IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
)
IN RE WEWORK LITIGATION ) Consolidated
) C.A. No. 2020-0258-AGB
)
OPINION
Date Submitted: October 29, 2020
Date Decided: December 14, 2020
William B. Chandler III, Brad D. Sorrels, Lori W. Will, Lindsay Kwoka Faccenda,
Leah E. Brenner, and Jeremy W. Gagas, WILSON SONSINI GOODRICH &
ROSATI, P.C., Wilmington, Delaware; Michael S. Sommer, WILSON SONSINI
GOODRICH & ROSATI, P.C., New York, New York; David J. Berger, Steven M.
Guggenheim, and Dylan G. Savage, WILSON SONSINI GOODRICH & ROSATI,
P.C., Palo Alto, California; Attorneys for Plaintiff The We Company.
William M. Lafferty, Kevin M. Coen, Sabrina M. Hendershot, and Sara Toscano,
MORRIS NICHOLS ARSHT & TUNNELL LLP, Wilmington, Delaware; Eric
Seiler, Philippe Adler, and Mala Ahuja Harker, FRIEDMAN KAPLAN SEILER &
ADELMAN LLP, New York, New York; William Christopher Carmody, Shawn J.
Rabin, and Arun Subramanian, SUSMAN GODFREY L.L.P., New York, New
York; Attorneys for Plaintiffs Adam Neumann and We Holdings LLC.
Robert S. Saunders and Sarah R. Martin, SKADDEN, ARPS, SLATE, MEAGHER
& FLOM LLP, Wilmington, Delaware; George A. Zimmerman, SKADDEN, ARPS,
SLATE, MEAGHER & FLOM LLP, New York, New York; Attorneys for The We
Company.
Elena C. Norman, Rolin P. Bissell, and Nicholas J. Rohrer, YOUNG CONAWAY
STARGATT & TAYLOR, LLP, Wilmington, Delaware; Erik J. Olson,
MORRISON & FOERSTER LLP, Palo Alto, California; James Bennett and Jordan
Eth, MORRISON & FOERSTER LLP, San Francisco, California; Attorneys for
Defendant SoftBank Group Corp.
Michael A. Barlow and E. Wade Houston, ABRAMS & BAYLISS LLP,
Wilmington, Delaware; John B. Quinn and Molly Stephens, QUINN EMANUEL
URQUHART & SULLIVAN, LLP, Los Angeles, California; Attorneys for
Defendant SoftBank Vision Fund (AIV M1) L.P.
BOUCHARD, Chancellor
This decision resolves a motion to dismiss that pits two committees of the
board of directors of The We Company (“WeWork” or the “Company”) against each
other concerning a lawsuit arising out of a multi-step transaction that was designed
to rescue WeWork from a liquidity crisis and to transfer control of the Company
from one of its co-founders (Adam Neumann) to SoftBank Group Corp. (“SBG”)
and SoftBank Vision Fund (AIV MI) L.P. (“Vision Fund” or “SBVF”). Resolving
the motion turns on an issue of first impression: Should a temporary committee of
a board of directors created in response to the filing of a lawsuit against the
corporation’s new controlling stockholders (SBG and Vision Fund) be permitted to
terminate the lawsuit, which an earlier committee of the board filed on behalf of the
corporation with the support of the Company’s management and its outside counsel
to enforce the corporation’s contractual rights against them?
The first committee (the “Special Committee”) was formed to evaluate the
company’s strategic alternatives and to negotiate a potential transaction in the wake
of its liquidity crisis. The Special Committee ultimately negotiated the terms of a
transaction embodied in a Master Transaction Agreement (the “MTA”), dated as of
October 22, 2019, among WeWork, SBG, Vision Fund, Neumann, and an entity
controlled by Neumann called We Holdings LLC. The MTA obligated SBG to do
three things in the following order: (i) provide the Company with $1.5 billion of
equity financing, (ii) purchase up to $3 billion of the Company’s stock from
1
Neumann and minority stockholders of the Company in a tender offer (the “Tender
Offer”), and (iii) provide the Company with up to $5.05 billion of debt financing.
When the WeWork board formed the Special Committee, its two members (Bruce
Dunlevie and Lewis Frankfort) and entities affiliated with them together held over
34 million shares of WeWork. In forming the Special Committee, with full
knowledge that its members might participate in the Tender Offer, the WeWork
board resolved that Dunlevie and Frankfort were free of any material conflict of
interest relating to the potential transaction.
The closing of the Tender Offer was subject to certain conditions, including
the roll-up of a joint venture known as ChinaCo (the “ChinaCo Roll-Up”). SBG and
Vision Fund both were obligated under the MTA to use their reasonable best efforts
to complete the ChinaCo Roll-Up and to satisfy other conditions necessary to
consummate the Tender Offer.
SBG commenced the Tender Offer on November 22, 2019. The Tender Offer
became oversubscribed, with over 90% of the shares eligible to tender doing so,
including the shares held by Dunlevie, Frankfort, and their affiliates.
On December 27, 2019, the Company, SBG, and Vision Fund approved an
amendment to the MTA to allow the debt financing to commence before the Tender
Offer closed. Neumann, a party to the MTA, refused to consent to this amendment.
2
On April 1, 2020, SBG terminated the Tender Offer, asserting that certain
closing conditions to the Tender Offer—in particular the failure to complete the
ChinaCo Roll-Up—had not been satisfied. On April 7, 2020, the Special Committee
filed this action against SBG and Vision Fund asserting, among other things, that
they had breached contractual obligations to use their reasonable best efforts to
complete the ChinaCo Roll-Up and to close the Tender Offer.
The Company, through its outside counsel (Skadden, Arps, Slate, Meagher,
& Flom LLP), encouraged the Special Committee to file the lawsuit. The
Company’s Chief Legal Officer and Skadden, who both believed that the Special
Committee was authorized to sue SBG and Vision Fund to enforce the terms of the
MTA, commented on drafts of the complaint subject to a common interest privilege.
SBG’s reaction to the lawsuit was swift. Its Chief Operating Officer and Chief
Legal Officer reached out to the CEO and Chief Legal Officer of WeWork,
respectively, criticizing the filing of the lawsuit, as did SBG’s outside counsel in a
letter addressed to the WeWork board. Soon thereafter, Skadden devised a strategy
to form a new committee of the WeWork board consisting of two new temporary
directors who would be tasked with determining whether the Special Committee
should be permitted to press the lawsuit against SBG and Vision Fund.
On May 29, 2020, by a 6-2 vote—with at least five conflicted directors voting
in favor and with the two Special Committee members voting against—the WeWork
3
board formed a new committee (the “New Committee”) and authorized it to
determine if “the Special Committee has or should have” the authority “to
commence and/or continue the litigation” it filed on behalf of the Company against
SBG and Vision Fund.
On July 28, 2020, the New Committee issued its report (the “Report”),
finding, among other things, that the Special Committee did not have the authority
to file this action when it did and should not have the authority to continue this action
now. At the direction of the New Committee, WeWork moved under Court of
Chancery Rule 41(a) for leave to voluntarily dismiss the complaint the Company
filed at the direction of the Special Committee. The Special Committee opposes the
motion.
The first question raised by the Rule 41(a) motion is what standard of review
the court should apply. The parties proposed four different standards of review,
which span the full spectrum of judicial scrutiny. For the reasons explained below,
the court concludes that something akin to the standard our Supreme Court
articulated in Zapata Corp. v. Maldonado1 best fits the unique circumstances of this
case and, based on the application of that standard to the evidence of record, that the
Rule 41(a) motion should be denied.
1
430 A.2d 779 (Del. 1981).
4
I. BACKGROUND
The facts recited in this opinion come from the pleadings in this action and
the parties’ submissions concerning the motion of the Company, filed at the direction
of the New Committee, for leave to dismiss under Court of Chancery Rule 41(a) the
complaint filed at the direction of the Special Committee.2 Any additional facts are
subject to judicial notice.
A. The Players
WeWork is a privately-held global real estate company specializing in shared
workspaces that was co-founded by Adam Neumann, the managing member of We
Holdings LLC, a Delaware limited liability company. For simplicity, this decision
refers to Adam Neumann and We Holdings LLC together as “Neumann” and refers
to Adam Neumann individually as “Mr. Neumann.”
SBG is incorporated under the laws of Japan and headquartered in Tokyo,
Japan. Masayoshi Son founded SBG’s predecessor in 1981 and serves as SBG’s
Chairman and Chief Executive Officer. At the times relevant to this action, SBG’s
Chief Operating Officer was Marcel Claure and its Chief Legal Officer was Adam
Townsend.
2
Two separate civil actions were consolidated into this action for purposes of discovery
and trial while maintaining separate pleadings for the different plaintiffs. See Dkt. 109.
5
Vision Fund, a Delaware limited partnership, was founded by Son. Vision
Fund’s website describes its “Leadership” as comprised of three people: Son, Ron
Fisher, and Rajeev Misra.3 Fisher has been a member of SBG’s board since 1997
and Vice Chairman of SBG since 2017.4 Misra has been a member of SBG’s board
since 2017 and an Executive Vice President of SBG since 2018.5 Vision Fund is
managed by its general partner, SB Investment Advisers (UK) Limited, which is
wholly-owned by SBG and which makes investment decisions for Vision Fund
through a three-person Investment Committee, which includes Son and Misra.6 SBG
and Vision Fund issue consolidated financial statements in which they jointly
describe their investments in WeWork and acknowledge that SBG has control over
Vision Fund.7
As of March 18, 2020, SBG owned approximately 43.4% of WeWork’s fully-
diluted equity (including options and warrants) and Vision Fund owned
approximately 8.9% of the Company’s fully diluted equity.8 Together, SBG and
3
The Team, SoftBank Vision Fund, https://visionfund.com/team (last visited Dec. 14,
2020).
4
Verified Am. Compl. (“Neumann Compl.”) ¶ 13 (Dkt. 131); Vision Fund’s Answer to
Neumann Compl. (“Vision Fund Answer”), at 7 (Dkt. 477).
5
Neumann Compl. ¶ 13; Vision Fund Answer 7.
6
Neumann Compl. ¶ 14; Vision Fund Answer 8.
7
Neumann Compl. ¶ 16; Vision Fund Answer 9.
8
Daines Decl. ¶ 21 (Dkt. 388).
6
Vision Fund hold a total of 52.3% of the Company’s fully-diluted equity but no more
than 49.9% of the combined voting power of the Company’s voting securities. 9 At
the times relevant to this decision, the WeWork board of directors (the “Board”)
controlled the proxy for Neumann’s shares of WeWork, which represents 14.1% of
the Company’s equity on a fully-diluted basis.10
This decision at times refers to SBG and Vision Fund together as “SoftBank,”
as the parties often have done in their submissions.
B. Formation of the Special Committee
In October 2019, after the well-publicized failure of its initial public offering,
WeWork was facing a liquidity crisis.11 To address the crisis, the Company
considered proposals from JPMorgan Chase Bank, N.A. and SBG.12
On October 12, 2019 the Board approved resolutions to form the Special
Committee, consisting of Bruce Dunlevie and Lewis Frankfort, to evaluate a
“Potential Transaction” (the “October 12, 2019 Resolutions”).13 Dunlevie co-
founded Benchmark Capital (“Benchmark”), which together with Dunlevie hold
9
Id.
10
Id.; see also Martin Decl. Ex. 5 (“Stockholders’ Agreement”), § 5.08 (Dkt. 372).
11
Martin Decl. Ex. 4 (“Disclosure Statement”), at 21-22.
12
See id. 16-21.
13
Martin Decl. Ex. 2, Annex A (October 12, 2020 Resolutions of the Board).
7
approximately 32.6 million shares of WeWork.14 Frankfort, the former executive
chairman of Coach, co-founded Benvolio Capital (“Benvolio”), which holds
approximately 2.1 million shares of WeWork.15 After reviewing the “background
and relationships” of Dunlevie and Frankfort, and considering that they might
participate in the tender offer,16 the Board determined that they both were “free of
any material conflict of interest relating to a Potential Transaction, SoftBank and
Adam Neumann.”17
The October 12, 2019 Resolutions define the term “Potential Transaction” to
refer to a transaction proposed by “SoftBank” (defined to include SBG, Vision Fund
and their respective affiliates) and other strategic alternatives available to the
Company, including an alternative debt financing arrangement with J.P. Morgan.18
SoftBank’s proposed transaction included, among other things, “debt financing
arrangements, a tender offer by SoftBank for Company equity, . . . amendments to
SoftBank’s $1.5 billion warrant agreement with the Company, and changes to the
Company’s governance . . . in connection with Mr. Neumann ceasing to be Chief
14
Martin Decl. Ex. 15 (“Report”), at 8, 38; Disclosure Statement at 28.
15
Report at 8, 38; Disclosure Statement at 28.
16
Will Decl. Ex. X (“Robinson Dep.”), at 18 (Dkt. 387).
17
Martin Decl. Ex 2, Annex A.
18
Id.
8
Executive Officer of the Company.”19 The October 12, 2019 Resolutions expressly
acknowledged that SoftBank’s proposed transaction, “if fully consummated, would
result in SoftBank acquiring majority economic ownership and voting control of the
Company [and] Mr. Neumann ceasing to have voting control” of the Company.20
The October 12, 2019 Resolutions authorized the Special Committee only to
recommend a Potential Transaction to the Board and, subject to that qualification,
delegated to the Special Committee “all rights and powers of the Board to the fullest
extent permitted by the Delaware General Corporation Law in connection with a
Potential Transaction.”21 The law firm of Skadden, Arps, Slate, Meagher & Flom
LLP (“Skadden”), which advised the WeWork Board when it approved the
Resolutions, drafted the October 12, 2019 Resolutions at the direction of Graham
Robinson, a Skadden M&A partner who was the “lead deal person” on the
transaction.22
On October 13, 2019, Robinson and Larry Sonsini of Wilson Sonsini
Goodrich & Rosati P.C. (“Wilson Sonsini”), counsel to the Special Committee,
recommended that the Board revise the October 12, 2019 Resolutions.23 The Board
19
Id.
20
Id.
21
Id.
22
Will Decl. Ex. Y (“Berrent Dep.”), at 49; Robinson Dep. 11, 50-51.
23
Martin Decl. Ex. 3 (October 13, 2019 Board Minutes), at 2.
9
then approved additional resolutions (the “October 13, 2019 Resolutions”) that
delegated to the Special Committee the authority to adopt and approve a Potential
Transaction on behalf of the Company without any further approval of the Board,
except to the extent otherwise required by law or regulation.24 This decision
hereafter refers to the October 12, 2019 and October 13, 2019 Resolutions together
as the “Resolutions.”
C. The MTA and Stockholders’ Agreement
On October 22, 2019, the Company, Neumann, SBG, and Vision Fund entered
into a Master Transaction Agreement (as defined above, the “MTA”), which the
Special Committee authorized and approved on behalf of the Company.25 Shortly
before the MTA was executed, a Skadden partner (Laura Knoll) advised a Board
observer (Michael Eisenberg) in an email that the “Special Committee, acting
through the Company, has the ability to sue for specific performance to cause
SoftBank to do the tender offer.”26
The MTA obligated SBG, subject to certain terms and conditions, to
undertake three significant transactions with WeWork and its stockholders in the
following order: (i) provide WeWork with $1.5 billion of equity financing (the
24
Id.
25
Will Decl. Ex. B (October 22, 2019 Special Committee Minutes), at 2 & Annex A
(October 22, 2019 Special Committee Resolutions), at 3 (Dkt. 386).
26
Will Decl. Ex. G (Email exchange between G. Robinson, L. Knoll, and M. Eisenberg).
10
“Equity Financing”);27 (ii) purchase up to $3 billion of WeWork stock from
Neumann and other stockholders of the Company in a tender offer at a per share
price of no less than $19.19 (as defined above, the “Tender Offer”);28 and (iii)
provide WeWork with up to $5.05 billion in debt financing (the “Debt Financing”).29
The Debt Financing had three components: providing credit support for a letter of
credit facility for up to $1.75 billion, purchasing up to $2.2 billion in senior
unsecured notes, and providing $1.1 billion of senior secured debt financing.30
Section 2.03(b) of the MTA required the parties to enter into a stockholders’
agreement (the “Stockholders’ Agreement”).31 The Stockholders’ Agreement, dated
as of October 30, 2019, provided for the following changes to the Company’s
governance structure.
SBG and Vision Fund would have the right to designate to the Board
five of the Company’s ten directors, of which at least one would be
designated by Vision Fund.32
SBG would have the right to designate one of its directors as
executive chairman of the Board.33
27
Verified Compl. (“Compl.”) Ex. A. (“MTA”), § 2.01 (Dkt. 1).
28
Id. § 3.01(a).
29
Id. §§ 4.01(a)-(b).
30
Id.
31
Id. § 2.03(b).
32
Stockholders’ Agreement § 2.01(b)(ii).
33
Id. § 2.01(b)(v).
11
WeWork investors Benchmark and Hony Capital Ltd. each would
have the right to designate one director to the Board.34
Stockholders other than Mr. Neumann, SBG, Vision Fund and their
respective affiliates would have the right to appoint two directors to
the Board.35
Special Committee member Frankfort would remain on the Board
for a specified period of time, after which he would be replaced by
the Chief Executive Officer of the Company.36
Mr. Neumann executed a proxy giving voting control of his super-
voting founder shares to the Board.37
As to Frankfort’s tenure on the Board, the Stockholders’ Agreement specifically
provided that he would continue to serve as a director at least until any material
litigation with SBG concerning the transactions in the MTA, including the Tender
Offer, had been finally resolved:
Until the later of (x) time as the Company has consummated the
transactions contemplated by [the MTA] . . . and finally resolved any
litigation or disputes (other than immaterial claims) with SBG arising
therefrom (including with respect to the Tender Offer (as defined in
the MTA)) or (y) consummation of the Tender Offer . . . Lewis
Frankfort shall serve as a Director unless earlier removed pursuant to
Section 2.01(d).38
34
Id. § 2.01(b)(ii).
35
Id. § 2.01(b)(iii).
36
Id. § 2.01(b)(iv).
37
Id. § 5.08.
38
Id. § 2.01(b)(iv) (emphasis added).
12
Sections 8.03(a), 8.09, and 8.12 of the MTA obligate SBG and Vision Fund
to use their “reasonable best efforts” to complete certain closing conditions to the
Tender Offer, including a “roll up” of two of WeWork’s joint ventures, known as
PacificCo and ChinaCo.39 The “ChinaCo Roll-Up” involved a subsidiary of
WeWork acquiring from Vision Fund shares in ChinaCo, a company WeWork used
to conduct operations in China.40 In exchange for these shares of ChinaCo, Vision
Fund would receive WeWork shares.41
Section 11.14 of the MTA provides that, for a defined period, WeWork must
receive approval from the Special Committee before taking any action against SBG
under the MTA and WeWork must pay the fees and expenses of any professional
advisors to the Special Committee.42 Specifically, Section 11.14 of the MTA states,
in its entirety, that:
Following the occurrence of the Board Change and until the later of the
consummation of the Debt Financing and the Tender Offer, (a) any
action or determination by the Company to exercise rights or enforce
remedies against SBG under this Agreement shall require the approval
of the Special Committee and (b) the Company shall pay, on behalf of
the Special Committee, for any reasonable and documented fees and
expenses of professional advisors or other representatives of the
Company.43
39
See MTA §§ 8.03(a), 8.09, 8.12.
40
MTA Ex. O (ChinaCo Share Purchase Agreement Term Sheet), at 1.
41
Id.
42
MTA § 11.14.
43
Id.
13
D. Disclosures Concerning the MTA and the Tender Offer
On October 28, 2019, WeWork sent a detailed 29-page letter to its
stockholders seeking certain approvals and waivers, including approval of the
transactions contemplated by the MTA (the “Disclosure Statement”).44 The
Disclosure Statement explained the background of the transactions included in the
MTA and provided a summary of the MTA’s terms.45 In explaining how the Board
would be reconstituted, the Disclosure Statement represented that Frankfort would
remain on the Board “until the later of (a) the completion of the SoftBank
Transactions (including the resolution of any litigation disputes with SoftBank
with respect to the SoftBank Transactions) and (b) consummation of the Tender
Offer.”46 The term “SoftBank Transactions” was defined in the Disclosure
Statement to include the Tender Offer. 47
The Disclosure Statement highlighted that each of the directors on the Board
would be eligible to participate in the Tender Offer and disclosed the number of
shares attributable to each director and the value of those shares at the Tender Offer
44
See Disclosure Statement at 1, 9-11.
45
Id. at 1, 14-21.
46
Id. at 2 (emphasis added).
47
Id. at 1.
14
price of $19.19 per share.48 Specifically, the Disclosure Statement attributed
32,645,314 shares to Dunlevie and 2,099,342 shares to Frankfort having an
aggregative value (at $19.19 per share) of approximately $626.4 million and $40.3
million, respectively.49 Assuming a proration rate of 56% if all eligible shares were
tendered, the shares accepted in the Tender Offer attributable to Dunlevie and
Frankfort would yield proceeds of approximately $350.8 million and $22.6 million,
respectively.50
On November 22, 2019, SBG commenced the Tender Offer. In explaining
how the Board had been reconstituted in accordance with the Stockholders’
Agreement, the Offer to Purchase for the Tender Offer (the “Offer to Purchase”)
represented that Frankfort would remain on the Board during the pendency of any
material litigation with SoftBank (defined to include SBG and Vision Fund)
concerning the Tender Offer:
the board was reconstituted to have up to 10 members, initially
consisting of: . . .
o one director (Lew Frankfort) from the special committee until
the later of (a) the completion of the transactions described in
the master transaction agreement (including the resolution of
any litigation disputes (other than immaterial claims) with
SoftBank arising therefrom (including with respect to the
48
Id. at 27-28. The Disclosure Statement separately noted Neumann’s right to participate
in the Tender Offer. See id. at 3, 12-13.
49
Id. at 28.
50
Id.
15
offer)) and (b) the consummation of the offer, at which point
(i) Mr. Frankfort shall be removed from the board and the
special committee and (ii) the special committee will be
dissolved (and following Mr. Frankfort’s removal, the
Company’s then chief executive officer (if any) will be
appointed to the board).51
E. Amendment No. 1 to the MTA
On December 27, 2019, the Company, Vision Fund, and SBG signed
Amendment No. 1 to the MTA (“Amendment No. 1”).52 Amendment No. 1 changed
the sequencing of the transactions set forth in the MTA to allow the Debt Financing
to occur either “before or after the Tender Offer Closing Time” instead of requiring
that the Tender Offer close before the Debt Financing could commence. 53
Amendment No. 1 also changed the initial expiration date of the Tender Offer from
“twenty (20) Business Days . . . after the date the Tender Offer is first
commenced”54—which already had passed—to the set time of “one minute
following 11:59 p.m., New York City time, on April 1, 2020.”55
51
Will Decl. Ex. A (Offer to Purchase Equity Securities of The We Company), at
WeWork_00000432 (emphasis added).
52
See Compl. Ex. B (“Amendment No. 1”).
53
Id. § 3.
54
MTA § 3.01(a).
55
Amendment No. 1 § 2.
16
Mr. Neumann and We Holdings LLC, both parties to the MTA, did not
approve Amendment No. 1.56 They contend that SBG and Vision Fund breached the
MTA by failing to obtain their consent to Amendment No. 1.57
F. Management and Company Counsel Collaborate with the Special
Committee to Sue SBG and Vision Fund for Breaching the MTA
On March 5, 2020, Trustbridge Partners (“Trustbridge”) and WeWork signed
a term sheet concerning ChinaCo that allegedly was inconsistent with terms
contemplated in the MTA for completing the ChinaCo Roll-Up, a closing condition
of the Tender Offer.58 Around this time, the Company’s management became
concerned that SBG was violating the MTA by failing to use its reasonable best
efforts to complete the ChinaCo Roll-Up. Robinson testified he “had been told by
management of the company that they believed that SoftBank . . . had sought to
frustrate the ChinaCo condition.”59 Jennifer Berrent, WeWork’s Chief Legal
Officer, testified “[she did] not believe SoftBank used reasonable best efforts to
complete the ChinaCo transaction.”60
56
See Neumann Compl. ¶¶ 53, 73, 83.
57
Id.
58
See Houston Decl. Ex. 3 (WeWork ChinaCo Restructuring and Follow-On Investment
Term Sheet, dated March 5, 2020) (Dkt. 160).
59
Robinson Dep. 43.
60
Berrent Dep. 136; see also id. 139-40.
17
On March 16, 2020, Robinson of Skadden sent an email to Wilson Sonsini,
stating that “the committee may need to make a decision soon about whether it will
bring a lawsuit against SoftBank on behalf of the company.”61 Skadden and Berrent
both believed at the time that the Special Committee had the authority to sue SBG
and Vision Fund to enforce the terms of the MTA. Robinson later told the New
Committee that when “the Special Committee was originally created to negotiate the
MTA, he had no doubt that if litigation were going to ensue over the MTA, the
Special Committee would be the entity to pursue it.”62 Berrent, who raised no
concerns about the Special Committee’s authority to bring litigation during this
period,63 testified similarly:
Q. . . . from an authority, legal authority, technical authority
point of view, you believed the Special Committee had the authority to
- - and had full authority how to handle how to respond to SoftBank
with respect to issues arising out the MTA; correct?
A. Yes.64
On March 24, 2020, during a Special Committee meeting, the Special
Committee “summarized and discussed” previous conversations between the
61
Will Decl. Ex. I (March 16, 2020 email exchange between Robinson and Larry Sonsini).
62
Will Decl. Ex. F (New Committee memorandum dated June 10, 2020), at 6 (emphasis
added); see also Robinson Dep. 59 (“This appears to me to delegate to the Special
Committee all of the power of the board in respect of the matter, so it would appear to give
the Special Committee the power to commence litigation.”)
63
See Robinson Dep. 47-48.
64
Berrent Dep. 58-59.
18
Special Committee members and Sandeep Mathrani,65 who had been hired as
WeWork’s CEO in February 2020 by Marcelo Claure, SBG’s Chief Operating
Officer.66 Minutes of the meeting reflect that “Mr. Mathrani expressed on multiple
occasions his concerns that litigation related to the tender offer could have adverse
consequences.”67
On March 27, 2020, Wilson Sonsini emailed multiple attorneys at Skadden,
including Robinson and Knoll, a “working draft” of a complaint against SBG and
Vision Fund to be brought by WeWork at the direction of the Special Committee.68
Wilson Sonsini’s cover email welcomed comments from Skadden, noted that the
draft was being provided to Skadden “pursuant to a common interest privilege,” and
stated that “[t]he draft complaint assumes that SoftBank does not close the tender
offer on April 1, and that we file on April 2.”69
65
See Dkt. 504, Ex. A (March 24, 2020 Special Committee Minutes), at WeWork-
_00232293.
66
Will Decl. Ex. Z (“Mathrani Dep.”), at 16.
67
Dkt. 504, Ex. A, at WeWork_00232293 (emphasis added).
68
Will Decl. Ex. J (Email from Lori Will of Wilson Sonsini to various Skadden attorneys
attaching draft complaint), at DNP000786.
69
Id.
19
On April 1, 2020, SBG terminated the Tender Offer, asserting that certain
closing conditions to the Tender Offer were not satisfied, one of which was the
ChinaCo Roll-Up.70
Around midnight on April 1, Knoll of Skadden emailed several Wilson
Sonsini attorneys Skadden’s “thoughts on the complaint,” including an updated draft
of the complaint.71 Knoll’s email asked Wilson Sonsini to consider “whether to take
an approach in the complaint that expresses more outrage over SoftBank’s actions
in frustrating the ChinaCo condition,” noting that “[t]he current, more factual tone
could be a strategic decision by the Committee so we just wanted to raise for
consideration.”72
Over the next several days, Skadden and Wilson Sonsini discussed the draft
complaint and continued to share information.73 In an email exchange on April 6,
Skadden confirmed that Wilson Sonsini did not object to “sharing the paragraphs on
the lease renegotiation” in the draft complaint with Berrent, “subject to a common
interest privilege.”74
70
Will Decl. Ex. H (Notice Regarding Termination and Withdrawal of Offer to Purchase
Equity Securities of The We Company).
71
Will Decl. Ex. K (Email from Knoll to various Wilson Sonsini attorneys), at
DNP000949.
72
Id.
73
See Will Decl. Ex. L (Email exchange between Will and Knoll).
74
Id. at DNP001041.
20
G. The Litigation
On April 7, 2020, the Special Committee, acting on behalf of WeWork, filed
a Verified Complaint against SBG and Vision Fund asserting two claims (the
“Complaint”).75 This decision refers to this lawsuit, at times, as the “MTA
Litigation.” Count I of the Complaint asserts that SBG and Vision Fund breached
certain provisions in the MTA, in particular their “obligation to use reasonable best
efforts to consummate the transactions contemplated by the MTA, including the
Tender Offer and the roll-up of ChinaCo.”76 Count II asserts that SBG and Vision
Fund breached their fiduciary duties as the Company’s controlling stockholders.77
The Complaint alleges that the failure to close the Tender Offer not only
harmed stockholders who had tendered shares for purchase, but also would harm the
Company because “SoftBank’s refusal to close the Tender Offer means that the
Company could be denied the $1.1 billion in senior secured debt financing that
SoftBank committed to in the MTA,” which was “contingent upon completion of
the Tender Offer.”78
75
See generally Compl. ¶¶ 89-104.
76
Id. ¶ 92.
77
Id. ¶ 101.
78
Id. ¶ 21. The $1.1 billion of debt financing referenced in the Complaint was one of three
components of the $5.05 billion of debt financing commitments SBG undertook in the
MTA. See MTA § 4.01(a)-(b). On April 15, 2020, SBG represented to the court that it
previously had addressed the other two components—backstopping a $1.75 billion letter
21
On May 4, 2020, four weeks after the Special Committee filed suit, Neumann
filed a complaint against SBG and Vision Fund in a separate action (C.A. No. 2020-
0329-AGB) (the “Neumann Complaint”). The Neumann Complaint, as amended,
asserts claims for breach of contract and breach of fiduciary duty similar to those
asserted in the Special Committee’s Complaint.79 On May 28, the court entered an
order consolidating the two actions for discovery and trial while maintaining
separate pleadings for the different plaintiffs.80
H. SBG Challenges the Special Committee’s Authority to Pursue Its
Lawsuit
On April 8, one day after the Special Committee filed its Complaint, Sandeep
Mathrani received an email from Claure.81 Despite Mathrani’s conversations with
Special Committee members where he expressed concern before the Complaint was
filed that “litigation related to the tender offer could have adverse consequences,”82
Mathrani testified in deposition that he did not learn about the Special Committee’s
lawsuit until after it was filed and that he had never seen or read the MTA.83
of credit facility in February 2020 and providing $2.2 billion in committed debt financing.
See Dkt. 14 (SBG’s Opp’n to Pl.’s Mot. for Expedited Proceedings), at 4.
79
See generally Neumann Compl. ¶¶ 70-90.
80
Dkt. 109.
81
Dkt. 402 (April 8, 2020 email exchange between Claure and Mathrani).
82
See Dkt. 504, Ex. A, at WeWork_00232293.
83
Mathrani Dep. 20-21.
22
Claure’s April 8 email to Mathrani provided some “recommendations” on
how WeWork should respond to the lawsuit the Special Committee filed on behalf
of the Company that were different from recommendations Mathrani apparently had
received internally at the Company:
My recommendations are a bit different than Lauren’s.[84] I am writing
to just you because it is your choice. You can select my
recommendations or not. But I want to share them with you.
First, I think that you should address point #1. These are the same
talking points that we have been using. Nothing new here. The tender
would not have benefited the company. Therefore, it has no impact on
WeWork’s ability to executive [sic] its 5-year plan and be successful.
I don’t think we should miss an opportunity to reiterate these facts.
Secondly, I think that we should take the opportunity to clarify that the
complaints [sic] were brought by the Special Committee – not the full
board. The Special Committee is comprised of only 2 board members,
1 of which stands to benefit significantly from the tender offer. These
are the facts. And laying out the facts will help to mitigate the storyline
that WeWork has a divided board that might somehow encumber the
future of the company.85
Within ninety minutes of receiving Claure’s email, Mathrani replied that he would
follow Claure’s “recommendations,” stating: “We will make the statements as
below.”86
84
The reference to “Lauren” appears to refer to Lauren Fritts, WeWork’s Chief
Communications Officer. Id. at 119.
85
Dkt. 402 (emphasis added).
86
Id.
23
On April 17, 2020, SBG and Vision Fund moved to dismiss the Complaint.87
The same day, SBG’s outside counsel sent a letter to the Board challenging the
authority of the Special Committee to file the lawsuit and asserting that each of its
members “faces material, disabling conflicts between their personal financial desire
to reduce their stake in WeWork by selling their shares to SBG [in the Tender Offer]
and the separate interests of WeWork.”88 SBG asked “that the Board move quickly
to confirm that the Special Committee is not authorized to act on behalf of WeWork
in the present lawsuit.”89
Around the time SBG sent its April 17 letter to the Board, SBG’s Chief Legal
Officer, Robert Townsend, called Berrent.90 Townsend told Berrent he thought she
“was conflicted as a tendering stockholder,” “that Skadden had a conflict” because
there was a “question related to [the] interpretation of [the] resolutions adopted at
the time of the MTA,” and that “he would move to have [Berrent and Skadden]
recused.”91 Berrent disagreed with Townsend’s assertion that she was conflicted. 92
Townsend also told Berrent during their call “that he thought a committee of John
87
See Dkts. 30, 31.
88
Martin Decl. Ex. 6 (April 17, 2020 Letter from Softbank to the Board), at 1.
89
Id. at 3.
90
Berrent Dep. 33-35.
91
Id. at 34-35, 40.
92
Id. at 32.
24
Zhao, who is a director, . . . and Sandeep Mathrani could be an independent
committee.”93
After her call with Townsend, Berrent called Robinson to relay what
Townsend had said to her.94 Berrent and Robinson later “talked about the proposal
of having a committee” but she “did not think that John Zhao could be independent
. . . [a]nd Skadden explained that under Delaware law, . . . [Mathrani] would not be
independent because of his role as CEO and the ability in that context for him to be
terminated by SoftBank.”95
On April 20, 2020, the Special Committee’s counsel sent a letter to the Board,
maintaining that the Special Committee did not have a disabling conflict preventing
it from continuing the litigation and saying that every other member of the Board
had a conflict of interest.96 The Special Committee’s letter also contended it had the
proper authority to continue the litigation, citing various provisions in the MTA,
disclosures sent to the Company’s stockholders in connection with the MTA, and
93
Id. at 35-36.
94
Id. at 41.
95
Id. at 42.
96
Martin Decl. Ex. 7 (April 20, 2020 Letter from Special Committee to the Board), at 4-5,
7.
25
the Resolutions.97 This decision refers to SBG’s April 17 letter to the Board and the
Special Committee’s April 20 letter to the Board, together, as the “Correspondence.”
I. Formation of the New Committee
On April 22, 2020, Skadden litigation partner Robert Saunders sent an email
to Berrent and Jared DeMatteis, WeWork’s general counsel, attaching “draft bullet
points to guide the discussion” the next day with Mathrani and other members of the
Company’s management about forming a new committee.98 The first bullet point
recites “that the company”—meaning WeWork’s management—“badly wants to get
out of the middle of the litigation against SoftBank.”99 The bullet points recommend
using a new committee “to affirmatively divest the special committee of litigation
authority.”100 Skadden opines that Mathrani could not be considered independent
for this task: “Sandeep, because SoftBank was involved in identifying you as CEO,
you could not be considered independent.”101
On April 29, 2020, the Board met to discuss how to proceed in light of the
competing letters it had received from SBG and the Special Committee’s counsel.102
97
Id. at 3-4.
98
Martin Decl. Ex. 8 (April 22, 2020 email sent by Robert Saunders), at WW_New
Committee_00011641; see also Mathrani Dep. 49-50.
99
Martin Decl. Ex. 8, at WW_New Committee_ 00011642; see also Mathrani Dep. 51.
100
Martin Decl. Ex. 8, at WW_New Committee_ 00011643.
101
Id.
102
See Martin Decl. Ex. 10 (April 29, 2020 Board Minutes), at 1.
26
At the time, the Board consisted of eight members: four designees of SBG and
Vision Fund, including Claure (Executive Chairman of the Board) and Mathrani; the
two members of the Special Committee; and Jeffrey Sine and John Zhao.103 Skadden
“recommended that an executive search firm be engaged to identify one to two
disinterested and independent directors, who would then be considered for
temporary appointment to the Board for the sole purpose of forming a new
committee to consider the governance issues raised by the” Correspondence.104 By
a vote of 6-2, with one member of the Special Committee voting against and the
other abstaining, the Board approved engaging Heidrick & Struggles, an executive
search firm, “to identify two independent candidates to join the board of
directors.”105
At least five of the six directors who approved this resolution were conflicted,
namely the four designees of SBG and Vision Fund and John Zhao.106 The draft of
the minutes for the April 29 Board meeting states that “Mr. Zhao, who also serves
103
Id.; Berrent Dep. 37-38.
104
Martin Decl. Ex. 10, at 2.
105
Id. at 3; see also Will Decl. Ex. P (Email exchange between Robinson and Wilson
Sonsini attorney David Berger).
106
The Special Committee asserts that a sixth director, investment banker Jeff Sine, is
beholden to SBG, which “is Sine’s largest client.” Compl. ¶ 58. According to the
Complaint, Sine led SBG’s negotiations of the MTA, acted as its “key” advisor in its
acquisition of a controlling interest in Sprint, Inc., and negotiated for SBG when Sprint
acquired T-Mobile, “the two largest deals that his firm ever advised on.” Id.
27
as CEO of HONY Capital, asked that it be noted for the record that he is not
independent in this context, because [of] HONY Capital’s venture with SBG in
China and that such venture is at the center of the [MTA] Litigation.”107 This
statement was deleted from the final version of the minutes.108 The same draft
minutes note that “[m]anagement . . . emphasized that it has no view as to whether
the decision not to complete the tender benefits or harms the Company.”109 This
statement also was deleted from the final version of the minutes.110
On May 11, 2020, the Special Committee filed a motion for entry of a status
quo order to prevent the Board from, among other things, forming a committee to
review the authority of the Special Committee pending the court’s decision on the
motions to dismiss the Complaint.111 On May 27, 2020, the court denied the motion
for a status quo order “without prejudice to [the Special Committee’s] ability to seek
relief in the future depending on how the situation unfolds.”112 The court stated:
Critically, if a new committee is appointed and if that committee
reaches a conclusion that the special committee takes issue with, the
special committee will be free at that time to challenge any action taken,
107
Will Decl. Ex. O (Draft of April 29, 2020 Board Minutes), at 2.
108
Compare id., with Martin Decl. Ex. 10.
109
Will Decl. Ex. O, at 3.
110
Compare id., with Martin Decl. Ex. 10.
111
Proposed Order Maintaining the Status Quo (Dkt. 55).
112
Mot. for Entry of a Status Quo Order Hr’g Tr. at 74 (May 27, 2020) (Dkt. 129).
28
at which point the Court would have a concrete set of facts with which
to then consider the merits of any renewed application.113
On May 29, 2020, Heidrick & Struggles presented two candidates to the
Board: Alex Dimitrief and Fred Arnold.114 That same day, the Board, by a 6-2 vote
with Dunlevie and Frankfort voting against, approved resolutions appointing
Dimitrief and Arnold as directors and appointing them to a newly created committee
(as defined above, the “New Committee”).115 The resolutions delegated to the New
Committee the authority to make and implement certain determinations concerning
the subject matter of the Correspondence, as follows:
The Board resolves that the New Committee is hereby authorized to
exercise all rights and powers of the Board to the fullest extent
permitted by the Delaware General Corporation Law to (1) determine,
in response to the Correspondence, whether the Special Committee has
or should have, in the best interests of the Company and its
stockholders, the authority to cause the Company to commence and/or
continue the MTA Litigation or other litigation in the name of the
Company involving the same or similar issues, and (2) to implement
such a determination.116
The Board further resolved that it “desires to establish a specific term of the New
Committee’s existence” and determined that the New Committee would exist for a
113
Id. at 73.
114
Martin Decl. Ex. 14 (May 29, 2020 Board Minutes), at Skadden_NewCommittee
0000010.
115
Id. at Skadden_NewCommittee 0000010; Martin Decl. Ex. 14, Annex Res-2 (May 29,
2020 Board Resolutions), at Skadden_NewCommittee 0000016.
116
Martin Decl. Ex. 14, Annex Res-2, at Skadden_NewCommittee 0000016.
29
two-month term automatically expiring on July 29, 2020.117 Each member of the
New Committee would receive $250,000 in compensation.118
On June 12, 2020, while the New Committee was conducting its investigation,
SBG offered to make available to the Company the $1.1 billion in secured debt
financing on the same terms that were included in the MTA.119 After negotiating
“terms the Company believes are more favorable than those provided in the MTA,”
the Company “waiv[ed] the closing of the Tender Offer as a condition precedent.”120
J. The New Committee’s Investigation
On May 29, 2020, the New Committee began its investigation, which
culminated in a 56-page report (as defined above, the “Report”) that was delivered
to the Board on July 28, 2020, the day before the New Committee disbanded.121 The
New Committee was advised by the law firms of McDermott Will & Emery LLP
and Selendy & Gay PLLC.122 With their assistance, the New Committee conducted
at least 24 interviews and reviewed approximately 1,500 documents.123
117
Martin Decl. Ex. 14, at Skadden_NewCommittee 0000010.
118
Id.
119
Report at 17.
120
Id.
121
Id. at 56.
122
Id. at 23.
123
Id. at 23-27.
30
As discussed later in this decision, the New Committee viewed its task to
require that it answer the following three questions:
(1) Did the Special Committee have the authority, at the time that the
MTA Litigation was filed, to initiate such litigation?
(2) Does the Special Committee have the authority today to continue to
litigate the action it commenced on behalf of the Company?
(3) Should the Special Committee, in the best interests of the Company
and its stockholders, have the authority on a going-forward basis to
continue the MTA (or similar) Litigation?124
The Report concluded that the answer to each of these questions is no.
At the conclusion of the Report, the New Committee issued the following six
directions to the Company:
First, the office of the General Counsel is to instruct the
Company’s counsel to file promptly a motion on behalf of the Company
for leave to dismiss the MTA Litigation without prejudice pursuant to
Court of Chancery Rule 41(a), appending to the motion a copy of this
Report for the benefit of the Court.
*****
Second, the Company is to cooperate fully with reasonable
discovery and information requests made by tendering stockholders
who pursue litigation against SBG to enforce the Tender Offer or OTP,
or to recover compensatory damages.
*****
124
Id. at 27-28.
31
Third, subject to applicable privacy laws, the Company is to
provide interested tendering stockholders and/or their counsel with
contact information reasonably necessary to prosecute such litigation.
*****
Fourth, the Company should consider waiving its right to compel
arbitration and its right to enforce (in whole or in part) any releases
given by current or former employees against SBG and SBVF in
employment or separation agreements, so as to enable current and
former employees to participate in a class action litigation or
themselves assert litigation in court to enforce the Tender Offer or
recover damages for its failure.
*****
Fifth, we suggest that SBG and SBVF waive any claim under the
MTA to indemnification of fees and costs in defending litigation
asserted by the tendering stockholders to enforce the Tender Offer or
seek damages from its failure.
*****
Sixth, we suggest that SBG and SBVF stipulate that the tendering
stockholders may bring actions as third-party beneficiaries of the MTA
so that they can base their claims on the MTA’s “reasonable best
efforts” clauses.125
On July 28, 2020, the New Committee acted by written consent to implement
the first three directions.126 The latter three directions are merely recommendations,
none of which have been implemented to date.127 In connection with its
125
Id. at 54-56 (bolded emphasis deleted).
126
Martin Decl. Ex. 16 (July 28, 2020 Action by Unanimous Written Consent of the New
Committee of the Board of Directors of The We Company).
127
See Berrent Dep. 131-32.
32
investigation, the New Committee incurred over $7 million in fees and expenses as
of September 30, 2020, all of which have been paid by WeWork.128
II. PROCEDURAL HISTORY
On July 30, 2020, WeWork, at the direction of management, filed a motion
under Court of Chancery Rule 41(a) seeking leave to voluntarily dismiss the
Complaint without prejudice.129 In response to this filing, the Special Committee
sought discovery. Management agreed to produce the two members of the New
Committee for deposition but rejected the Special Committee’s request for (i)
privileged information relating to the circumstances under which the New
Committee was established and (ii) three-hour depositions of Mathrani, Robinson,
and Berrent. On August 21, 2020, the court issued an opinion granting the Special
Committee’s request for this discovery.130
After expedited discovery and briefing, the court heard oral argument on
October 16, 2020.131 The parties provided supplemental submissions thereafter.132
128
Dkt. 410 (October 23, 2020 New Comm. letter to the court), at 4.
129
Dkt. 204.
130
In re WeWork Litig., 2020 WL 4917593 (Del. Ch. Aug. 21, 2020). The Special
Committee did not seek any privileged communications between the New Committee and
its counsel. Id. at *1.
131
Dkt. 403.
132
See Dkts. 410, 412, 420, 421.
33
During the pendency of the Rule 41(a) motion, the court has held in abeyance
motions SBG and Vision Fund previously filed to dismiss the Special Committee’s
Complaint, in part, under Court of Chancery Rule 12(b)(6). On October 30, 2020,
the court issued a memorandum opinion granting in part and denying in part SBG
and Vision Fund’s motion to dismiss the Neumann Complaint.133 Simultaneously
with this opinion, the court is issuing an opinion granting in part and denying in part
SBG and Vision Fund’s motion to dismiss the Special Committee’s Complaint. In
that opinion, the court concludes, among other things, that the Complaint stated a
claim for breach of the MTA against Vision Fund but failed to state a claim for
breach of fiduciary duty against SBG and Vision Fund.134
III. ANALYSIS
The issue before the court is one of first impression: Should a temporary
committee of a board of directors created in response to the filing of a lawsuit against
the corporation’s putative controlling stockholders (SBG and Vision Fund) be
permitted to terminate the lawsuit, which an earlier committee of the board filed on
behalf of the corporation with the support of the Company’s management and its
outside counsel to enforce the corporation’s contractual rights against them?
133
See In re WeWork Litig., 2020 WL 6375438 (Del. Ch. Oct. 30, 2020).
134
SBG did not seek dismissal of the contract claim asserted against it under Court of
Chancery Rule 12(b)(6).
34
To be clear, the parties do not dispute that the Board, acting through the New
Committee, has the legal authority to revoke powers that the Board granted the
Special Committee in the first place. As this court has explained, “it is an elementary
principle of corporate law that if a board has the power to adopt resolutions or
policies, then it has the corresponding power to rescind them.”135 Consistent with
this principle, the Special Committee states it “does not claim that its authority is
‘irrevocable’ or that the board may not validly remove a committee’s authority.” 136
The novelty of the issue underlying the New Committee’s motion is reflected
in the parties’ advancement of four different theories for what legal standard should
govern the motion. Those theories span the full spectrum of judicial scrutiny.
Relying on the venerable principle that “inequitable action does not become
permissible simply because it is legally possible,” the Special Committee argues that
the New Committee’s decision to revoke the Special Committee’s authority should
be nullified as inequitable under Schnell v. Chris-Craft Indus., Inc. and its
progeny.137 In the alternative, the Special Committee contends the court should
135
Perlegos v. Atmel Corp., 2007 WL 475453, at *26 (Del. Ch. Feb. 8, 2007) (internal
quotation marks omitted).
136
Special Comm. Opp’n Br. 24-25 (Dkt. 392).
137
285 A.2d 437, 439 (Del. 1971).
35
apply the entire fairness standard because it is “[t]he ‘default’ standard for reviewing
the actions of a conflicted Board or those uniquely benefitting a controller.”138
On the other side of the caption, the Company, acting at the direction of the
New Committee, argues that the New Committee’s determination that this action
should be dismissed is “conclusive” because regardless of whether the Special
Committee once had the authority to act for the Company in this litigation, “[t]he
Board, acting through the New Committee, revoked that power.”139 The New
Committee tempered this position modestly in its reply brief, suggesting that instead
of being conclusive, its determination should be subject to “business judgment”
review.140 That standard, “which requires that [a] decision be approved if it can be
attributed to any rational business purpose,” equates to “something as close to non-
review as our law contemplates.”141 As a fallback, the New Committee contends
that “[i]f any standard of review were appropriate here, it should not be more
138
Special Comm. Opp’n Br. 32.
139
New Comm. Opening Br. 24 (Dkt. 372).
140
See New Comm. Reply Br. 15 (Dkt. 396).
141
Kallick v. Sandridge Energy, Inc., 68 A.3d 242, 257 (Del. Ch. 2013) (Strine, C); see
also Brehm v. Eisner, 746 A.2d 244, 264 (Del. 2000) (“Irrationality is the outer limit of the
business judgment rule. Irrationality may be the functional equivalent of a waste test or
tend to show that the decision is not made in good faith, which is a key ingredient of the
business judgment rule.” (footnote omitted)); In re J.P. Stevens & Co. S’holders Litig., 542
A.2d 770, 780-81 (Del. Ch. 1988) (Allen, C.) (“A court may, however, review the
substance of a decision made by an apparently well motivated board for the limited purpose
of assessing whether that decision is so far beyond the bounds of reasonable judgment that
it seems essentially inexplicable on any ground other than bad faith.”).
36
stringent than that applied to the conclusion of a Zapata committee to dismiss
derivative litigation with prejudice.”142
For the reasons discussed next, the court agrees that something akin to the
standard our Supreme Court’s articulated in Zapata Corp. v. Maldonado,143 while
designed to address a different scenario than present here, provides the best
framework among those the parties identified for analyzing the New Committee’s
determination to seek dismissal of the Special Committee’s complaint.
A. Standard of Review
In Zapata, a stockholder sued ten officers and/or directors of Zapata
Corporation for breaches of fiduciary duty.144 Despite the fact that demand on the
board was excused,145 the board appointed two new outside directors to an
“Independent Investigation Committee,” which determined that the claims should
be dismissed because “continued maintenance is inimical to the Company's best
142
New Comm. Opening Br. 29.
143
430 A.2d 779 (Del. 1981).
144
Id. at 780.
145
Id. at 787 (“The context here is a suit against directors where demand on the board is
excused.”).
37
interests.”146 After the Zapata Corporation moved to dismiss the action based on the
committee’s determination, the Court of Chancery denied the motion.147
In reversing the trial court, the Delaware Supreme Court framed the issue on
appeal as follows: “When, if at all, should an authorized board committee be
permitted to cause litigation, properly initiated by a derivative stockholder in his
own right, to be dismissed?”148 In answering this question, the high court recognized
that the board had the authority under 8 Del. C. § 141(a) to create a committee to
“rid itself of detrimental litigation” but also recognized “potentials for abuse” that
use of the “committee mechanism” posed:149
If, on the one hand, corporations can consistently wrest bona fide
derivative actions away from well-meaning derivative plaintiffs
through the use of the committee mechanism, the derivative suit will
lose much, if not all, of its generally-recognized effectiveness as an
intra-corporate means of policing boards of directors. If, on the other
hand, corporations are unable to rid themselves of meritless or harmful
litigation and strike suits, the derivative action, created to benefit the
corporation, will produce the opposite, unintended result. It thus
appears desirable to us to find a balancing point where bona fide
stockholder power to bring corporate causes of action cannot be
unfairly trampled on by the board of directors, but the corporation can
rid itself of detrimental litigation.150
146
Id. at 781.
147
Id. In a companion action in the United States District Court for the Southern District
of New York, where Zapata moved for summary judgment based on the Independent
Investigation Committee’s determination, the district court granted the motion. Id.
148
Id. at 785.
149
Id.
150
Id. at 786-87 (internal citations omitted).
38
The “balancing point” the Supreme Court struck is a two-part test. In the first
step, the corporation bears “the burden of proving independence, good faith and a
reasonable investigation” and if the court “determines either that the committee is
not independent or has not shown reasonable bases for its conclusions, or, . . . is not
satisfied for other reasons relating to the process,” the court “shall deny the
corporation’s motion.”151 Even if the first step is satisfied, the court may proceed
“in its discretion” to the second step and “determine, applying its own independent
business judgment, whether the motion should be granted.”152
There are important differences between this case and the scenario that gave
rise to the Zapata standard. The focus of the Zapata standard is whether an
independent committee of the board should be permitted to dismiss with prejudice
derivative claims asserted by a stockholder—typically for breach of fiduciary duty—
seeking a recovery for the corporation in a “demand excused” situation, meaning
that the claims would survive a Rule 23.1 motion for failure to make a demand.153
151
Id. at 788-89.
152
Id. at 789.
153
See, e.g., Kahn v. Kolberg Kravis Roberts & Co., L.P., 23 A.3d 831, 834-35 (Del.
2011); London v. Tyrrell, 2010 WL 877528, at *11 (Del. Ch. Mar. 11, 2010); Norfolk Cty.
Ret. Sys. v. Jos. A. Bank Clothiers, Inc., 2009 WL 353746, at *7 & n.52 (Del. Ch. Feb. 12,
2009), aff'd, 977 A.2d 899 (Del. 2009); Sutherland v. Sutherland, 958 A.2d 235, 237-38
(Del. Ch. 2008) (Lamb, V.C.); In re Oracle Corp. Deriv. Litig., 824 A.2d 917, 939-40 (Del.
Ch. 2003) (Strine, V.C.); Katell v. Morgan Stanley Grp., Inc., 1993 WL 205033, at *1-2
(Del. Ch. June 8, 1993); Spiegel v. Buntrock, 1988 WL 124324, at *2-4 (Del. Ch. Nov. 17,
1988), aff’d 571 A.2d 767 (Del. 1990); Kaplan v. Wyatt, 484 A.2d 501, 504-506 (Del. Ch.
1984), aff'd, 499 A.2d 1184 (Del. 1985).
39
Here, by contrast, the New Committee seeks to dismiss a viable direct claim for
breach of contract that the Company, at the direction of the Special Committee, has
asserted against SBG and Vision Fund seeking specific performance to require SBG
to pay stockholders for the shares they tendered in the Tender Offer.154 In other
words, the proponent of the claim (a stockholder versus a board committee), the
nature of the claim (breach of fiduciary duty versus breach of contract), and the
recipient of any monetary recovery (the corporation versus a subset of stockholders)
are all different. 155
Notwithstanding these differences, the common denominator between this
case and the Zapata scenario is the use a fully-authorized board committee to
determine whether viable claims of the corporation should be dismissed.156 The
154
The viability of the Special Committee’s claim that SBG and Vision Fund breached the
reasonable best efforts provisions of the MTA is evidenced by the fact that SBG did not
seek to dismiss the claim at the pleadings stage and the court has denied Vision Fund’s
motions to dismiss the same claim asserted against it under Court of Chancery Rule
12(b)(6) by Neumann and, in an opinion issued today, by the Special Committee. See Dkt.
84 (Br. in Supp. of SBG’s Mot. to Dismiss Compl.); In re WeWork Litig., 2020 WL
6375438, at *9 (“Accepting as true the well-pled allegations of the Complaint and drawing
all reasonable inferences in Plaintiffs’ favor, as the court must at this stage, Count II states
a reasonably conceivable claim that Vision Fund breached its reasonable best efforts
obligations in Sections 8.03(a), 8.09, and 8.12 of the MTA.”).
155
The Zapata scenario and this case also differ in that a Zapata dismissal is with prejudice
so as to preclude further litigation of the derivative claims whereas the New Committee’s
motion seeks to dismiss the Special Committee’s Complaint “without prejudice to preserve
the Company’s options in the event that circumstances change in the future such that
resurrecting the claims in the MTA Litigation would best serve the interests of the
Company and all its stockholders.” Report at 54.
156
See Zapata, 430 A.2d at 786-87.
40
potential for abuse in using the “committee mechanism” for this purpose was the
impetus for creating the two-step Zapata test. As the Supreme Court explained in
Zapata, “there is sufficient risk in the realities of a situation like [this] to justify
caution beyond adherence to a theory of business judgment.”157 Given that the
realities underlying creation of the Zapata standard are equally present in this case—
i.e., the presence of a conflicted Board and of putatively controlling stockholders
(SBG and Vision Fund) who are defendants in the underlying litigation and who
have made known to the Board their desire to have the litigation dismissed—it would
be inappropriate in my view to accept the New Committee’s determination as
conclusive or to review its dismissal motion under the highly deferential business
judgment rule. Rather, these realities support applying a higher level of scrutiny
along the lines of the Zapata standard.
Turning to the two standards of review the Special Committee has proposed,
the court is not persuaded that either standard fits the circumstances of this case as
well as the Zapata standard. The Special Committee cited no authority in which a
director (as opposed to a stockholder) was found to have standing to invoke equitable
review of a legally permissible action under Schnell and its progeny to challenge the
157
Id. at 787; see also In re Trados Inc. S'holder Litig., 73 A.3d 17, 43 (Del. Ch. 2013)
(“Enhanced scrutiny applies to specific, recurring, and readily identifiable situations
involving potential conflicts of interests where the realities of the decisionmaking context
can subtly undermine the decisions of even independent and disinterested directors.”
(emphasis added)).
41
action of other directors.158 And as a leading treatise explains, our “case law is
indicative of a healthy inclination on the part of the judiciary to employ the Schnell
principle of ‘legal but inequitable’ only sparingly,” and typically does so only when
“inequitable conduct has occurred but is not plainly remediable under conventional
fiduciary doctrines.”159 Here, Zapata articulates a standard that is more
appropriately tailored to address the actions of a board committee formed to consider
whether or not a viable corporate claim should be dismissed.
At first blush, there is some appeal to the Special Committee’s fallback
position to apply the entire fairness standard, which Delaware courts routinely apply
158
When pressed on the issue, the only authority the Special Committee identified for
support was this court’s decision in In re CBS Corp. Litig., 2018 WL 3414163 (Del. Ch.
July 13, 2018). Mot. for Leave to Dismiss Compl. Pursuant to Court of Chancery Rule
41(a) Hr’g Tr. at 54-58, 87 (Oct. 16, 2020) (Dkt. 433). CBS did involve a special
committee, but the court never considered whether the committee had standing to assert a
claim under Schnell and its progeny.
159
1 David A. Drexler et al., Delaware Corporation Law and Practice § 4.03, at 13 (2019);
see also STAAR Surgical Co. v. Waggoner, 588 A.2d 1130, 1137 n.2 (Del. 1991) (“Again,
we emphasize that our courts must act with caution and restraint when granting equitable
relief in derogation of established principles of corporate law.”); Alabama By-Products
Corp. v. Neal, 588 A.2d 255, 258 n.1 (Del. 1991) (“While the doctrine of [Schnell], is an
important part of our jurisprudence, its application, or that of similar concepts, should be
reserved for those instances that threaten the fabric of the law, or which by an improper
manipulation of the law, would deprive a person of a clear right.”); Dolgoff v.
Projectavision, Inc., 1996 WL 91945, at *7 (Del. Ch. Feb. 29, 1996) (Allen, C.) (“But such
equitable power obviously must be invoked sparingly and only when circumstances make
relatively clear that inequitable behavior or manipulation is present.”); Leo E. Strine, Jr., If
Corporate Action Is Lawful, Presumably There Are Circumstances in Which It Is Equitable
to Take That Action: The Implicit Corollary to the Rule of Schnell v. Chris–Craft, 60 Bus.
Law. 877, 893 n.68 (2005) (“Schnell's tradition cautions against a literal reading of the
quoted language, which is better read as manifesting a recognition that equity should not
lightly impede actions authorized by law.”).
42
to actions taken by a controlling stockholder or a conflicted board of directors. Once
again, however, the Zapata standard seems like the better fit given that the action to
be reviewed—dismissal of this action under Court of Chancery Rule 41(a)—is based
on the determination of a committee that was “authorized to exercise all rights and
powers of the Board to the fullest extent permitted by the Delaware General
Corporation Law” with respect to this issue.160
For these reasons, the court concludes that the appropriate standard of review
to apply to the Rule 41(a) dismissal motion is a form of the two-step Zapata test.
B. The First Prong of the Zapata Test
“The first prong of the Zapata standard analyzes the independence and good
faith of committee members, the quality of its investigation and the reasonableness
of its conclusions.”161 The New Committee “is not entitled to any presumptions of
independence, good faith, or reasonableness.”162 “Rather, the corporation has the
burden of proof under Rule 56 standards, which require the corporation to establish
the absence of any material issue of fact and its entitlement to relief as a matter of
law.”163 “The motion must be supported by a thorough written record.”164
160
Martin Decl. Ex. 14, Annex Res-2, at Skadden_NewCommittee 0000016.
161
Kahn, 23 A.3d at 836.
162
Sutherland, 958 A.2d at 239.
163
Id.
164
Kaplan, 484 A.2d at 506.
43
1. Independence
The independence of the two members of the New Committee is
unchallenged. No evidence has been provided that either of them have a personal
interest in the outcome of this litigation or that they are beholden to anyone who
does, including SBG and Vision Fund. Nor has any evidence been provided calling
into question the independence of the New Committee’s legal advisors.
The record also reflects that Dimitrief and Arnold were qualified to serve on
the New Committee. Dimitrief was a litigation partner at Kirkland & Ellis LLP for
over twenty years, served in senior positions at General Electric, has served on
corporate boards, and currently is a partner at a legal consulting firm.165 Arnold is a
retired financial professional with a background in investment banking, has served
in senior operating positions at troubled private equity-owned portfolio companies,
and has served as a corporate executive and director at multiple companies.166
2. Good Faith and Reasonable Investigation
Notwithstanding the independence of the New Committee’s members, there
are significant shortcomings and errors in the New Committee’s report that
undermine the court’s confidence in the reasonableness of its investigation and a
number of its conclusions. Before turning to those issues, it bears emphasis what
165
Report at 21.
166
Id.
44
the Report does not do. Unlike a typical Zapata special litigation committee, the
New Committee did not investigate the factual allegations of the Special
Committee’s Complaint and offers no opinion on the merits of the Company’s
claims against SBG and Vision Fund.167 Instead, the New Committee’s Report is
devoted to a narrow issue: “whether it is in the best interests of the Company and
its stockholders for the Special Committee to pursue its claims as a lawsuit by the
Company at the Company’s expense.”168
As previously explained, the New Committee tackled this assignment by
answering in the negative the following three questions:
(1) Did the Special Committee have the authority, at the time that
the MTA Litigation was filed, to initiate such litigation?
(2) Does the Special Committee have the authority today to
continue to litigate the action it commenced on behalf of the Company?
(3) Should the Special Committee, in the best interests of the
Company and its stockholders, have the authority on a going-forward
basis to continue the MTA (or similar) Litigation?169
The court addresses it concerns with the reasonableness of the New Committee’s
investigation with respect to these three issues, in turn, next.
167
Id. at 2 (“Our purpose is not to second-guess or decide the merits of the claims asserted
by the Special Committee regarding the failed Tender Offer.”); see also id. at 32 (“We have
not aspired to conduct a Zapata-like assessment of the merits of the MTA Litigation.”).
168
Id. at 32.
169
Id. at 27-28.
45
a. The “Did” Question
The New Committee’s conclusion that the Special Committee did not have
the authority to file the MTA Litigation when it did is based primarily on its
subsidiary conclusions that the MTA Litigation was not authorized under the
Resolutions or the MTA.170
Starting with the Resolutions, the New Committee correctly observes that the
Resolutions “do not expressly delegate litigation authority over the MTA or any
Potential Transaction to the Special Committee.”171 The New Committee then goes
on to analyze what it characterizes as the “catch-all” provision in the October 12,
2019 Resolutions.172 That provision appears in the fourth paragraph of the excerpt
from the October 12, 2019 Resolutions quoted below:
The Board therefore resolves that the Special Committee is
hereby formed and the Bruce Dunlevie and Lewis Frankfort are hereby
designated as the members of the Special Committee, with Bruce
Dunlevie to serve as the Chairperson of the Special Committee.
170
See id. at 33-35. The Report also concludes that the Special Committee did not have
the authority to bring a claim for breach of fiduciary duty against SBG and Vision Fund
and, even if it did, that such a claim should not proceed for various reasons. See id. at 37,
45-47. This issue is moot because the court grants SBG and Vision Fund’s motions to
dismiss Count II of the Complaint, which asserted breach of fiduciary duty claims against
SBG and Vision Fund, for the reasons explained in a decision issued concurrently with this
opinion.
171
Id. at 33.
172
See id. at 34.
46
The Board further resolves that the Special Committee is hereby
authorized to review, evaluate and assist in the structuring of a Potential
Transaction (including the possibility of not permitting a Potential
Transaction to proceed at this point in time) and to make any and all
determinations and recommendations regarding a Potential Transaction
that the Special Committee deems appropriate, including a
determination or recommendation whether the final terms of any
Potential Transaction are in the best interests of the stockholders of the
Company (other than any interested stockholders of the Company), and
the Special Committee shall provide periodic updates to the Board in
this regard, where appropriate to do so.
The Board further resolves that it shall not adopt or approve the
consummation of any Potential Transaction without such a
determination or recommendation by the Special Committee of the
final terms of such Potential Transaction, but a determination or
recommendation by the Special Committee to adopt or approve the
consummation of a Potential Transaction shall be subject to approval
by the Board and, if required by law or regulation, by the Company’s
stockholders.
The Board further resolves that, subject to the foregoing
(including the requirement of Board approval prior to execution of any
definitive agreements relating to a Potential Transaction), the Special
Committee is hereby authorized to exercise all rights and powers of the
Board to the fullest extent permitted by the Delaware General
Corporation Law in connection with a Potential Transaction, including
for purposes of Section 2.01 of the Company’s Stockholders’
Agreement the power and authority to authorize the issuance of equity
securities of the Company.173
The Report explains that the Special Committee relies heavily on the “catch-
all” provision in the October 12, 2019 Resolutions as the source of its authority to
173
Martin Decl. Ex. 2, Annex A.
47
initiate the MTA Litigation.174 The New Committee found there was “a textual flaw
in” the Special Committee’s reliance on this provision because “[t]he catch-all
provision was expressly made ‘subject to the foregoing,’ including the articulation
that the Special Committee’s express charge was to ‘review, evaluate, and assist in
the structuring of a Potential Transaction.’”175 The Report asserts “that the more
reasonable reading of” this provision is that it merely “gave the Special Committee
‘all rights and powers’ to ‘review, evaluate, and assist in the structuring of a Potential
Transaction’ and then ‘adopt and approve’ it, not to sue to enforce it outside of a
Company’s regular processes for such litigation.”176 This analysis is incorrect in my
opinion for three reasons.
First, given that the second paragraph of the excerpt of the October 12, 2019
Resolutions quoted above authorizes the Special Committee not only “to review,
evaluate and assist in the structuring of a Potential Transaction,” but “to make any
and all determinations and recommendations regarding a Potential Transaction that
the Special Committee deems appropriate,” it is not apparent what independent
effect the “catch-all” provision would have under the New Committee’s
interpretation.177 Put differently, the interpretation proffered in the Report appears
174
Report at 34.
175
Id. (quoting October 12, 2019 Resolutions).
176
Id. (quoting October 12, 2019 Resolutions).
177
Martin Decl. Ex. 2, Annex A (emphasis added).
48
to render the authorization of “rights and powers” in the “catch-all” provision mere
surplusage, contrary to basic principles of contract interpretation, since earlier parts
of the October 12, 2019 Resolutions already authorized the Special Committee to
make any determination concerning a Potential Transaction.178
Second, and most importantly, the more reasonable interpretation of the plain
language of the Resolutions is that the “subject to the foregoing” qualification
referred to the limitations in the paragraph of the October 12, 2019 Resolutions
immediately preceding the “catch-all” provision, i.e., that (i) a determination by the
Special Committee to adopt or approve the consummation of a Potential Transaction
would be subject to Board approval and (ii) the Board would not adopt or approve
the consummation of a Potential Transaction without a recommendation from the
Special Committee. This interpretation is supported by the fact that (i) the
parenthetical immediately following the “subject to the foregoing” qualification—
which plainly is intended to illustrate the meaning of the qualification—expressly
references the Board approval requirement and (ii) the October 13, 2019 Resolutions
removed the “subject to the foregoing” limitation at the same time the Board
approval requirement was eliminated:
178
Kuhn Const., Inc. v. Diamond State Port Corp., 990 A.2d 393, 396-97 (Del. 2010) (“We
will read a contract as a whole and we will give each provision and term effect, so as not
to render any part of the contract mere surplusage.”).
49
The Special Committee is empowered to adopt and approve the
consummation of any Potential Transaction (as defined in the October
12, 2019 resolutions of the Board), if the Special Committee deems a
Potential Transaction to be advisable and in the best interests of the
Company and its stockholders (other than any interested stockholders
of the Company), and no such determination or recommendation by
the Special Committee to adopt or approve the consummation of a
Potential Transaction shall require further approval by the Board or
the Company’s stockholders except to the extent required by law or
regulation. In furtherance of the foregoing, the Special Committee
is hereby authorized to exercise all rights and powers of the Board to
the fullest extent permitted by the Delaware General Corporation Law
in connection with a Potential Transaction.179
Importantly, as restated in the last sentence of the October 13, 2019
Resolutions, the “catch-all” provision begins with the phrase “[i]n furtherance of the
foregoing.” This language—unlike the phrase “subject to the foregoing” and
contrary to the New Committee’s reading180—is not a form of limitation.
Delaware courts look to dictionaries when assessing the plain meaning of
terms.181 Black’s Law Dictionary defines the term “furtherance” to mean “[t]he act
or process of facilitating the progress of something or making it more likely to occur;
179
Martin Decl. Ex. 3, at 2 (emphasis added).
180
Report at 34.
181
In re Solera Ins. Coverage Appeals, 2020 WL 6280593, at *9 (Del. Oct. 23, 2020) (“This
Court often looks to dictionaries to ascertain a term’s plain meaning.”); Lorillard Tobacco
Co. v. Am. Legacy Found., 903 A.2d 728, 738 (Del. 2006) (“Under well-settled case law,
Delaware courts look to dictionaries for assistance in determining the plain meaning of
terms which are not defined in a contract.”).
50
promotion or advancement.”182 Other dictionaries are to the same effect.183
Consistent with this definition, the plain language of the Resolutions in their final,
revised form delegated to the Special Committee the authority to adopt and approve
the consummation of a Potential Transaction unilaterally (unless Board approval was
required by “law or regulation”) along with the further authority “to exercise all
rights and powers of the Board to the fullest extent permitted by the Delaware
General Corporation Law in connection with a Potential Transaction.”184 The latter
phrase logically would include the Board’s statutory authority to pursue litigation on
behalf of the Company in connection with a “Potential Transaction.”185 As noted
above, that term is defined in the Resolutions to include the proposal that ultimately
was documented in the MTA, which included “a tender offer by SoftBank for
Company equity.”186 Thus, in my opinion, the more reasonable interpretation of the
182
Black’s Law Dictionary (11th ed. 2019).
183
Webster’s Third New International Dictionary 924 (1976) (defining “furtherance” as “a
helping forward: advancement, promotion”); Furtherance, Dictionary.com,
https://www.dictionary.com/browse/furtherance?s=t (last visited Dec. 14, 2020) (“the act
of furthering; promotion; advancement.”).
184
Martin Decl. Ex. 3, at 2.
185
Zapata, 430 A.2d at 782 (“Directors of Delaware corporations derive their managerial
decision making power, which encompasses decisions whether to initiate, or refrain from
entering, litigation, from 8 Del. C. § 141(a).”); Spiegel, 571 A.2d at 773 (“The decision to
bring a law suit or to refrain from litigating a claim on behalf of a corporation is a decision
concerning the management of the corporation.”).
186
Martin Decl. Ex. 2, Annex A.
51
plain language of the Resolutions is that the Special Committee did have the
authority to file the MTA Litigation when it did.
Third, to the extent reasonable minds could differ as to whether the
Resolutions authorized the Special Committee to file litigation to enforce the
provisions of the MTA, the evidence before the court uniformly supports the
conclusion that it did. The Report, however, considers very little of this evidence.
This is troubling because the necessary implication of the Report’s analysis—which
refers to the New Committee’s interpretation as the “the more reasonable reading”
of the “catch-all” provision187—is that the New Committee itself viewed the “catch-
all” provision to be susceptible to more than one reasonable interpretation, meaning
that the provision is ambiguous.188 To resolve the ambiguity, the Report should have
analyzed all relevant extrinsic evidence:
If the contract is ambiguous, a court will apply the parol evidence rule
and consider all admissible evidence relating to the objective
circumstances surrounding the creation of the contract. Such extrinsic
evidence may include overt statements and acts of the parties, the
business context, prior dealing between the parties, [and] business
custom and usage in the industry.189
187
Report at 34 (emphasis added).
188
See O’Brien v. Progressive N. Ins. Co., 785 A.2d 281, 287 (Del. 2001) (holding that a
contract is “ambiguous when the provisions in controversy are reasonably or fairly
susceptible to different interpretations or may have two or more different meanings”).
189
Salamone v. Gorman, 106 A.3d 354, 374 (Del. 2014) (quoting In re Mobilactive Media,
LLC, 2013 WL 297950, at *15 (Del. Ch. Jan. 25, 2013)); see also Eagle Indus., Inc. v.
DeVilbiss Health Care, Inc., 702 A.2d 1228, 1233 (Del. 1997) (“In construing an
52
The extrinsic evidence before the court, some of which was developed in
discovery in response to the Rule 41(a) motion, uniformly supports that the
Resolutions were intended to authorize the Special Committee to file litigation to
enforce the provisions of the MTA, including:
The October 22, 2019 email from a Skadden partner advising a
Board observer shortly before the MTA was executed that “[t]he
“Special Committee, acting through the Company, has the ability to
sue for specific performance to cause SoftBank to do the tender
offer.”190
The representation WeWork made to its stockholders in the
Disclosure Statement that Frankfort would remain on the Board
“until the later of (a) the completion of the SoftBank Transactions
(including the resolution of any litigation or disputes with SoftBank
with respect to the SoftBank Transactions) and (b) the
consummation of the Tender Offer.”191
The provision in the Stockholders’ Agreement that Frankfort would
remain a director of WeWork until the later of the final resolution of
“any litigation or disputes . . . with SBG arising [from the MTA]
(including with respect to the Tender Offer (as defined in the MTA))
or . . . the consummation of the Tender Offer.”192
The representation in the Offer to Purchase that mirrors the
provisions in the Disclosure Statement and the Stockholders’
Agreement quoted above.193
ambiguous contractual provision, a court may consider evidence of prior agreements and
communications of the parties as well as trade usage or course of dealing.”).
190
Will Decl. Ex. G.
191
Disclosure Statement at 2 (emphasis added).
192
Stockholders’ Agreement § 2.01(b)(iv) (emphasis added).
193
Will Decl. Ex. A, at WeWork_00000432.
53
The unequivocal statements and testimony of Robinson, the lead
deal partner for the MTA transaction at Skadden, which drafted the
Resolutions, that the Special Committee had the authority to pursue
litigation to enforce the terms of the MTA under the Resolutions.194
The fact that Robinson prompted the Special Committee to bring the
lawsuit against SBG and Vision Fund on behalf the Company after
WeWork signed a term sheet with Trustbridge concerning ChinaCo
that allegedly was inconsistent with the terms contemplated in the
MTA for completing the ChinaCo Roll-Up.195
The testimony of Berrent, WeWork’s Chief Legal Officer, that the
Special Committee had the “full authority to handle how to respond
to SoftBank with respect to issues arising out of the MTA.”196
The fact that Skadden and Berrent participated, subject to a common
interest privilege, in reviewing drafts of the complaint to be filed by
the Company at the direction of the Special Committee to assert
claims against SBG and Vision Fund for breach of the MTA.197
It is unclear from the Report how much of this evidence the New Committee
marshaled during its investigation. What is clear is that, with one exception, the
Report did not analyze any of this evidence in reaching its conclusion concerning
the meaning of the Resolutions.198
194
Will Decl. Ex. F, at 3; Robinson Dep. 61.
195
See supra Part. I.F.
196
Berrent Dep. 58-59.
197
See supra Part. I.F.
198
The Report does note that the New Committee reviewed drafts of the MTA, which
“reveal no material negotiations about the condition precedent to closing the Tender Offer.”
Report at 27.
54
The one piece of extrinsic evidence the Special Committee considered in the
Report, which is discussed in a footnote, is the representation SBG made to the
minority stockholders in the Disclosure Statement “that Mr. Frankfort would retain
his Board seat until the later of ‘the SoftBank transactions (including the resolution
of any litigation or disputes with SoftBank with respect to the [the MTA])’ and ‘the
consummation of the Tender Offer.’”199 Quoting Section 11.14 of the MTA, the
Report contends that “[t]he Special Committee reads too much into” this disclosure
because the MTA only grants it the “power to ‘approve’ ‘any action or determination
by the Company to exercise rights or enforce remedies against SBG under [the
MTA].’”200 As discussed next, however, Section 11.14 did not preclude the Special
Committee from initiating litigation against SBG to enforce remedies under the
MTA. Thus, the Report’s disregard of the representation in the Disclosure Statement
relied on a flawed understanding of Section 11.14.
Section 11.14 of the MTA states in relevant part, that:
Following the occurrence of the Board Change and until the later of the
consummation of the Debt Financing and the Tender Offer, . . . any
action or determination by the Company to exercise rights or enforce
remedies against SBG under this Agreement shall require the approval
of the Special Committee . . . .201
199
Id. at 35 n.156 (quoting Disclosure Statement at 2).
200
Id. (quoting MTA § 11.14).
201
MTA § 11.14.
55
The Report concludes that this provision “does not grant the Special Committee
authority to sue on the Company’s behalf.”202 The Report goes on to explain that
the New Committee “read[s] Section 11.14 to say that the Company (e.g.,
management) can propose to bring suit, but cannot do so without the Special
Committee’s approval.”203 The Report does not discuss who else could propose
under Section 11.14 that the Company bring a suit against SBG, implying that
“management” has the exclusive authority to enforce remedies against SBG under
the MTA during the period covered by Section 11.14, i.e., after the “Board Change”
and until the consummation of both the Debt Financing and the Tender Offer. The
court disagrees with this interpretation.
Although Section 11.14 does not expressly grant the Special Committee the
authority to sue on the Company’s behalf, neither does that provision preclude the
Special Committee from doing so. Indeed, Section 11.14 does not purport to
delegate the Company’s authority to exercise rights or enforce remedies against SBG
under the MTA to anyone. It merely provides that no one purporting to act on behalf
of the Company may enforce remedies against SBG under the MTA during the
relevant period without obtaining the Special Committee’s approval. A lawsuit filed
by the Company at the direction of the Special Committee pursuant to its authority
202
Report at 35.
203
Id.
56
under the Resolutions to enforce remedies against SBG under the MTA necessarily
would have been approved by the Special Committee and thus would comply with
Section 11.14.
Even assuming that the New Committee’s interpretation of Section 11.14 was
correct, which it is not in the court’s judgment, the Report suffers from another
failing. Having determined that “management” could propose to bring a suit against
SBG under Section 11.14, it was incumbent on the New Committee to determine if
it had done so. The record developed on this motion provides strong evidence that
management, in fact, encouraged the Special Committee to file suit against SBG (as
well as Vision Fund) on behalf of the Company to enforce its remedies under the
MTA. Specifically:
Berrent and WeWork’s outside counsel (Skadden) became
concerned that SBG was violating the MTA by failing to use its
reasonable best efforts to complete the ChinaCo Roll-Up.204
Thereafter, on March 16, 2020, Robinson of Skadden, in an email to
the Special Committee’s counsel (Wilson Sonsini), encouraged the
Special Committee “to make a decision soon about whether it will
bring a lawsuit against Softbank on behalf of the company.”205
Skadden and Berrent subsequently reviewed and commented on
drafts of the complaint to be filed by the Company at the direction
of the Special Committee, asserting, among other things, that SBG
and Vision Fund breached their obligations under the MTA to
complete the ChinaCo Roll-Up and to consummate the Tender Offer
204
See Berrent Dep. 136, 139-40; Robinson Dep. 43-44.
205
Will Decl. Ex. I.
57
and seeking the remedy of specific performance.206 Skadden
specifically suggested that the Special Committee’s draft complaint
should “express[] more outrage over SoftBank’s actions in
frustrating the ChinaCo condition.”207
It is inexplicable that the New Committee, having determined that
management could propose that the Company bring a lawsuit against SBG under
Section 11.14 of the MTA, did not analyze whether management effectively made
such a proposal through the Special Committee before reaching the conclusion that
the Special Committee was not authorized to file the MTA Litigation. Had it done
such an analysis, the New Committee would have been presented with facts
indicating management encouraged the Special Committee to take action and
approved of the filing of the Complaint.208
*****
In sum, in determining whether the Special Committee had the authority to
file the MTA Litigation, the New Committee reached the wrong legal conclusion in
206
See Will Decl. Ex. K, at DNP000949; Will Decl. Ex. L.
207
Will Decl. Ex. K, at DNP000949.
208
The New Committee contends in its December 10, 2020 letter to the court that the
minutes of a Special Committee on March 24, 2020 contradict the Special Committee’s
assertion that Mathrani never “objected” to the MTA Litigation before Berrent’s call with
Townsend in mid-April. See Dkt. 504. The court does not see the contradiction. The
minutes do not indicate that Mathrani objected to the filing of the MTA Litigation. Rather,
they state that the Special Committee “reported that Mr. Mathrani expressed concerns that
litigation related to the tender offer could have adverse consequences.” Dkt. 504 Ex. A
(emphasis added). It strains credulity, furthermore, to suggest that the Company’s Chief
Legal Officer and outside counsel would encourage and assist in the filing of the MTA
Litigation over the objection of the Company’s CEO.
58
my opinion by misinterpreting the Resolutions and Section 11.14 of the MTA. With
respect to the Resolutions, moreover, the Special Committee failed to consider
extrinsic evidence even though the New Committee itself seemingly found the
Resolutions to be ambiguous.
b. The “Does” Question
The second question the New Committee answered in the Report was “[e]ven
if the Special Committee had authority to bring the MTA Litigation as of when the
MTA was being negotiated and/or executed, does the Special Committee continue
to have the authority to maintain this Litigation today?”209 In concluding that the
answer to this question is no, the New Committee found that “[t]he Special
Committee is no longer sufficiently disinterested to fulfill its mandate to act in the
best interests of the Company and its stockholders (except those affiliated with Mr.
Neumann and SBG).”210
The Report premised this finding on the fact that circumstances changed after
the MTA Litigation was filed in April 2020 because the Company has now “received
all the benefits to which the Company was entitled under the MTA.”211 These
“benefits” to which the Report refers consist of the three components of the $5.05
209
Report at 37.
210
Id.
211
Id. at 38.
59
billion of Debt Financing set forth in the MTA.212 SoftBank provided two of these
components before this action was filed,213 but had not provided the third component
(i.e., $1.1 billion of secured debt financing) as of that date. At the outset of this
action, the Special Committee asserted, justifiably, that requiring SBG to complete
the Tender Offer would benefit the Company by triggering SBG’s obligation to
provide the secured debt financing.214 It was only in June 2020, after this action was
filed—and perhaps due to its filing—that SBG offered to make the secured debt
financing available to the Company.215
The change of circumstances concerning the Debt Financing was facilitated
by Amendment No. 1 to the MTA. It allowed the Debt Financing to occur either
before or after the Tender Offer closed whereas the original terms of the MTA
required that the Tender Offer close before the Debt Financing could commence.216
Neumann has advanced a viable claim against SBG and Vision Fund that they
212
See MTA § 4.01(a)-(b).
213
See Dkt. 14, at 4.
214
See Compl. ¶¶ 21, 87; Dkt. 28 (Special Comm.’s Reply in Further Support of its Mot.
for Expedited Proceedings) ¶ 16; Dkt. 132 (Special Comm.’s Answering Br. in Opp’n to
Defs.’ Mot. to Dismiss Compl.), at 42.
215
Report at 17.
216
Amendment No. 1 § 3.
60
breached the MTA by obtaining this amendment without Neumann’s consent as a
signatory to the MTA.217
Significantly, the Special Committee never asserted a claim for breach based
on Amendment No. 1 and it has not been suggested that either of its members has
impeded the Company in any way from receiving any of the benefits of the Debt
Financing.218 Given the absence of any indication that the Special Committee
members failed to advance the Company’s best interests with respect to the Debt
Financing, it comes with ill grace to contend the that Special Committee is no longer
“sufficiently disinterested” simply because the Company has now received all of the
benefits of the Debt Financing.
The New Committee contends that “[g]enerally speaking, directors cannot
devote corporate resources for the exclusive benefit, or to vindicate the special
rights, of a particular subset of stockholders.”219 None of the authorities the Report
cites for this proposition involve the issue here: the use of corporate funds to pay
advisors of a board committee that the corporation is obligated to pay.220 Here, the
217
SBG did not seek to dismiss this claim, conceding its viability. Vision Fund did seek
to dismiss the claim under Court of Chancery Rule 12(b)(6), but the court denied that
motion. See In re WeWork Litig., 2020 WL 6375438, at *9-11.
218
See Compl. ¶¶ 89-98.
219
Report at 39.
220
See Frederick Hsu Living Tr. v. ODN Hldg. Corp., 2017 WL 1437308, at *1, *39 (Del.
Ch. Apr. 14, 2017), as corrected (Apr. 24, 2017) (denying motion to dismiss fiduciary duty
claim against certain directors because “[t]he Complaint's detailed factual allegations
61
Resolutions and the MTA both require that the Company pay for the fees and
expenses of the Special Committee’s advisors.221 The relevant question in the New
Committee’s “Does” analysis to my mind is whether the MTA Litigation must be
dismissed now that the issues concerning the Debt Financing are off the table simply
because Dunlevie and Frankfort stand to benefit personally if SBG is required to
close the Tender Offer and the Company pays for the litigation to secure that
outcome.
Importantly, it was entirely foreseeable when the Board approved the
Resolutions to form the Special Committee that Dunlevie and Frankfort would
support a reasonable inference that the individual defendants acted in bad faith to benefit”
a venture capital firm “by maximizing the value of its contractual redemption right” “over
the undifferentiated equity” of the corporation); In re Nine Sys. Corp. S’holders Litig., 2014
WL 4383127, at *36 (Del. Ch. Sept. 4, 2014) (finding unfair process in an entire fairness
analysis due to “[t]he Board's utter failure to understand” that it “owe[s] fiduciary duties to
all stockholders”), aff'd sub nom. Fuchs v. Wren Hldgs., LLC, 129 A.3d 882 (Del. 2015);
Gilbert v. El Paso Co., 1988 WL 124325, at *10 (Del. Ch. Nov. 21, 1988) (granting
summary judgment and dismissing duty of loyalty claims against directors because “[t]here
is no direct evidence that the directors were motivated by selfish concerns”), aff'd, 575
A.2d 1131 (Del. 1990).
221
Martin Decl. Ex. 2, Annex A (“The Board further resolves that the Special Committee
is hereby authorized to . . . enter into such arrangements providing for the retention,
compensation, [and] reimbursement of expenses . . . of such advisors as the Special
Committee determines to be advisable, thereby obligating the Company to pay all fees,
expenses and disbursements and to honor all other obligations of the Company under such
contracts.”); MTA § 11.14 (“Following the occurrence of the Board Change and until the
later of the consummation of the Debt Financing and the Tender Offer . . . the Company
shall pay, on behalf of the Special Committee, for any reasonable and documented fees and
expenses of professional advisors or other representatives of the Company.”).
62
participate in the Tender Offer.222 And the extrinsic evidence discussed above
suggests the parties to the MTA contemplated that the Special Committee, which
was entitled to have the Company pay for its advisors, would be responsible for
litigating on behalf of the Company any disputes against SBG that might arise
concerning the transactions in the MTA, including the Tender Offer. Thus, the
record supports a reasonable inference it was “baked into the deal” that Dunlevie
and Frankfort could press claims on behalf of the Company and at its expense to
enforce SBG’s obligation to complete the Tender Offer even though they stood to
benefit from tendering shares in the Tender Offer.223 The New Committee, however,
did not consider this possibility in its Report, presumably because it concluded,
without a reasonable basis in my view, that the Special Committee was not
authorized to file the MTA Litigation in the first place.
c. The “Should” Question
The third question the New Committee addressed is “whether it is in the best
interests of the Company and all its stockholders for the Special Committee to have
the authority to continue to prosecute these claims.”224 In answering this question in
222
See Robinson Dep. 17-19.
223
Another potential litigation expense baked into the deal was that the Company would
indemnify SBG for its attorneys’ fees and expenses if it were to prevail in a litigation
accusing it of breaching its obligations under the MTA. See MTA § 11.02(b).
224
Report at 40.
63
the negative, the Report concluded “that the limited and/or intangible benefits the
Company could receive from the MTA Litigation are readily outweighed by the very
real harms the Company has and will continue to suffer.”225 The court considers
next key aspects of the Report’s analysis of the benefits versus the harms.
On the “benefits” side of the equation, the Report acknowledges that the
Tender Offer would provide tendering stockholders “a significant premium to
current equity value.”226 The Report also recognizes that closing the Tender Offer
would benefit 244 employees of the Company who stand to receive approximately
$39.8 million if the Tender Offer is completed and could provide a benefit to the
Company, albeit a “relatively small” benefit, in the form of improved employee
morale and retention.227 The Report concludes, however, that the harm to employee
morale and retention from not completing the Tender Offer is not “significant
enough” to warrant proceeding with the MTA litigation given the harms to the
Company of doing so and given “that the Company can address morale and retention
issues in a more efficient, targeted fashion than the MTA Litigation.”228 To that end,
the Report comments that “[m]anagement could easily address any dissatisfaction
among this group through other means of compensation awards” and that this
225
Id.
226
Id.
227
Id. at 42-43.
228
Id.
64
approach would be “less damaging than pursuing the Litigation.”229 But the Report
provides no quantification to support those assertions and it is far from clear that the
cost of providing additional compensation to employees in lieu of allowing them to
receive a total of $39.8 million for some of their WeWork shares would be less than
the cost of pressing the MTA Litigation for the benefit of all stockholders who
tendered shares.
More broadly, the Report concludes that “completion of the Tender Offer
cannot be viewed as a significant benefit” to the Company because it “would receive
none of [the] proceeds.”230 In reaching this conclusion, the Report does not consider
that WeWork and all of its stockholders may benefit from closing the Tender Offer
by increasing SBG’s “skin in the game.” The MTA contemplates that SBG would
invest a total of approximately $9.5 billion in WeWork, $3 billion of which is
attributable to the Tender Offer. To be sure, tendering stockholders and not the
Company would receive the consideration paid for shares in the Tender Offer. By
the same token, if consummated, the Tender Offer would increase SBG’s ownership
stake from 43.4% to 69% of the Company’s fully-diluted equity or, when combined
with Vision Fund, from 52.3% to 77.9% of the Company’s fully-diluted equity.231
229
Id.
230
Id. at 42.
231
See Daines Decl. ¶ 21.
65
Robert M. Daines, the Priztker Professor of Law and Business and Associate Dean
at Stanford Law School, opines in a declaration submitted in support of the Special
Committee’s opposition to the Rule 41(a) motion: “This increase in SoftBank’s
equity interest would improve its incentive to increase firm value and reduce the risk
that it would extract value from minority stockholders.”232
The New Committee complains that the Special Committee did not make this
point during its investigation,233 but it seems like a point the New Committee should
have considered on its own. The bargain struck in the MTA was that SBG, subject
to certain conditions, would invest a total of $9.5 billion in WeWork—not $6.5
billion. It stands to reason that SBG would be more incentivized to improve the
Company’s value for the benefit of all of its stockholders if it had $3 billion more of
its capital at risk in the success of WeWork, particularly in the form of equity.
232
Id. ¶ 35; see also In re EZCORP Inc. Consulting Agreement Deriv. Litig., 2016 WL
301245, at *2 (Del. Ch. Jan. 25, 2016) (“The basic insight is a simple one: by virtue of its
control over the firm, the controller can direct how that firm deploys its capital. As an
equity owner, the controller participates in the resulting benefits (and losses) in proportion
to its equity stake, effectively gaining or losing on a pro rata basis with other stockholders.
By contrast, in a related-party transaction, the controller receives 100% of the benefit while
only funding the payment to the extent of its equity stake. The balance of the payment is
funded by the unaffiliated equity holders. The economic incentive to tunnel varies inversely
with the controller's equity stake. All else equal, as the controller's equity stake declines,
the relative benefit from a direct payment increase.”); Lucian A. Bebchuck & Kobi Kastiel,
The Perils of Small-Minority Controllers, 107 Geo. L.J. 1453, 1465 (2019) (“Conversely,
whereas a majority owner cannot be replaced and would not be disciplined by the market
for corporate control, her large equity stake in the controlled company provides powerful
financial incentives to maximize company value.” (emphasis added)).
233
New Comm. Reply Br. 9-10.
66
Turning to the “harms” side of the equation, apart from the expense of the
MTA Litigation, the Report identifies four categories of what more fairly can be
characterized as risks to the Company rather than actual harms: (i) the risk that the
MTA Litigation “fosters a harmful perception that the Company is financially
unstable”; (ii) the “risk to the Company’s legal strategy in other litigations and
regulatory investigations” arising out of “its failed IPO and subsequent MTA
negotiations”; (iii) the risk of procedural uncertainties associated with the MTA
Litigation; and (iv) the risk of counterclaims being asserted against the Company.234
The last three categories concern risks inherent in complex commercial
litigation, e.g., the potential impact of factual findings in one case on other litigations
and investigations, potential privilege waiver issues, the potential challenges of
structuring a comprehensive settlement, and the omnipresent risk that asserting a
claim may prompt counterclaims. The New Committee appropriately identifies
these risks but the reality is that they are conjectural and involve issues that
sophisticated and well-represented litigants routinely manage in complex
litigation.235
234
Report at 48-53.
235
The court shares the New Committee’s concern over potential privilege waivers. As a
practical matter, however, if the Special Committee seeks to waive the Company’s
privilege as to some subject matter over the objection of the Company’s management, the
court will be called upon to resolve the dispute.
67
From my reading of the Report, the risk of primary concern to the New
Committee is that the MTA Litigation “fosters a harmful perception that the
Company is financially unstable” and “at war with its largest financial backer” in
the eyes of its “landlords, tenants, members, vendors and others.”236 The risk from
negative media publicity is certainly a valid concern, but there is a critical
shortcoming in the New Committee’s assessment of this issue.237 Specifically, when
evaluating the impact of the publicity concerning this case, the Report relies solely
on anecdotal evidence and impressions from three senior officers of the Company—
the CEO (Mathrani), Chief Legal Officer (Berrent), and CFO (Kim Ross)—and one
director (Zhao).238 Each of these individuals, however, have conflicts that make their
impartiality suspect and the Report’s unquestioned reliance on them unreasonable.
“Under the great weight of Delaware precedent, senior corporate officers
generally lack independence for purposes of evaluating matters that implicate the
236
Report at 48-49.
237
Notably, the two articles cited in the Report as evidence of “negative publicity” focus
on the dispute arising from the appointment of the New Committee and not on the
substance of the MTA Litigation. See Report at 48 nn.213 & 214 (citing Andrew
Edgecliffe-Johnson, WeWork Factions Head for Showdown over Director Appointments,
Fin. Times (May 27, 2020), https://www.ft.com/content/0b6aa928-fb51-44af-9162-
e54ce243d245; Jef Feeley, WeWork Board Factions Head for Clash Over New Directors,
Bloomberg (May 28, 2020, 2:45 AM), https://www.bloomberg.com/news/articles/2020-
05-28/wework-board-actions-head-for-clash-over-new-directors).
238
See Report at 48-50.
68
interests of a controller.”239 Here, not only do SBG and Vision Fund have all the
attributes of a control group,240 the record indicates that SBG, acting through its
senior officers, sought to exert its influence over Company management to
undermine the MTA Litigation.
The day after the lawsuit was filed, Claure, who was instrumental in hiring
Mathrani, sent a not-too-subtle “recommendation” to Mathrani on how he—as
SBG’s Chief Operating Officer—would like the lawsuit to be messaged, which
Mathrani embraced immediately.241 Less than ten days later, on the same day SBG
sent a letter to the Board challenging the Special Committee’s authority, Townsend
(SBG’s Chief Legal Officer) reprimanded Berrent, telling her that she and Skadden
were conflicted with respect to the lawsuit and threatening to have them
“recused.”242 Soon thereafter, Berrent and Skadden both seemed to shift from
supporting the MTA Litigation—to the point of commenting on draft complaints
under a “common interest privilege”—to becoming its detractors, with Skadden
239
EZCORP, 2016 WL 301245, at *35 (collecting authorities).
240
See supra Parts I.A (detailing SBG and Vision Fund’s relationship with each other and
their equity ownership in WeWork) and I.C (explaining WeWork’s governance structure
under the Stockholders’ Agreement).
241
See Dkt. 402. The Report defends Mathrani’s independence because “his personal
financial incentives as CEO are aligned with the Company’s long-term success” and his
“compensation plan is structured” to afford him liquidity “if he is terminated without
cause.” Report at 50. Even so, it is rarely good for one’s reputation to be fired as a senior
officer.
242
Berrent Dep. 34-35, 40.
69
drafting the game plan to form the New Committee.243 These facts, which are not
mentioned in the Report, provide good reason to question the views attributed to
management on an intangible and subjective subject—the perception of third parties
concerning WeWork’s financial stability in response to publicity concerning the
MTA Litigation.
The Report notes that Zhao “characterized the Litigation as a ‘cloud’
overhanging the Company’s relationships with all its partners.”244 But the Report
omits that Zhao, the CEO of Hony Capital, admitted he was conflicted when the
Board established the New Committee because of Hony Capital’s interest in
ChinaCo—a central issue in the MTA Litigation.245 Nor does the Report mention
that Robinson and Berrent did not consider Zhao to be independent.246
Critically, what is missing from the Report is any objective evidence to verify
what management told the New Committee to support its conclusions concerning
the asserted harm to the Company from negative publicity. The Report, for example,
does not cite to any emails or other documentary evidence from the Company’s
243
Compare Part I.F, with Part I.I.
244
Report at 49.
245
See Will Decl. Ex. O, at 2. The New Committee’s memo of Zhao’s interview notes that
“he was not on the Special Committee because he was a co-investor in WeWork China
with SoftBank” and that he was not involved in WeWork’s dealings with Trustbridge
“because of the conflict.” Will Decl. Ex. W (New Committee June 10, 2020 Interview
with Zhao), at 9-10.
246
See Berrent Dep. 42; Robinson Dep. 94.
70
landlords, tenants, vendors, etc. to corroborate the views management attributed to
them. Nor does the Report contain any data reflecting lost revenues or business
opportunities caused by the MTA Litigation.247
In a brief filed at the New Committee’s direction, the Company asserts that
the present “dispute boils down to one issue: who should pay the substantial legal
fees of Messrs. Dunlevie and Frankfort’s affiliates and the subset of minority
stockholders who, like them, want to sell their shares to SoftBank.”248 The New
Committee’s Report, fairly read, does not share that perspective. To be sure, the
Report lists as a harm to the Company that “the MTA Litigation is likely to impose
significant legal costs on the Company,” and notes “that the Company has budgeted
over $20 million for the Litigation.”249 But the relevant costs to consider, which are
not estimated in the Report, are those that the Special Committee would incur going
forward to take this case to trial, which is scheduled to begin in less than three
247
This court has found that a special litigation committee’s “decision not to conduct” an
analysis of a relevant issue “gives rise to substantial questions concerning the
reasonableness and good faith of the [special litigation committee]’s investigation.”
Sutherland, 958 A.2d at 243; see also Electra Inv. Tr. PLC v. Crews, 1999 WL 135239, at
*5 (Del. Ch. Feb. 24, 1999) (finding “sufficient cause to reject the” conclusions of a special
litigation committee where the committee relied exclusively on a conflicted witness and
failed to contact any “outside source of information . . . to verify or contradict” the
conflicted witnesses “version of the facts”); Lewis v. Fuqua, 502 A.2d 962, 967 (Del. Ch.
1985) (finding that a special litigation committee “has not borne its burden of establishing
a reasonable basis for” its conclusion).
248
New Comm. Reply Br. 4.
249
Report at 52.
71
months, on March 3, 2021.250 This amount is presumptively immaterial to the
Company, especially when one considers that the Board had no apparent qualms
about spending more than $7 million on the New Committee.251
Finally, in its evaluation of the “benefits” and “harms,” the New Committee
appropriately takes into account what recourse tendering stockholders would have if
the MTA Litigation is terminated.252 The only viable claim in the Complaint is that
SBG and Vision Fund both breached their obligations in the MTA to use reasonable
best efforts to consummate the Tender Offer. The Report acknowledges that
tendering stockholders cannot bring this claim directly under the MTA because they
are not parties to, or third-party beneficiaries of, that agreement.253
250
The Special Committee had incurred over $8 million in attorneys’ fees and expenses as
of September 30, 2020. See Dkt. 410, at 4. In response to the court’s question, the
Company represented in a letter submission after oral argument that it “will not seek to
claw back fees that have been paid to the Special Committee’s counsel.” Id. That same
letter manifested a change in position. Instead of contending the cost of litigation was the
“one issue” the current dispute “boils down to,” the letter explains that “the cost of litigation
was not the only, or even primary, detriment to the Company that the New Committee
considered.” Id. The latter view is a more accurate characterization of the Report.
251
Dkt. 410, at 4.
252
See Report at 43-44, 56.
253
Id. at 43-44. The New Committee did not analyze whether a tendering stockholder
could bring a claim under the MTA derivatively even though, according to Skadden, they
could do so. See Mot. for Leave to Dismiss Compl. Pursuant to Court of Chancery Rule
41(a) Hr’g Tr. at 18-19. Such a claim, however, could prompt the appointment of a special
litigation committee. See id. at 19.
72
According to the Report, the tendering stockholders’ recourse would be
limited to asserting that “SBG’s frustration of the MTA’s closing conditions
constituted a breach of the implied covenant of good faith and fair dealing implied
in the [Offer to Purchase].”254 Even if such a claim is equivalent to the claim against
SBG for breach of the reasonable best efforts obligations in the MTA, as SBG has
represented,255 the tendering stockholders would not have any apparent recourse
against Vision Fund, which also owed an obligation in the MTA to use its reasonable
best efforts to satisfy the closing conditions to the Tender Offer.256 This is because
Vision Fund, unlike SBG, was not an offeror in the Tender Offer and thus would not
owe any obligations (express or implied) under the Offer to Purchase.257 This is not
inconsequential. Vision Fund was a key player in the ChinaCo Roll-Up, which
contemplated that Vision Fund would exchange its shares of ChinaCo for shares of
WeWork.258
254
Id. at 44.
255
In a recent letter to the court, SBG’s counsel represented that “SBG has not argued (and
will not argue) that its obligations arising from the implied covenant of good faith and fair
dealing under the Offer to Purchase . . . differ from its reasonable best efforts obligations
under the Master Transaction Agreement.” Dkt. 398, at 1.
256
See MTA §§ 8.03(a), 8.09, 8.12; Will Decl. Ex. A.
257
See Gilbert v. El Paso Co., 490 A.2d 1050, 1054 (Del. Ch. 1984) (explaining that “[a]
tender offer results in formation of a contract” between the offeror and offerree).
258
See MTA Ex. O, at 1.
73
Further complicating matters, a subset of tendering stockholders—namely
WeWork employees who stand to receive approximately $39.8 million if the Tender
Offer closes259—would confront additional obstacles in seeking recourse if the MTA
Litigation is terminated. As the Report explains, many current and former
employees are subject to “releases and arbitration agreements” that would impede
their ability to litigate claims for themselves.260
Recognizing that the tendering stockholders—particularly current and former
employees—face significant impediments to litigating claims on their own that are
not present in this action, the New Committee makes two recommendations. First,
the New Committee “suggest[s] that SBG and [Vision Fund] stipulate that the
tendering stockholders may bring actions as third-party beneficiaries of the MTA so
that they can base their claims on the ‘reasonable best efforts’ clauses” instead of
using the implied covenant of good faith and fair dealing as a proxy.261 Second, the
New Committee asks the Company to “consider waiving its right to compel
arbitration and its right to enforce . . . any releases given by current or former
employees against SBG and [Vision Fund] in employment or separation
259
Report at 43.
260
Id.
261
Id. at 56 (emphasis added).
74
agreements.”262 To date, no action has been taken on either of these
recommendations.263
*****
As previously discussed, the New Committee is not entitled to any
presumptions of independence, good faith, or reasonableness on this motion, and has
the burden of proof under Rule 56 standards.264 Although the court has no reason to
doubt the independence and good faith of the New Committee, significant
shortcomings and errors exist in its Report that undermine the court’s confidence in
the reasonableness of its investigation and many of its conclusions.
To summarize, based on the plain language of the Resolutions and the MTA,
the court disagrees with the New Committee’s conclusion that the Special
Committee did not have the authority to file the MTA Litigation. Also, the court’s
conclusion that the Special Committee was so authorized is supported by substantial
extrinsic evidence that the New Committee should have considered given its
apparent belief that the Resolutions were ambiguous.265
262
Id. at 55 (emphasis added).
263
See Berrent Dep. 131-32.
264
Sutherland, 958 A.2d at 239.
265
See id. at 243 (“In this case, where [a special litigation committee] seeks to wrest control
of litigation from 50% stockholders in a closely held corporation, the [special litigation
committee]'s decision not to conduct that analysis, but, instead, to omit any mention of [it],
gives rise to substantial questions concerning the reasonableness and good faith of the
[special litigation committee]'s investigation.”).
75
As to its second inquiry, the New Committee did not have a reasonable basis
to conclude that the Special Committee members were “no longer sufficiently
disinterested” based on a change of circumstances beneficial to the Company
(obtaining the final component of the Debt Financing) that they desired to occur and
never sought to impede. The New Committee also failed to consider an important
question: whether it was foreseeable and the expectation of the parties to the MTA
that the Special Committee would be responsible for litigating disputes on behalf of
the Company to enforce the terms of the MTA with respect to the Tender Offer, with
the Company paying for the litigation expenses, notwithstanding the Special
Committee members’ personal interests in tendering shares into the Tender Offer?
Finally, as to its third inquiry, the New Committee’s comparison of the
“benefits” and “harms” of the MTA litigation was flawed on each side of the ledger.
As to the benefits, the New Committee did not consider whether holding SBG to the
bargain it struck in the MTA by requiring it to complete the Tender Offer would not
only benefit the stockholders who tendered, but also would benefit all stockholders
of the Company by materially increasing SBG’s financial stake in the Company and,
commensurately, its incentive to enhance WeWork’s value. As to the harms, on
what ostensibly was the most important factor in its analysis, the New Committee
relied on anecdotal evidence and impressions of three senior officers and one
director whose impartiality was suspect. The New Committee also failed to
76
investigate troubling indications concerning the filing and procession of this action,
i.e., the reason why the Company’s management and its outside counsel made a 180-
degree turn from supporting the filing of this action to seeking its dismissal.
For all of the reasons explained above, the court denies the Rule 41(a) motion
under the first prong of the Zapata test.
C. The Second Prong of the Zapata Test
The second prong of the Zapata standard permits the court “in its discretion”
to use “its own independent business judgment” in determining whether the motion
to dismiss should be granted.266 The Supreme Court described the second prong as
follows:
The second step provides, we believe, the essential key in striking the
balance between legitimate corporate claims as expressed in a
derivative stockholder suit and a corporation's best interests as
expressed by an independent investigating committee. The Court
should determine, applying its own independent business judgment,
whether the motion should be granted. This means, of course, that
instances could arise where a committee can establish its independence
and sound bases for its good faith decisions and still have the
corporation's motion denied. The second step is intended to thwart
instances where corporate actions meet the criteria of step one, but the
result does not appear to satisfy its spirit, or where corporate actions
would simply prematurely terminate a stockholder grievance deserving
of further consideration in the corporation's interest. The Court of
Chancery of course must carefully consider and weigh how compelling
the corporate interest in dismissal is when faced with a non-frivolous
lawsuit. The Court of Chancery should, when appropriate, give special
266
Zapata, 430 A.2d at 789.
77
consideration to matters of law and public policy in addition to the
corporation's best interests.267
The high court further recognized “that the final substantive judgment whether a
particular lawsuit should be maintained requires a balance of many factors ethical,
commercial, promotional, public relations, employee relations, fiscal as well as
legal.”268
Although it is unusual for the Court of Chancery to apply the second prong of
the Zapata standard, particularly where the movant has not met its burden under the
first prong, it is appropriate to do so here in my view given the unique circumstances
of this case. As discussed in Part III.A, while the Zapata standard seems to fit this
motion better than any of the other standards the parties proposed, there are some
meaningful differences between the Zapata scenario and this case. Given those
differences, and given that this case implicates an issue of first impression, the court
will apply the second prong to explain why, in the court’s own business judgment,
the motion to dismiss should be denied.
As an overarching matter, it is the court’s opinion that the Special Committee
was authorized under the Resolutions to file and to pursue this action on behalf of
the Company for the reasons discussed in Part III.B.2.a, and that it would be
267
Id.
268
Id. at 788 (internal quotation marks and alterations omitted).
78
fundamentally unfair to the minority stockholders who tendered shares into the
Tender Offer to dismiss this case now, less than three months before trial. Several
factors inform the court’s judgment on this issue.
First, one of the animating principles of Zapata is that corporations should
have a mechanism “to rid themselves of meritless or harmful litigation and strike
suits” brought derivatively on behalf of the corporation by a stockholder. 269 That
concern is not relevant here. This case does not concern a frivolous claim. To the
contrary, the claim for breach of the reasonable best efforts provisions in the MTA
is clearly viable. SBG tacitly conceded as much when it did not move under Court
of Chancery Rule 12(b)(6) to dismiss the claim for breach of the MTA in the
Complaint at issue here or in the Neumann Complaint. The court also has now
denied Vision Fund’s Rule 12(b)(6) motions to dismiss the same claim against it
with respect to both of those pleadings.
Second, if this action was dismissed, the legal options available to
stockholders who tendered shares in the Tender Offer (other than Neumann) will be
adversely affected for the reasons explained in Part III.B.2.c. The New Committee
recognized as much and, to its credit, recommended certain actions to ameliorate
those problems.270 But the New Committee was powerless to fix the problems,
269
Id. at 786-87.
270
See Report at 55-56.
79
which remain in place. Thus, if this case was dismissed, tendering stockholders
would have no recourse against Vision Fund for breach of its independent
contractual obligation to use its reasonable best efforts to consummate the Tender
Offer, and many employees who tendered shares may have no recourse at all. This
result is especially troubling because SBG represented to tendering stockholders in
the Disclosure Statement—when asking them to provide “required approvals and
waivers” to permit the MTA to move forward—that Special Committee member
Frankfort would remain on the Board “until the later of . . . the completion of the
SoftBank Transactions (including the resolution of any litigation or disputes with
SoftBank with respect to the SoftBank Transactions) and . . . the consummation of
the Tender Offer.”271
Our Supreme Court counseled in Zapata that in applying the second prong,
“[t]he Court of Chancery of course must carefully consider and weigh how
compelling the corporate interest in dismissal is when faced with a non-frivolous
lawsuit.”272 It was logical for the Supreme Court to refer to the “corporate interest”
because Zapata concerns derivative claims where any recovery would go to the
corporation. But here, in applying Zapata by analogy to a non-derivative claim, it
is appropriate and necessary in my view—and consistent with the flexibility the
271
Disclosure Statement at 2.
272
Zapata, 430 A.2d at 789.
80
second prong of Zapata affords the Court of Chancery to achieve an equitable
result—to consider the interests of the minority stockholders who tendered shares in
the Tender Offer and would receive any monetary recovery.
On that point, it would be fundamentally unfair in my opinion to constrain the
ability of those stockholders to obtain relief, if the case can be proven, for a breach
of SBG and Vision Funds’ contractual obligations to use reasonable best efforts to
close the Tender Offer. And the practical reality is that the only way the tendering
stockholders can make this case is to deny the Rule 41(a) motion, even if that means
that the claim for breach of the MTA will be prosecuted under the direction of two
directors who have a personal interest in having the Company pay for this litigation.
Third, another practical reality is that this case is poised to be tried in the near
future in tandem with essentially the same claim for breach of the MTA in the
Neumann Complaint. At the outset of this action, the court granted expedition, albeit
not on the schedule the Company requested, so that a trial could occur in early
2021.273 Enormous effort has been expended taking discovery from around the
world, fact discovery is scheduled to be completed by December 24, 2020, and
opening expert reports are due on December 29, 2020.274 It is not clear what would
happen next in this litigation with respect to the claims of non-Neumann
273
Mot. for Expedited Proceedings Hr’g Tr. at 51 (April 17, 2020) (Dkt. 66).
274
Dkt. 506.
81
stockholders who tendered shares in the Tender Offer if the Complaint was
dismissed now. But it is clear to me that it would be highly inefficient, not only to
those stockholders but with respect to the use of judicial resources, to dismiss this
action now and potentially put their claims back on the starting line.
Fourth, the Special Committee’s conflict of interest in pursuing this action is
certainly a legitimate concern, indeed it is the type of concern about which the Court
of Chancery is ever vigilant. But that conflict was foreseeable when the parties
entered into the MTA and its significance now appears overstated. The reply brief
filed at the direction of the New Committee and prepared by the same counsel that
urged the Special Committee to file this action asserts that the present “dispute boils
down to one issue: who should pay the substantial legal fees of Messrs. Dunlevie
and Frankfort’s affiliates and the subset of minority stockholders who, like them,
want to sell their shares to SoftBank.”275 The decidedly different tone of the Report,
which focuses more on the potential harm to the Company from negative publicity
concerning the litigation and less on the use of corporate funds to litigate the case,
suggests that the issue before the court is more nuanced and more complicated—and
it is.
Not only is it the court’s opinion that the Resolutions authorized the Special
Committee to file this action on behalf of the Company, we now know with the
275
New Comm. Reply Br. 4.
82
benefit of discovery that the drafter of the Resolutions had the same opinion and that
Company management and outside counsel encouraged and approved the Special
Committee’s filing of this action.276 They did so knowing full well that corporate
funds would be used to pay for any litigation stemming from the MTA, even though
the Special Committee members stood to benefit from its outcome. That reality did
not prevent them from moving forward. Why? Because that is what the Resolutions
and the MTA contemplated.
Put differently, the conflict arising from the Company paying for litigation
that could benefit the Special Committee members personally was a “known known”
when the Special Committee was formed and was not considered by Company’s
own Chief Legal Officer and its outside counsel to be disabling when this suit was
filed. A mitigating factor with respect to the conflict, furthermore, is that the
members of the Special Committee continue to owe fiduciary duties to the Company
as they oversee the MTA Litigation and could be held to account for wasting
corporate resources if that were to occur.
Fifth, the court does not question the independence of the New Committee’s
members, who, by all accounts, took their jobs very seriously. But the New
Committee’s ability to achieve an overall fair result was constrained from the outset.
They had two months to conduct an investigation and had to leave the scene after
276
See supra Part III.B.2.a.
83
that. There was another option. The Board could have established a committee of
two independent directors with regular terms and a broader mandate affording them
the option to take control of the litigation on behalf of the Company in order to
eliminate the Special Committee’s members conflict and to manage the litigation of
the MTA claim through the morass of issues discussed in the Report that often arise
in complex commercial litigation. This would have been fair to the minority
stockholders who tendered shares and who, if this action was dismissed, would have
to litigate with one arm tied behind their backs.
There is an obvious reason why this option was not pursued. The creation of
the New Committee was the product of a conflicted Board vote taken at the behest
of SBG, the obvious controlling force behind the Company. SBG was and is
motivated to put up as many roadblocks as possible to avoid having its actions
related to the Tender Offer judged on the merits. Discovery concerning SBG’s
reaction to the filing of the MTA Litigation also indicates it has not been shy about
throwing its weight around to derail the MTA Litigation.277
*****
In an ideal world, it would be better if the Special Committee members were
free of any conflict whatsoever. But clean choices are not on the table. Between the
options of (i) dismissing the Company’s Complaint now, less than three months
277
See supra Part I.H.
84
before trial, and leaving the tendering stockholders (other than Neumann) in limbo
with ostensibly less potent claims to pursue in some other manner and at a date
uncertain and (ii) allowing the Special Committee to complete the job it was asked
to do and encouraged to undertake, it is the court’s business judgment that the latter
course is preferable. Accordingly, the Rule 41(a) motion to dismiss must be denied
under the second prong of the Zapata test for this independent reason.
IV. CONCLUSION
For the reasons explained above, the Rule 41(a) motion to dismiss the
Complaint is DENIED.
IT IS SO ORDERED.
85