Key Points
- The Delaware Court of Chancery issued the first opinion analyzing the DGCL Section 144 safe harbors in the context of a challenged merger transaction involving a conflicted director/officer, holding the safe harbors were unavailable at the pleading stage but dismissing most defendants under common law protections.
- The decision affirms that Section 144 provides “powerful protections for conflicted transactions” when statutory requirements are met, but that gross negligence and materially misinformed stockholder votes will defeat those safe harbors.
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Court Decision
On August 26, 2026, in Dodiya v. Franklin, C.A. No. 2025-0932-LWW (Del. Ch. Aug. 26, 2026), Vice Chancellor Lori W. Will of the Delaware Court of Chancery granted in part and denied in part the defendants’ motion to dismiss a stockholder challenge to the acquisition of Whole Earth Brands, Inc. by a Martin Franklin-controlled entity at $4.875 per share. This is the first decision analyzing the Delaware General Corporation Law (DGCL) Section 144 safe harbors in the context of a challenged merger transaction involving a conflicted director or officer.
The court held that neither of the safe harbors under Section 144(a) were available at the pleading stage because the board purportedly acted with gross negligence during the merger process and the stockholder vote approving the transaction was materially misinformed. Nevertheless, the court dismissed claims against all but two defendants because plaintiffs failed to satisfy the common law requirement to plead non-exculpated loyalty-based claims against each individual defendant.
Case Background
Whole Earth Brands, Inc. was a publicly traded Delaware corporation that manufactured plant-based sweeteners and flavorings. Martin E. Franklin, through his family investment firm Mariposa Capital and a newly formed entity called Sababa Holdings, held a 19.8% ownership stake in Whole Earth.
In early 2023, Martin Franklin’s son, Michael E. Franklin — who had recently been appointed interim CEO of Whole Earth — transmitted a 54-page confidential valuation report (the Kroll Report) and other material nonpublic information to Mariposa Capital and Sababa without any confidentiality protections. The Kroll Report valued the company at $9.73 per share, well above its then-trading price of $3.84. Following these disclosures, Sababa purchased millions of shares at prices between $2.67 and $3.10 per share to help accumulate its 19.8% interest. Michael Franklin also allegedly held a profit interest entitling him to 10% of the appreciation in Sababa’s assets.
In June 2023, Sababa submitted a proposal to acquire Whole Earth at $4.00 per share. The board formed a special committee to evaluate the bid. Michael Franklin recused himself but refused to sign a confidentiality undertaking. The Audit Committee thereafter conducted an investigation in which it did not interview Michael or analyze his documents but still revealed his actions. Ultimately, Michael resigned as CEO but remained on the board. The board also subsequently restored his access to confidential materials and allowed him to attend a board meeting where the special committee reported on the sale process.
After a two-week bidding window, the board ultimately approved the merger at $4.875 per share. Over 81% of eligible stockholders voted in favor. The proxy statement disclosed that Michael Franklin had disclosed material nonpublic information to representatives of Sababa without an NDA and in violation of Whole Earth’s internal policies. However, the proxy statement also stated that Michael Franklin “did not participate in any activities, meetings, or communications with respect to the Process” — a representation the court found inconsistent with the pleaded facts.
The Court’s Analysis
Section 144(a)(1) Safe Harbor: Disinterested Director Approval Requires Directors to Act ‘in Good Faith and Without Gross Negligence’
The court held that Section 144(a)(1) requires three elements for the safe harbor to apply:
- The material facts about the director’s relationship or interest must be disclosed to, or known by, the board.
- The board must act “in good faith and without gross negligence” to authorize the transaction.
- The board must authorize the transaction by an affirmative vote of the majority of disinterested directors.
The court applied the heightened presumption of director disinterestedness under Section 144(d)(2) to directors whom the board determined satisfied Nasdaq independence criteria, requiring “substantial and particularized facts” to rebut that presumption.
The court held that a disinterested board majority existed, and knew of Michael Franklin’s relationship and interest, and voted to approve the transaction. However, the court held that, as alleged, the board acted with gross negligence in authorizing the transaction. The court clarified that the gross negligence analysis “extends beyond the formal vote to the fiduciary conduct through which the board or committee informed itself, deliberated, negotiated, and reached its decision.”
The court also held that gross negligence was reasonably conceivable at the pleading stage because after discovering the information leak, the board knew Michael Franklin had previously transmitted confidential information to his father’s entity, knew he refused to promise not to do so again and knew its investigation into him was incomplete. Yet the board restored his access to sensitive, process-related materials with no safeguards against further leaks. The court characterized this as “reckless indifference to the risk that confidential information would reach the buyer.”
Section 144(a)(2) Safe Harbor: Informed Stockholder Vote Required
The court held that Section 144(a)(2) requires “an informed, uncoerced, affirmative vote of a majority of the votes cast by the disinterested stockholders.” While the numerical threshold was easily satisfied, the court found the vote was not “informed” because the proxy affirmatively misstated Michael Franklin’s exclusion from the sale process. The court held that Whole Earth’s stockholders would consider it important to know whether, as alleged, the former CEO and son of the acquirer continued to receive confidential process updates after the leak was uncovered.
Common Law: Non-Exculpated Claims Required
Importantly, the court emphasized that failing to meet the safe harbors under Section 144 does not establish fiduciary liability, and defendants also retain the protections available at common law. Whole Earth’s charter contained a Section 102(b)(7) charter provision that bars money damages for care-based violations. To state a claim, plaintiffs must plead a breach of the duty of loyalty, whether through self-interest, advancement of an interested party’s interests over the company’s interests, or bad faith. Section 144 also remains important in a key respect – the heightened presumption of disinterestedness and the enhanced pleading requirement under Section 144 to rebut that presumption applies even under a common law analysis. And the court reinforced the requirement that an “extreme set of facts” is required sustain a claim that disinterested directors acted in bad faith by intentionally disregarding their duties.
Applying these standards, the court dismissed claims against five of seven directors. The complaint’s allegations demonstrated that the disinterested directors took affirmative steps to manage conflicts (demanding a confidentiality undertaking, forming a committee, hiring advisors, negotiating the price upward). The court said that these steps were inadequate under the facts alleged, but reflected “a breach of the duty of care — not bad faith.” Claims survived only against (i) Michael Franklin, who was not independent because he owned a profit interest in Sababa and could not be deemed independent from his acquirer-father; and (ii) another director who had a unique material interest in the transaction because he secretly negotiated a $1.4 million consulting agreement with Whole Earth and the acquirer that was executed when the merger agreement was approved.
Insight for Directors and Boards
- Section 144 will be applied to “provide powerful protections for conflicted transactions” and “certainty” when the statutory requirements are met. The court made clear at the outset that Section 144 was enacted “to give corporations and their boards a predictable path to safe harbor” when the statutory requirements are met. While the transaction as alleged “strayed from that path,” the court’s emphasis on the “certainty” of the protections that Section 144 provides is notable.
- Section 144’s heightened independence presumptions apply broadly. Although the safe harbors under Section 144 did not technically apply, the court nevertheless confirmed that directors will still enjoy Section 144’s heightened presumption of director disinterestedness when the court is considering a common law merger challenge analysis.
- Gross negligence and uninformed votes will defeat the safe harbors. The “in good faith and without gross negligence” requirement extends beyond the formal vote to the fiduciary conduct through which the board informed itself, deliberated and reached its decision. The safe harbors will not likely apply if information control failures — particularly where the board has actual knowledge of a conflict — rise to gross negligence, and where there are material affirmative misstatements in the proxy statement.
- Common law exculpation protections remain a critical backstop. Even where the statutory safe harbors are unavailable, the court will also consider traditional statutory protections for directors and officers, such as a charter provision barring money damages for care-based claims. More to the point, plaintiffs must allege non-exculpated claims, such as bad faith, to succeed. As the court reiterated, there remains a “vast difference between an inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties.”
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.
For further information, please contact:
Arthur R. Bookout, Partner, Skadden
art.bookout@skadden.com
