Cloudflare’s appeal won’t fix what’s broken in Delaware’s Chancery Court

The morning after we wrote in Fortune about a controversial Chancery Court decision involving Cloudflare, Vice Chancellor J. Travis Laster moved with uncommon speed to certify an interlocutory appeal of his ruling to the Delaware Supreme Court.

Corporate boards might read that as a sign the system is correcting itself. They shouldn’t, at least not yet.

The appeal was necessary because Laster used an unusually expansive reading of “good faith” to enjoin the Cloudflare board’s decision about its capital structure.

With corporate anchoring fees rivaling personal income taxes as Delaware’s primary source of revenue, Delaware’s wise leaders, including its governor and its legislature, saw this exodus coming, and tried to stem its root cause. In March 2025, Delaware passed Senate Bill 21 (SB 21), the most significant rewrite of its corporate code in a generation, to stop the flow of companies out of the state. SB 21 was generally recognized to have been a direct response to a run of activist rulings from the Court of Chancery, which were widely seen as blatant judicial overreach.

The spirit of SB 21 is simple: if a board routes a possibly “conflicted” deal through a committee of independent directors with real power to reject it, the deal is considered “kosher.” This means no injunctions, no damages, no trial.

Indeed, Laster’s 142-page opinion concedes the legitimacy of SB 21 and its applicability to this case. He held the directors were independent. He held they were not negligent. He wrote that their process showed “all the outward signs of diligent and careful effort.” By his own account, virtually every requirement the legislature wrote was met by the Cloudflare board.

He enjoined the transaction anyway, on a novel basis. SB 21 does require that the committee act “in good faith,” but Laster’s route was to re-define what good faith entails – even though the legislative intent of SB 21 and the surrounding debate in the legislature, clearly shows that the Delaware legislature intended SB 21 to be more deferential to independent boards, not less.

The term “good faith” was not a third level of diligence beyond the duty of care and duty of loyalty, but merely presumed to be the spirit of board actions. Before this, good faith had been previously generally assumed, in deference to independent boards, with nary any heightened review threshold, much less any invocation to enjoin a transaction.

Instead, he pointed in part to the fact that the board used Signal to communicate about sensitive strategic information they presumably did not want competitors obtaining, irrespective of litigation, and to a CEO who was known to have a hot temper, even though the temperament of the entrepreneur is irrelevant to good faith and typical of creative businesses in technology, media, fashion and the like.

From those disconnected scraps, the court inferred that the committee was serving the founders rather than bargaining against them, or what Laster, borrowing from the 2011 Southern Peru case, called “a controlled mindset”, as proof of possible lack of good faith by the committee.

In analyzing Laster’s novel interpretation of what “good faith” means, readers might ask whether Laster was merely applying the statute, SB 21, rather than inventing a new standard. But that flies in the face of the legislative history of SB 21, which clearly suggests the intent of the Delaware legislature was to try to drive greater predictability and greater deference to independent boards, rather than drive more elevated scrutiny of those same boards. Against that backdrop, Laster’s idiosyncratic, broader reading of ‘good faith’ substantively guts the protections SB21 was meant to provide.

But even more importantly, and legally salient; Laster’s interpretation of ‘good faith’ is far from what “good faith” has always historically meant in Delaware, from a legal perspective. The existing Delaware definition of bad faith is grounded in scienter, the requirement of showing that individuals acted with knowledge and intent of wrongdoing, together with the requirement that each board member be assessed individually to determine whether a majority intentionally acted in bad faith. That is the Disney line of cases.