By Whitney J. Smith and Mehreen Ahmed

In Re WeWork Litigation, C.A. No. 2020-0258-AGB (Del. Ch. Oct. 30, 2020), concerns a transformative transaction involving The We Company, a real estate company specializing in shared workspaces more commonly known as WeWork. Adam Neumann (“Neumann”), the CEO of WeWork, brought a case against both SoftBank Group (“SBG”) and SoftBank Vision Fund (AIV MI) L.P. (“Vision Fund”) for two counts of breach of contract and breach of fiduciary duty as controlling stockholders. SBG and Vision Fund filed partial motions to dismiss the complaint. Vision Fund, but not SBG, sought to dismiss the contract claim against it, whereas, both SBG and Vision Fund sought to dismiss the fiduciary duty claim. In a memorandum opinion, the Delaware Court of Chancery denied Vision Fund’s motion to dismiss the contract claim, except as to one provision, and granted the motion to dismiss the fiduciary duty claim as that claim was duplicative of the contract claims against them.

In October 2019, WeWork was facing a crisis after the failure of its initial public offering. In order to raise funds, facilitate Neumann’s exit as WeWork’s CEO, and provide liquidity to Neumann and the minority stockholders of the company, WeWork, Neumann, We Holdings LLC, SBG, and Vision Fund entered into a Master Transaction Agreement (the “MTA”). The MTA obligated SBG to do three things in the following order: (i) provide WeWork with $1.5 billion of equity financing, (ii) purchase up to $3 billion of WeWork’s stock from Neumann and other stockholders in a tender offer, and (iii) provide WeWork with up to $5.05 billion of debt financing. The MTA contained three provisions requiring the parties to use reasonable best efforts to complete certain closing conditions, including a “roll-up” of a WeWork joint venture, ChinaCo, which WeWork used to conduct business in China. The ChinaCo roll-up involved a subsidiary of WeWork acquiring from Vision Fund shares in ChinaCo in exchange for shares of WeWork within 10 days of the closing of the equity financing. The closing of the tender offer was conditioned on the closing of the ChinaCo joint venture. The tender offer began on November 22, 2019 and was oversubscribed.

On December 27, 2019, with the ChinaCo roll-up still not consummated, WeWork, SBG, and Vision Fund approved an amendment to the MTA to allow the debt financing to commence before the tender offer closed. Particularly, the amendment changed the sequencing set forth in Section 1.02 of the MTA to allow the debt financing to occur either “before or after” the tender offer closed instead of requiring that the tender offer close before the debt financing could commence. Neumann did not consent to this amendment. SBG continued to proceed with the debt financing although the tender offer had not closed. At that time, SBG and Vision Fund held more than 52% of WeWork’s equity on a fully-diluted basis and had the right to designate one half of the members of its board of directors. On April 1, 2020, SBG terminated the tender offer, citing the fact that the roll-up of ChinaCo was not satisfied. Two separate lawsuits followed promptly thereafter. The first case was filed by a special committee of two directors who negotiated the MTA on behalf of WeWork. The second case was filed by Neumann. The court consolidated the two lawsuits, but maintained separate pleadings. The opinion addressed the motions to dismiss the Neumann complaint.

Counts I and II of Neumann’s complaint asserted claims for breach of the MTA against SBG and Vision Fund, respectively, and Count III asserted that SBG and Vision Fund breached their fiduciary duties as controlling stockholders.  Vision Fund moved to dismiss the breach of contract claim against it, and both Vision Fund and SBG moved to dismiss the breach of fiduciary duty claims against them.

Neumann alleged that Vision Fund breached the MTA in two ways — (i) failing to use reasonable best efforts to timely finalize the roll-up documents and close the ChinaCo roll-up transaction and (ii) amending the MTA without his consent. Under Delaware law, reasonable best efforts clauses “impose obligations to take all reasonable steps to solve problems and consummate the transaction.”  “When evaluating whether a merger partner has used reasonable best efforts, this court has looked to whether the party subject to the clause (i) had reasonable grounds to take the action it did and (ii) sought to address problems with its counterparty.”  Such a determination, is an inherently factual inquiry that is not typically capable of being resolved at the pleading stage. Vision Fund’s motion asked the court to consider facts and evidence outside of the complaint, and draw inferences in its favor. Vision Fund’s request was viewed as impermissible as the court is required to accept as true the well-plead allegations of a complaint. Additionally, the court is required to make reasonable inferences in the non-moving party’s favor. Accordingly, the court denied Vision Fund’s motion to dismiss this particular breach of contract claim.

With respect to amending the MTA to allow the debt financing to commence before the tender offer closed, Vision Fund asserted that Neumann’s consent was not required because an exception to the amendment provision of the MTA allowed amendments without the consent of Neumann if the amended terms did not alter any economic benefits he would receive. Neumann argued that the amendment financially harmed him as SBG and Vision Fund were allowed to obtain the benefits of their bargain through the debt financing, while depriving Neumann of his economic benefits in the tender offer. This is because the original MTA provided Neumann the right to obtain liquidity by tendering his shares into the tender offer before WeWork and SBG commenced the debt financing. That right was viewed as meaningful by the court because SBG was expected to receive certain benefits pursuant to the debt financing, specifically: “(i) penny warrants for more WeWork stock, (ii) capital for WeWork to protect SBG and Vision Fund’s multi-billion-dollar WeWork investment and (iii) increased control over WeWork—but only if SBG honored its obligation to close the tender offer first.” For these reasons, the court found that Neumann stated a reasonably conceivable claim for relief against Vision Fund for breach of the MTA.

Finally, the court dismissed the breach of fiduciary duty claims concluding that they were duplicative of the breach of contract claims. The court found that the breach of fiduciary duty claim was not broader in scope, and did not rely on any additional facts, and did not seek any relief not sought for breach of the MTA.

In Re WeWork Litigation, C.A. No. 2020-0258-AGB (Del. Ch. Oct. 30, 2020)

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