When the Safe Harbor Is Not Safe: Court of Chancery Weighs in on Amended Section 144 in Dodiya v. Franklin

Introduction

In Dodiya v. Franklin, the Delaware Court of Chancery delivered the first interpretation of the Delaware General Corporation Law Section 144(a)(1) amendment that requires the board or committee’s authorization be “in good faith and without gross negligence” to obtain the safe harbor protections for a conflicted transaction. The court held that the board could not invoke Section 144(a)(1)’s safe harbor because it was “reasonably conceivable that [it] acted with gross negligence” when it restored a conflicted director’s access to sale-process information after learning that director had leaked material nonpublic data to the buyer. The court separately found the stockholder-vote safe harbor under Section 144(a)(2) unavailable because the proxy statement allegedly misrepresented the conflicted director’s involvement in the sale process. Although the safe harbors were not available, the Court of Chancery still dismissed the claims against all but the two conflicted directors, who faced claims for breach of the duty of loyalty.  The disinterested directors faced claims for gross negligence, for which they were exculpated from liability under the company’s charter. The decision reinforces that a disinterested majority vote does not provide a rubber stamp for Section 144(a)(1)’s safe harbor.

Background

On August 26, 2026, the Delaware Court of Chancery issued an opinion denying in part a motion to dismiss claims arising from the sale of Whole Earth Brands Inc. (Whole Earth). The opinion is the first to interpret amended Section 144. The court held that a plaintiff adequately alleged the board failed to authorize a conflicted transaction “in good faith and without gross negligence” under Section 144(a)(1). Although a majority of Whole Earth’s board was presumed disinterested, the court found it “reasonably conceivable” that the board’s collective conduct “was grossly negligent,” making the statutory safe harbor unavailable at the dismissal stage.

The case arose from a take-private acquisition led by Sababa Holdings Free LLC (Sababa), an entity owned and managed by Martin Franklin. Martin Franklin’s son, Michael Franklin, had joined the Whole Earth board in August 2022 and became interim CEO on January 1, 2023. Ten days later, Michael Franklin secretly sent his father’s investment firm “a 54-page goodwill impairment test” report containing material nonpublic information. The report “estimated Whole Earth’s fair value at $9.73 per share” when its stock traded at $3.84. Michael Franklin later “shared additional confidential information,” including a draft Form 10-K, the status of credit agreement negotiations, and a draft earnings and guidance release. Sababa subsequently purchased millions of shares of Whole Earth stock and accumulated a 19.8% stake before proposing to acquire the company.

After Sababa submitted its initial proposal, the board recognized Michael Franklin’s conflict and asked him to “sign an undertaking” prohibiting him from participating in the sale process, accessing process-related confidential information, or sharing information with his father or Sababa affiliates. He refused and was placed on paid leave. An audit committee investigation “uncovered misconduct” even though the investigators neither “interview[ed] Michael Franklin [nor collected] his documents.” By early October 2023, “the full [b]oard [knew he] had previously provided non-public information to his father’s company.”

Michael Franklin remained a director after resigning as CEO. On October 24, 2023, he received materials from “meetings held during his suspension,” including “nonpublic financial results,” special committee materials, “and an update on the […] investigation into his own misconduct.” A week later, he attended a board meeting for updates on that investigation, company financial results, and the special committee’s consideration of Sababa’s proposal. No mechanism was in place “to prevent or detect further” leaks. The proxy statement nevertheless told stockholders that Michael Franklin had not participated in process-related activities, meetings, or communications and had received no process information from Whole Earth. Stockholders approved the $4.875-per-share merger, and the proxy statement disclosed that “Michael Franklin was expected to [become] CEO of the [combined] company” after closing.

The Court of Chancery’s Ruling

The court explained that a majority vote by disinterested directors is “necessary” but “not sufficient” by itself for Section 144(a)(1)’s safe harbor. The statute also requires that the board or committee authorizes the transaction “in good faith and without gross negligence.” This requirement, however, includes not just the mere act of director voting but also “the collective conduct of the board or committee that authorized the transaction.” Specifically, this requirement applies to how the board “informed itself, deliberated, negotiated, and reached its decision.” The participation of an interested director “does not [automatically] defeat the safe harbor,” but it “may bear on whether” the authorizing body acted “in good faith and without gross negligence.”

Drawing on Delaware fiduciary law, the court explained that good faith and gross negligence are distinct conditions. According to the court, “bad faith is a culpable failure of [the duty of] loyalty,” which can include a conscious disregard of a known duty to act, acting with “a purpose contrary to the corporation’s interests,” or acting “with the intent to violate positive law.” Gross negligence, which concerns the exercise of the duty of care, means “reckless indifference to or a deliberate disregard of the whole body of stockholders or actions which are ‘without the bounds of reason.’” Because Section 144(a)(1) uses the conjunctive “and,” both conditions must be satisfied for the safe harbor to apply. Thus, a board may be grossly negligent even if it believes it is serving the corporation, while a careful process may still be undertaken in bad faith if directors “consciously advanc[e] interests other than those of the corporation.”

Applying that framework, the court stressed that inadequate information controls would ordinarily amount only to simple negligence. Here, the allegations crossed the line. The board knew Michael Franklin had leaked detailed financial information to the prospective buyer, knew he had refused to promise not to do it again, and knew its investigation was incomplete — “yet [it] restored his access to [confidential] and process-related information” and a special committee briefing without any apparent safeguard. The court called the gap between that process and a rational one “profound” and found it reasonably conceivable that the board acted with reckless indifference “to the risk that confidential information would reach the buyer,” thereby compromising “the integrity of the sale process.” Section 144(a)(1)’s safe harbor was therefore unavailable at the dismissal stage.

The court separately held that Section 144(a)(2)’s stockholder-vote safe harbor was unavailable. Although the merger received overwhelming approval, the proxy’s assurance that Michael Franklin had been “walled off from the process” was inconsistent with the pleaded facts and incorporated board materials. Because a reasonable stockholder would consider his continued access important given the father-son conflict and the prior leak, the “vote was not informed for purposes of [the] motion to dismiss.”

The court emphasized that failure to obtain Section 144 safe harbors “does not [itself] establish fiduciary liability.” Whole Earth’s exculpatory charter provision still shielded directors from damages for duty of care violations. The court analyzed the five disinterested directors and found that the plaintiff’s allegations made it “reasonably conceivable that the [b]oard was grossly negligent.” But because the plaintiff did not make well-pleaded allegations of bad faith against any of the five disinterested directors, they were dismissed notwithstanding the board’s alleged collective gross negligence. The breach of fiduciary duty claim survived only against directors Irwin Simon (who had allegedly secretly negotiated a $1.4 million consulting arrangement with the buyer) and Michael Franklin.

Key Takeaways

• Process still matters. While this case involved extreme facts, it demonstrates that even with a disinterested board majority, Section 144(a)(1) is not just a vote-counting exercise. The board or committee must act in good faith and without gross negligence throughout the process.
• Disclosure documents must match the record. Section 144(a)(2) requires an informed vote, and the safe harbor may be unavailable if the proxy statement’s description of the process is inconsistent with what actually occurred.
• Conflicted directors need not be excluded altogether. The Section 144(a)(1) safe harbor can still be available even when a conflicted director is not excluded from the process. But when a conflict runs deep, it must be disclosed, and companies should consider strict, documented, and enforceable limits on participation and access.
• Losing the safe harbors does not necessarily mean liability for gross negligence. A court’s finding that gross negligence is reasonably conceivable renders the Section 144 safe harbors unavailable at the pleading stage. That removes an early path to dismissal for conflicted directors. But even without the safe harbors under Section 144, a company’s exculpation provision in its charter will protect directors from monetary liability for duty of care violations.