Disclosure Pitfalls in Take-Private Deals: Lessons from the KnowBe4 Securities Litigation

Introduction: Disclosure Risk in Sponsor-Led Buyouts

As private equity firms continue to drive a significant share of merger activity, take-private transactions have become a focal point for securities litigation. Shareholders challenging these deals often allege that merger disclosures omit critical information about valuation, conflicts of interest, and fairness to public investors. A recent decision from the U.S. District Court for the Southern District of Florida illustrates how federal judges evaluate these claims—and where disclosure gaps can create lasting litigation exposure.

In late December 2025, Judge Cecilia M. Altonaga issued a mixed ruling in a consolidated class action involving KnowBe4, Inc., a cybersecurity training company taken private by a consortium of private equity sponsors. The court dismissed some claims outright while allowing others to advance, underscoring the importance of precision and completeness in merger-related disclosures. For deal participants—including target boards, financial advisors, and sponsors—the decision offers a roadmap for understanding where disclosure obligations begin and where courts will draw boundaries around shareholder claims.

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The KnowBe4 Transaction Structure

KnowBe4’s journey to a private equity-led buyout unfolded over several months beginning in late 2022. The company, which provides security awareness training and simulated phishing platforms, attracted interest from multiple sponsor groups. As discussions advanced, KnowBe4’s board formed a special committee of independent directors to evaluate potential offers and negotiate on behalf of the company’s public stockholders.

The special committee retained a financial advisor to assess the fairness of any proposed transaction from a financial standpoint. Meanwhile, several private equity firms—including prominent sponsors such as KKR, Vista Equity Partners, and Elephant Partners—engaged in negotiations that involved not only cash consideration for public shares but also rollover equity arrangements allowing certain existing investors to retain a stake in the post-transaction entity.

Between October 2022 and February 2023, KnowBe4 and the buyer consortium filed a series of merger-related disclosures with the Securities and Exchange Commission, including preliminary and definitive proxy statements. These documents informed shareholders about the special committee’s process, the financial advisor’s fairness opinion, the merger consideration offered to public stockholders, and certain details regarding sponsor rollover investments.

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What Shareholders Claimed Was Missing

Plaintiffs—representing a putative class of KnowBe4 public stockholders—filed a consolidated amended complaint alleging that these disclosures were materially misleading. The lawsuit did not challenge the merger itself as substantively unfair but rather focused on what information was disclosed (or omitted) when shareholders were asked to vote on the deal.

The complaint raised several categories of alleged deficiencies:

Fairness Opinion Disclosures: Plaintiffs contended that while the proxy materials included a fairness opinion stating that the merger price was fair to public stockholders from a financial point of view, the disclosures omitted internal valuation analyses prepared by company management. According to the complaint, these internal assessments indicated that KnowBe4’s intrinsic value was higher than the merger price, information that could have influenced how shareholders interpreted the fairness opinion.

Rollover Equity Arrangements: The complaint also alleged that disclosures regarding rollover equity were incomplete. Specifically, plaintiffs claimed that one private equity sponsor initially planned to roll over a larger percentage of its equity stake but subsequently reduced that commitment. Plaintiffs argued that this change—and the reasons for it—were not adequately disclosed, even though such shifts might signal sponsor concerns about valuation or deal terms.

Committee and Advisor Independence: Plaintiffs challenged statements characterizing the special committee and its financial advisor as fully independent. They alleged that certain committee members and advisors had preexisting relationships with the sponsors or management that created conflicts, rendering the independence statements misleading.

Plaintiffs brought claims under three provisions of the Securities Exchange Act: Section 14(a), which prohibits false or misleading statements in proxy materials; Section 10(b) and Rule 10b-5, which address securities fraud more broadly; and Section 20(a), which imposes secondary liability on persons who control entities that violate the Exchange Act.

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The Court’s Framework for Evaluating Disclosure Claims

To survive a motion to dismiss, securities plaintiffs must meet heightened pleading standards. Under Section 14(a), plaintiffs must allege that a disclosure was materially misleading and that defendants acted with negligence. Materiality is determined by the “total mix” standard: an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would have considered it important in deciding how to vote.

Section 10(b) claims face even stricter requirements. In addition to materiality, plaintiffs must plead scienter—a mental state embracing intent to deceive, manipulate, or defraud. The Private Securities Litigation Reform Act (PSLRA) requires plaintiffs to state with particularity facts giving rise to a “strong inference” of scienter, meaning an inference that is at least as compelling as any opposing innocent explanation. Rule 9(b) of the Federal Rules of Civil Procedure imposes similar particularity requirements for fraud allegations.

Judge Altonaga applied these standards to each category of alleged misstatements and omissions, ultimately concluding that some claims met the threshold for proceeding while others did not.

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Where the Court Drew the Line

A. Claims That Failed

The court dismissed claims based on alleged misrepresentations about the independence of the special committee and the financial advisor. Judge Altonaga found that plaintiffs’ allegations on this point were conclusory and lacked the factual specificity required under Rule 9(b). The complaint described certain relationships between committee members, advisors, and sponsors but did not explain with sufficient detail how those relationships rendered the independence statements false or created a material conflict that should have been disclosed.

The court also dismissed Section 10(b) claims against KnowBe4 itself and three individual defendants—Daly, Shanley, and Wilson—because plaintiffs failed to plead scienter adequately. While the complaint alleged that these defendants knew or should have known about the purported disclosure gaps, it did not provide particularized facts supporting a strong inference that they acted with fraudulent intent. Allegations of negligence or recklessness, without more, were insufficient to satisfy the PSLRA’s demanding scienter standard.

B. Claims That Survived

By contrast, the court allowed certain claims to proceed based on alleged omissions related to merger price fairness and rollover equity disclosures.

Fairness Opinion Omissions: The court held that plaintiffs plausibly alleged that defendants’ disclosures about the fairness of the merger price were misleading because they omitted internal valuation analyses suggesting the company was worth more than the deal price. These internal assessments, if accurate, could have altered the total mix of information available to shareholders and might have caused them to question the fairness opinion or demand a higher price. Because the complaint alleged that defendants were aware of these valuations and chose not to disclose them, the court found that plaintiffs stated a viable claim for relief.

Rollover Disclosure Gaps: Similarly, the court concluded that plaintiffs adequately alleged that disclosures regarding rollover equity were misleading. The complaint described a private equity sponsor’s initial plan to roll over a substantial equity stake and subsequent decision to reduce that rollover significantly. Plaintiffs argued that this change, along with the rationale behind it, should have been disclosed because it bore on the sponsor’s view of the transaction’s value and fairness. The court agreed that these allegations, if proven, could support a finding of material omission.

The court also permitted Section 20(a) control-person claims to proceed to the extent they were predicated on the surviving Exchange Act violations. Because Section 20(a) is a form of derivative liability, these claims remain viable only when a primary violation is adequately pleaded.

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Practical Implications for Deal Participants

The KnowBe4 decision offers several lessons for companies, boards, financial advisors, and sponsors navigating take-private transactions:

Be Transparent About Internal Valuations: When a target company or its advisors prepare internal valuation models or forecasts that differ materially from the merger price or the assumptions underlying a fairness opinion, those analyses may need to be disclosed. Courts are increasingly willing to allow shareholders to challenge disclosures that present only one side of the valuation story while omitting contrary views generated internally.

Document and Disclose Rollover Changes: Rollover equity arrangements are common in sponsor-led buyouts, but shifts in rollover commitments—especially reductions—can raise red flags. If a sponsor or significant investor decides to roll over less equity than initially planned, that change may be material to shareholders evaluating the deal. Disclosures should explain the nature of any rollover adjustments and, where possible, the reasons for those changes.

Substantiate Independence Claims: Statements about the independence of special committees and financial advisors are not merely boilerplate. Courts expect these representations to be supported by specific facts. If relationships exist that could reasonably be construed as conflicts, those relationships should either be disclosed or the independence language should be qualified. Conclusory assertions of independence, without factual support, invite judicial skepticism.

Tailor Disclosures to the Legal Standard: Plaintiffs challenging proxy disclosures often allege both Section 14(a) (negligence-based) and Section 10(b) (scienter-based) violations. Because the scienter threshold is higher, careful drafting can help insulate certain defendants from Section 10(b) exposure even if Section 14(a) claims survive. Clear attribution of statements, precise identification of who knew what and when, and thorough documentation of disclosure decisions all contribute to a stronger defense posture.

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What Happens Next in the KnowBe4 Litigation

Following Judge Altonaga’s order, plaintiffs have the opportunity to amend their complaint. The court set a deadline of January 7, 2026, for plaintiffs to notify defendants whether they intend to file an amended pleading, with any such filing due by January 18, 2026. Plaintiffs will likely use this opportunity to bolster their allegations regarding scienter for the defendants against whom the Section 10(b) claims were dismissed and to add additional factual detail regarding the omissions that survived.

If plaintiffs choose not to amend—or if an amended complaint does not cure the deficiencies identified by the court—those dismissed claims will be gone for good. However, given that the court granted leave to amend and several claims remain viable, the litigation is far from over. Discovery will likely focus on the special committee’s deliberations, communications between the committee and its advisors, internal valuation documents, and the evolution of rollover negotiations.

Settlement discussions may also intensify as discovery proceeds, particularly if plaintiffs uncover documents that support their allegations. Securities class actions involving take-private transactions often settle before trial, as defendants weigh the costs and risks of protracted litigation against the benefits of resolving claims early.

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Conclusion: Lessons for Future Transactions

The KnowBe4 litigation underscores a broader trend in securities enforcement and private litigation: courts and shareholders expect detailed, balanced, and context-rich disclosures when management or sponsors seek to take a public company private. The stakes are particularly high in transactions involving conflicts of interest, such as management rollovers or sponsor-led buyouts, where the risk of self-dealing is inherent.

For private equity sponsors, the lesson is clear: disclosure obligations do not end with a fairness opinion. Internal analyses, valuation models, and changes in transaction terms—especially those that might suggest a buyer’s concerns about price or value—must be carefully considered for inclusion in proxy materials. For target boards and special committees, the message is equally important: independence must be real, not just asserted, and the process by which a deal is evaluated and negotiated should be thoroughly documented and transparently disclosed.

Finally, for financial advisors and legal counsel, the KnowBe4 decision is a reminder that merger disclosures are scrutinized both at the time of the transaction and potentially for years afterward. The best defense against disclosure-based litigation is a proactive approach: anticipating shareholder concerns, erring on the side of transparency, and ensuring that every material fact is on the table when shareholders are asked to make an irreversible decision about the future of their investment.

As the KnowBe4 case moves forward, it will serve as a case study for how courts balance the need for robust disclosure against the practical realities of deal-making. But the core principle remains unchanged: when in doubt, disclose.