Strayed from the Path: Dodiya v. Franklin and the Emerging Rules of the DGCL’s Section 144 Safe Harbors

On August 26, 2026, the Court of Chancery issued Dodiya v. Franklin, C.A. No. 2025-0932-LWW (Del. Ch. Aug. 26, 2026), concluding that the “striking breakdown in corporate governance” detailed in the complaint made the “predictable path to safe harbor” under amended Section 144 of the Delaware General Corporation Law (DGCL) unavailable at the pleading stage. Dodiya’s message for boards is simple: the safe harbors deliver powerful protection, particularly by virtue of the presumption of disinterestedness afforded to directors determined to be independent for listing standard purposes, but only to boards that (i) run a process that is not grossly negligent and (ii) provide materially accurate disclosure to stockholders.

Section 144 Background

On March 25, 2025, Delaware Gov. Matt Meyer signed into law significant changes to the DGCL, including amendments to Section 144 that create statutory safe harbors for conflicted transactions involving fiduciaries, including controlling stockholders and control groups. These safe harbors preclude equitable relief and eliminate damages claims against fiduciaries if certain cleansing mechanisms are deployed to mitigate conflicts:

• Authorization, in good faith and without gross negligence, by an informed vote of the disinterested directors on a majority-disinterested board or committee, provided that if a majority of the board is not disinterested, authorization must be approved or recommended for approval by a committee of at least two directors, each of whom is disinterested (Section 144(a)(1)); or
• Authorization by an informed, uncoerced vote of disinterested stockholders (Section 144(a)(2)).

Delaware courts have only begun to interpret amended Section 144. In February, the Delaware Supreme Court upheld the constitutionality of the amended statute’s safe harbors in Rutledge v. Clearway Energy Group (Del. Feb. 27, 2026). In June, the Court of Chancery held in Ayers v. Foley (Del. Ch. June 15, 2026), its first-look interpretation of amended Section 144(d)(2), that Delaware law affords a “heightened” presumption of disinterestedness to directors the board has determined to be independent under applicable stock exchange rules.

You can find our coverage of the amendments, Rutledge, and Ayers in earlier Enhanced Scrutiny posts.

Deal Background

The pleaded facts of Dodiya, accepted as true at the pleading stage, are stark.

A stockholder plaintiff challenged Whole Earth Brands’ $4.875 per share take-private by Sababa Holdings FREE, LLC, an investment vehicle controlled by the father of Whole Earth’s CEO. Ten days after becoming interim CEO in January 2023, Whole Earth’s CEO sent his family’s personal investment firm a goodwill impairment analysis valuing Whole Earth at $9.73 per share, more than double the $3.84 market price. The CEO continued to funnel confidential information to his father and Sababa through March 2023. During this period, his father and Sababa bought nearly $10 million of stock at prices as low as $2.67 and built a 19.8% position in the company. In late June 2023, Sababa bid $4.00 per share to take Whole Earth private, representing a 28.2% premium to the company’s publicly traded stock price.

Following questions by the Board about his relationship with Sababa, Whole Earth’s CEO recused himself at the Board meeting to consider this bid. The Board formed a special committee and demanded an undertaking that would have prohibited the CEO from (i) participating in sale discussions, (ii) seeking to access, retrieve or use confidential information relating to the sale process, and (iii) sharing confidential information with his father or any Sababa-affiliated entities. The CEO refused to sign the undertaking, was placed on leave, and ultimately resigned, though he stayed on the Board. An audit committee investigation, run without interviewing the CEO or collecting his documents, confirmed the leak. The Board nonetheless sent him special committee materials and let him attend a Board meeting covering the committee’s report on Sababa’s take-private bid. Despite this, the proxy statement assured stockholders that after his recusal he “did not participate in any activities, meetings or communications with respect to the Process . . . and as a result did not receive from the Company any information with respect thereto.”

The three-member special committee included the company’s Executive Chairman. The Board determined that none of the three members had “any material interests in connection with the [p]roposal.” The Executive Chairman was a longtime business associate of the CEO’s father, with 14 years of service on one of his boards and roughly $2 million in director fees. And on the day the Board approved the merger, the Executive Chairman secured a $1.4 million consulting agreement with the company and Sababa’s acquisition vehicle.

The merger was approved with 81% of eligible stockholders in favor and closed at a 56% premium to the unaffected price.

Analysis of the Safe Harbors

Section 144(a)(1) failed, on the pleaded facts, as a result of the Board’s conduct. Although the Court found that Whole Earth had a majority-disinterested board, the Board acted with “reckless indifference” to significant process issues, making the safe harbor unavailable. At authorization, the Board knew that Whole Earth’s CEO had leaked information to Sababa, that he had refused to promise not to do it again, and that he had refused to cooperate with the audit committee’s investigation. Despite these facts, the Board had restored his access to transaction information. According to the Court, “By permitting a deeply conflicted fiduciary to access sensitive process-related materials without any mechanism to prevent or detect further disclosures, the Board was recklessly indifferent to the risk that confidential information would reach the buyer.”

Section 144(a)(2) failed as a result of Whole Earth’s proxy statement disclosure because the Court found it was reasonably conceivable that the proxy statement contained a material misstatement that rendered the stockholder vote not fully informed. In the Court’s words, “A reasonable stockholder would want to know whether the former CEO and son of the acquirer continued to receive confidential updates about the transaction process after his leak was uncovered.”

Notwithstanding these findings, the claims against the five outside directors were dismissed on exculpation grounds, with only the claims against the CEO and the Executive Chairman surviving the motion to dismiss.

Takeaways

• Section 144(a)(1) Won’t Cure Grossly Negligent or Reckless Process Defects.

Section 144(a)(1) is a powerful tool for conflicted transactions. As the Court put it, when the statutory requirements are met, Section 144 “delivers the certainty its terms promise, precluding equitable relief and damages against directors, officers, and controlling stockholders.”

Still, it isn’t a cure-all, and the conduct requirements of Section 144(a)(1) mean that the process designed and run by a board may still be scrutinized. The safe harbor requires that the board act both in good faith and without gross negligence.

Dodiya illustrates that there are limits to the safe harbors’ protections. Here, the Board strayed from the path to the safe harbor after it knowingly permitted a conflicted fiduciary to continue to access confidential process information, conduct the Court held could reasonably be conceived as grossly negligent.

The Court emphasized that these were “not the ordinary imperfections of a sale process,” but rather “reckless indifference” or conduct “without the bounds of reason.”

• The Listing Standard Presumption Appears to Have Substantial Effect.

Quoting Ayers, the Court noted that the amendments “strengthen the presumption of independence and disinterestedness when a corporation has a class of stock listed on a national securities exchange and the board determines that the challenged director satisfies the exchange’s independence criteria.” The disinterestedness of four of seven directors was in dispute. Three of the four carried the Board’s listing standard independence determination and with it Section 144(d)(2)’s “heightened” presumption, which “may only be rebutted by substantial and particularized facts” showing a “material interest” in the merger or a “material relationship with a person with a material interest” in it.

Applying that standard, the Court found:

• An executive relationship with the Executive Chairman that ended in 2014 (despite more than $12 million in past compensation) was “particularized, but insubstantial”; and
• An overlapping directorship (the CEO’s father appointed the director to another public company’s board in 2013, with customary directors’ fees), a failed SPAC venture with the CEO’s father in 2021, and a speculative allegation that the CEO’s father recommended the director’s appointment to the Whole Earth board did not, collectively, defeat the presumption of disinterestedness.

The Court also invoked new Section 144(d)(3) in noting that a director’s designation or nomination by an interested person is not, of itself, evidence that the director is interested.

Those rulings gave the Board a four-member disinterested majority despite the closeness of the relationships alleged by the plaintiff.

• Disclose the Process You Actually Ran.

The proxy statement disclosure should reflect the actual record, even where it reflects poorly on the process. In Dodiya, the proxy statement’s disclosure that the CEO “did not participate in any activities, meetings or communications with respect to the Process . . . and as a result did not receive from the Company any information with respect thereto” was inconsistent with the pleaded facts given that he received a packet of Board materials containing non-public special committee materials and attended a Board meeting where a special committee report on Sababa’s proposal was relayed. This deficient disclosure was enough to plead that the stockholder vote in favor of the transaction was not “informed” and thus defeat the Section 144(a)(2) safe harbor.

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.