WeWork. WeLitigate.
We Holdings LLC and We Company (collectively “WeWork”) is a privately held company that leases office space on a short-term basis. Following a failed IPO in 2019, the company was faced with a liquidity crisis. In response, the board of directors formed a special committee (the “Special Committee”) to evaluate strategic alternatives to the IPO and to negotiate a potential transaction to save the company. The Special Committee was comprised of two directors. Together, the two Special Committee members and entities affiliated with them held over 34 million shares of WeWork.
On October 22, 2019, the Special Committee entered into a Master Transaction Agreement with Softbank Group (“SBG”) which contemplated a tender offer, equity financing, and debt financing. On November 22, 2019, SBG made a tender offer to purchase shares from WeWork. Issues arose shortly thereafter and on April 1, 2020, SBG terminated the tender offer. On April 7, 2020, at the direction of the Special Committee, WeWork filed suit against SBG. WeWork’s co-founder, Adam Neumann, also filed suit. The suits were consolidated by the Court of Chancery of the State of Delaware (the “Court”) into In re WeWork Litigation (“WeWork”).
After the Special Committee filed suit against SBG, WeWork’s Board of Directors formed a new committee (the “New Committee”) comprised of independent directors to determine whether the special committee had authority to file suit and continue the litigation, and whether it was in WeWork’s best interests to maintain the suit. The New Committee answered all three inquiries in the negative and filed a Rule 41(a) motion seeking leave to voluntarily dismiss the suit brought by the Special Committee.
WeWork has presented two issues of first impression to the Court: (1) whether management of a Delaware corporation has the authority to unilaterally preclude a director of the corporation from obtaining the corporation’s privileged information and (2) whether a temporary committee created in response to the filing of a lawsuit against the corporations’ new controlling stockholders is permitted to terminate the suit brought by an earlier committee of the board with the support of management and outside counsel. The court decided the first issue on August 21, 2020 when it held that management of a Delaware corporation does not have the authority to unilaterally preclude a director of the corporation from obtaining the corporation’s privileged information. Resolving a discovery dispute, the Court found that the Special Committee is entitled to discover privileged communications between the New Committee and WeWork’s in-house counsel and WeWork’s outside counsel, but not between the New Committee and its own counsel, because the directors of a Delaware corporation are presumptively entitled to privileged corporate information.
On December 14, 2020, the court decided the second issue, finding that the suit brought by the Special Committee should continue because the New Committee’s investigation was not reasonable and there is a viable claim for breach of contract. The Court denied WeWork’s Rule 41(a) motion, holding that a temporary committee created in response to the filing of a lawsuit against the corporation’s new controlling stockholders is not permitted to terminate the suit brought by an earlier committee of the board with the support of management and outside counsel.
In reaching its decision, the court employed the seminal Zapata Corp. v. Maldonado decision. Zapata employs a two-prong approach to determine if a claim should continue. First, the company must prove independence, good faith and reasonable investigation. Second, the court may exercise its discretion and apply its own independent business judgment.
The court found that the New Committee was independent and exercised good faith but that it failed to conduct a reasonable investigation. Instead, the investigation was flawed, mainly because it was formed at the request of SBG to hinder WeWork’s suit.
The Court, exercising its own independent business judgment, also denied the motion under the second prong of Zapata finding that WeWorks has a viable claim for breach of contract against SBG and that allowing the Special Committee to continue to trial is preferrable where the alternative is granting the Rule 41(a) motion to dismiss three months before trial, leaving stockholders in limbo.
Silverman Thompson regularly counsels and litigates complex business disputes in Maryland, Delaware, and across the country. If you would like further information about the WeWorks decision, or if you would like to learn more about Silverman Thompson’s business practice, please contact its chair, Bill Sinclair, at bsinclair@silvermanthompson.com or at (410) 385-9116.