Set your H264 encode to as slow as you can bear it, do a CRF value of about 22, 1280x720 (well, crop the letterboxing, so like 1280x544 or so), with AAC audio, and you can definitely get a decent ~2GB file. High profile 3.1 is fairly universally compatible.
Chapters can be kept, but can cause issues in an MP4 container, which is more widely compatible than MKV. And soft subs don’t work well in MP4.
That’s all from my own experience, YMMV.