Alignment Is Not Control: Court of Chancery Dismisses the KnowBe4 Challenge

In Le Clair v. KnowBe4, Inc. (available here), the Delaware Court of Chancery recently dismissed a putative class action brought by former stockholders who claimed that two institutional investors and KnowBe4’s CEO had joined forces as a control group, and that the directors who approved the deal breached their fiduciary duties. The Court of Chancery rejected the control-group theory outright and held that, even assuming the board was conflicted, a fully informed stockholder vote cleansed the transaction.

The decision illustrates the fact-specific showing that plaintiffs need in order to plead the existence of a control group, as well as to plead a disclosure deficiency sufficient to challenge a stockholder vote approving a transaction.

Background

KnowBe4, Inc.’s founder served as CEO and, along with two institutional investors, held significant equity in the company. In 2022, a private equity firm expressed interest in acquiring KnowBe4 and taking it private.

In July 2022, before any price was negotiated, KnowBe4’s board formed a special committee of three directors. The committee was authorized to recommend, reject, or approve a potential transaction, and it retained independent legal and financial advisors. The board also conditioned the transaction on the dual protections associated with Kahn v. M&F Worldwide Corp. (“MFW”): (i) approval by the special committee, and (ii) a majority-of-the-minority vote of disinterested stockholders. The committee ran a market check that touched 16 potential buyers, separated sale-price negotiations from rollover discussions, and ultimately extracted a price of $24.90 per share, valuing the company at roughly $4.6 billion. The buyer conditioned the deal on the CEO and two institutional investors rolling over approximately $682 million of equity.

KnowBe4’s stockholders approved the merger by substantial margins: of all outstanding stock entitled to vote, 99.8% of the majority, 99.0% of the minority, 98.9% of Class A, and 100% of Class B approved. The merger closed in February 2023.

Nearly two years later, two former Class A stockholders filed suit, alleging primarily that (i) the CEO and the two rollover investors formed a control group that breached its fiduciary duties, and (ii) the directors breached their duty of loyalty in connection with the transaction. The defendants moved to dismiss, and the Court of Chancery granted the motions in full.

No Control Group: Aligned Interests Are Not an Agreement

The plaintiffs did not contend that any single investor controlled KnowBe4. Instead, they argued that the CEO and the two rollover investors acted together as a control group. Applying the standard from Sheldon v. Pinto Technology Ventures, L.P., the Court explained that a group must be “connected in some legally significant way”—for example, by contract, common ownership, agreement, or other arrangement—to “work toward a shared goal.” Absent a formal or written agreement showing such a connection, a plaintiff must plead an “array of plus factors,” such as historical ties and transaction-specific coordination.

The complaint fell short on both fronts. First, the alleged group members lacked the kind of “long, well-documented history of coordinated investments” that Delaware courts expect in order to demonstrate that the parties “operated in tandem” as a control group: one of the two institutional rollover investors was a nascent private equity firm, each made their initial investments in KnowBe4 three years apart, and their handful of financings in KnowBe4 were largely separate and independent. Second, as to the transaction-specific facts, the Court of Chancery characterized the decision to roll over equity as a “quintessential example of parallel economic interests” that does not, by itself, establish a legally significant connection. The rollover commitments, the separate support agreements, and a few early meetings with the buyer reflected an alignment of interests, not an actual agreement to act in concert. As a result, the Court declined to conclude that the CEO and the two rollover investors formed a control group.

Notably, the Court refused to treat the board’s adoption of MFW protections as a concession that a conflicted controller or control group existed. It reasoned that, because MFW is designed to encourage boards to adopt procedural safeguards, penalizing that choice by construing it as an admission would undermine the doctrine’s purpose by disincentivizing its use. The Court emphasized that the analysis is holistic and turns on whether the alleged facts collectively support an inference of an agreement, not whether any single factor is present.

A Fully Informed Stockholder Vote Cleanses an Allegedly Conflicted Board

Turning to the directors, the Court of Chancery assumed without deciding that the entire fairness standard applied, based on the plaintiffs’ theory that a majority of the board was interested (the CEO rolled over his shares, and three other directors were alleged to be dual fiduciaries for certain of the rollover investors). That assumption, however, did not save the claim.

As the Court explained, where entire fairness applies because of alleged board-level conflicts rather than a conflicted controller, the transaction can be cleansed by either (i) approval of a fully empowered, independent special committee, or (ii) a fully informed, uncoerced stockholder vote under Corwin. The defendants relied foremost on the stockholder vote, which shifted to the plaintiffs the burden of pleading a material disclosure deficiency that would render the vote uninformed or coerced.

The plaintiffs identified five alleged disclosure gaps, and the Court rejected each:

• Special committee “conflicts.” On the pleaded facts, ordinary board service, passive fund investments, and personal friendships did not compromise the committee members’ independence or qualify as material to investors. A disqualifying “sense of owingness” requires deep ties that the complaint did not allege.
• Financial advisor conflicts. The advisor’s holdings in one rollover investor were not material because that investor was a quarantined minority stockholder, not a counterparty or controller. The Court distinguished decisions like Brookfield and PLX, where the advisor’s conflict flowed from allegations and/or evidence sufficient to show a close relationship with the actual counterparty.
• The evolving rollover amount. The proxy disclosed the negotiation process in detail; earlier, contingent rollover estimates would not have altered the total mix of information.
• The “Unaffiliated Stockholder” disclosure. Labeling a large holder an “Unaffiliated Stockholder” was accurate under the proxy’s defined term, and his subjective reasons for supporting the deal did not require disclosure.
• Alleged favoritism toward the buyer. One of the disclosure-gap theories addressed the wording of statements in the proxy regarding the timing of the buyer’s and other potential bidders’ due diligence processes (a “tell me more” complaint); the other faulted the proxy for not further discussing preliminary interest from parties that never bid. Neither sufficed. Delaware law requires a full and fair account, not a preferred framing or discussion of every detail, and the court confirmed that Delaware law imposed no duty on KnowBe4 to disclose preliminary indications of interest that never ripened into a bid.

Because the plaintiffs had no viable theory to show any disclosure deficiency, the stockholder vote cleansed the transaction, and the business judgment standard applied. The plaintiffs conceded that their claim could not survive that standard, so Count II was dismissed.

Key Takeaways

This case illustrates the high burden to which courts hold plaintiffs trying to establish a control group, and the continued power of an informed stockholder vote. The decision also offers several practical takeaways for deal planning and litigation at the pleading stage:

• Rollovers and voting commitments, standing alone, do not create a control group. Aligned economic interests are expected in a take-private transaction. To plead a control group, a plaintiff must allege facts indicating that there was an actual agreement to act in concert, supported by historical ties and transaction-specific coordination—not mere alignment of interests. The key point is not that any single fact is irrelevant, but that the allegations must collectively support an actual agreement or coordinated effort.
• Adopting MFW protections cannot alone prove the existence of a conflicted controller or control group. Boards can implement belt-and-suspenders safeguards under the MFW framework, without concern that doing so later be treated by a court as a concession that a conflicted controller or control group exists.
• The record regarding the Board’s or special committee’s process can be outcome-determinative at the pleading stage. For example, a record regarding an empowered, independent committee that retains its own advisors, quarantines conflicted holders, runs a market check, and conditions the deal on a majority-of-the-minority vote from the outset can serve as a strong basis for dismissal.
• The source of the alleged conflict matters. Where an alleged conflict sits at the board level rather than with a controller, a fully informed, uncoerced stockholder vote under Corwin restores business-judgment review—a lower bar than MFW’s dual requirement.
• Disclosures must be full and fair, but do not need to include every detail of the directors’ deliberations. Once a defendant relies on a stockholder vote, the plaintiff must plead a material omission in the disclosures. Delaware courts remain unmoved by “tell me more” complaints and do not require disclosure of all details of the directors’ discussions and deliberations. For example, KnowBe4’s disclosures did not need to disclose preliminary indications of interest that never became bids.

Note that because this action was filed before 2025, the amended version of DGCL § 144 did not apply. Practitioners should evaluate current transactions and litigation under the revised statute, in addition to applicable case law, in evaluating deal planning and potential litigation risks.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.