purposes.
The founders control a majority of the company’s voting power through a dual-class stock structure, where Class B shares carry ten votes per share compared to Class A shares, which carry only one vote. As the founders sold shares over time, their voting power decreased, leading to concerns about losing majority control by the end of 2026. To address this, the board of directors formed a special committee to explore options for recapitalization.
The special governance committee proposed a multi-step recapitalization plan that would allow the founders to maintain control while still achieving their liquidity and estate-planning goals. However, stockholder plaintiffs challenged this plan, claiming it breached fiduciary duties and sought a preliminary injunction to halt the recapitalization until the case could be fully heard in court.
The Ruling
The court ruled in favor of the plaintiffs, granting a preliminary injunction to preserve the status quo pending trial. The ruling emphasized the potential for irreparable harm if the recapitalization proceeded before the court could assess the merits of the case. The court stated, "The recapitalization will fundamentally alter the company’s capital structure and result in the issuance of new non-voting shares that will begin trading in the market. The court cannot effectively unwind it after the fact."
Judge Laster noted that the plaintiffs had established a reasonable probability of success on the merits of their claims, particularly regarding whether the founders acted in good faith in proposing the recapitalization. The court highlighted evidence that suggested the committee may have prioritized the founders' interests over those of the broader stockholder base.
Impact
This ruling has significant implications for Cloudflare and its governance structure. By granting the preliminary injunction, the court has effectively halted the proposed recapitalization, which aimed to preserve the founders' control while allowing for new stock issuance. The decision underscores the court's commitment to protecting minority stockholders' rights and ensuring that controlling stockholders do not exploit their position.
The ruling may set a precedent for how Delaware courts handle similar cases involving dual-class stock structures and the fiduciary duties of controlling stockholders. It emphasizes the importance of transparency and fairness in corporate governance, particularly when it comes to transactions that could disproportionately benefit founders or insiders.
What's Next
The case will proceed to trial, where the court will examine the merits of the stockholders' claims against the founders and the board. The defendants may appeal the ruling, but for now, the preliminary injunction remains in effect, preventing any changes to the company's capital structure until the court has made a final determination.