WeWork’s meteoric rise in popularity and its unceremonious descent back to earth have kept WeWork in the news over the past few years. WeWork’s decision to sue two of its largest shareholders last year seemed no less newsworthy. In a recent development in this ongoing litigation, a Delaware Court of Chancery decision granted the defendants’ motion to dismiss WeWork’s breach of fiduciary duty claims, finding the allegations insufficient to establish a controlling shareholder relationship and the claims to be duplicative of the breach of contract claim.
WeWork was founded in 2010 as a commercial real estate company offering co-working office space with modern designs and state-of-the-art technology. WeWork enjoyed an astronomical initial valuation and was well-funded by some of the biggest names in venture capital. In 2019, WeWork began filings for an IPO. However, after a barrage of negative press involving revelations of WeWork’s shaky financials and its CEO’s erratic behavior, WeWork’s value tanked and its IPO was ultimately scrapped.
Following WeWork’s failed IPO, WeWork’s board formed a two-person special committee which negotiated a rescue funding package with Softbank, one of WeWork’s biggest and most significant investors, and the Vision Fund, a $100 billion venture capital fund that Softbank runs. According to the Complaint, under its agreements with WeWork, Softbank agreed to buy up to $3 billion worth of shares in WeWork and offer billions more in lending, which would have provided needed capital to WeWork while giving Softbank majority control of the company.
After the outbreak of COVID-19 and the rise of work from home, Softbank allegedly rethought its decision to invest in a company whose product is office space. Upon learning that Softbank was considering backing out of its agreements, WeWork filed suit against Softbank accusing it of breaching those agreements as well as breaching its fiduciary duties to WeWork shareholders. In its Complaint, WeWork alleges that Softbank is the company’s controlling shareholder and as such owed certain fiduciary duties to WeWork’s other shareholders. Softbank allegedly breached these fiduciary duties, when it “repeatedly used its influence over the Company [WeWork] to limit the Company’s options and force it into favorable outcomes for SoftBank, to the detriment of the Company’s minority stockholders.”
Softbank advanced three primary arguments for dismissing the breach of fiduciary claims. First, it argued that the Complaint failed to establish that Softbank was a controlling shareholder, even when examining Softbank and Vision Fund’s interest in conjunction. Second, with respect to the period before Softbank entered the agreement to purchase equity and provide financing to WeWork, Softbank argued that it did not owe fiduciary duties to WeWork and its stockholders because WeWork’s founder and CEO at the time undisputedly controlled the company during this period. Third, with respect to the period after Softbank entered the agreement, it argued that the breach of fiduciary duty claim could not stand because it was duplicative of the complaint’s breach of contract claim.
With regard to the pre-agreement period, the Court agreed with Softbank’s argument that WeWork’s founder and CEO, not Softbank, was the controlling shareholder. The Court cited various corporate documents to support its conclusion. Board minutes acknowledged “the status of Mr. Neumann [WeWork’s then-CEO] as the controlling stockholder of the Company.” The Court found that WeWork’s allegations that Softbank and Vision collectively held 27.1% of the company’s stock before the agreement insufficient to establish control because such allegations provided no context for the level of control that came with the 27.1% ownership interest. The Court referred to a stockholder’s agreement and a capitalization table that showed that Softbank owned an approximately 12% equity interest in WeWork and Vision Fund owned approximately 15% interest, which yielded voting interests of approximately 3.1% and 3.9% respectively.
Regarding the period after Softbank entered the agreement, the Court acknowledged that “the Complaint alleges facts to support a compelling case at the pleadings stage that [Softbank] and Vision Fund owed fiduciary duties to WeWork’s other stockholders as a control group after entering into the MTA and the Stockholders’ Agreement.” However, the Court determined that it “does not need to reach that question” because “[e]ven assuming that [Softbank] and Vision Fund owed fiduciary duties to the Company’s other stockholders, the court concludes that [the] claim for breach of fiduciary duty must be dismissed because it is duplicative of [the] breach of contract claims.” Under Delaware law, the Court explained, “where a dispute arises from obligations that are expressly addressed by contract, that dispute will be treated as a breach of contract claim” and “any fiduciary claims arising out of the same facts that underlie the contract obligations [are] foreclosed as superfluous.”
The Court’s full opinion is available here.
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