Chancery Resolves Dispute Between Competing Special Committees, Finding Second Committee Could Not Voluntarily Dismiss Suit Brought By The First Committee Under The Zapata Framework
In re WeWork Litigation, C.A. No. 2020-0258-AGB (Del. Ch. Dec. 14, 2020)
This decision addresses a matter of first impression arising out of a dispute pitting two special committees of the same company, WeCompany (“WeWork” or the “Company”), against one another over control of a lawsuit on the Company’s behalf. The lawsuit involved claims against the Company’s putative controlling shareholders, SoftBank Group Corp. and SoftBank Vision Fund (AIV MI) L.P. (together, “SoftBank”), for abandoning a multi-step agreement by which SoftBank committed to a $3 billion tender offer for WeWork’s shares in addition to providing equity and debt financing (the “Transaction”). The same two-member committee that negotiated the Transaction on the Company’s behalf (the “Transaction Committee”), initiated the lawsuit with the support of the Company’s management (including WeWork’s Chief Legal Officer) as well as the Company’s outside counsel, Skadden, Arps, Slate, Meagher & Flom LLP (“Skadden”)
Despite initially displaying support for lawsuit, after receiving pushback from SoftBank, the conflicted WeWork board voted six to two to form a new committee consisting of two outside, temporary directors (the “New Committee”) to determine whether the Transaction Committee had the authority to pursue the lawsuit on the Company’s behalf. Following a two month investigation, the New Committee determined, among other findings, that the Transaction Committee did not have the authority to file the action. Upon the New Committee’s recommendation, WeWork moved to voluntarily dismiss the action pursuant to Delaware Court of Chancery Rule 41(a).
The Court first had to identify the standard of review to assess the New Committee’s motion. As in Zapata Corp. v. Maldonado, which addressed special litigation committees in the derivative litigation context, the core question presented was whether a “fully-authorized board committee” can be used to determine “whether viable claims of the corporation should be dismissed.” Accordingly, the Court applied an analysis akin to the two-prong Zapata test.
Applying Zapata’s first prong, the Court found that WeWork had not met the burden of establishing that the New Committee conducted a reasonable investigation. For instance, in the Court’s view, the more reasonable interpretation of the Transaction Committee’s mandate would include the authority to bring the litigation and, to the extent there was ambiguity, the New Committee did not consider any of the relevant extrinsic evidence that uniformly supported that conclusion. Applying Zapata’s second prong and making its own “independent business judgment,” the Court found a variety of factors supported rejecting the voluntary dismissal. Among those factors was the Court’s observations that the New Committee “was the product of a conflicted Board vote taken at the behest of [SoftBank],” and that dismissal of the suit would adversely affect the legal options of WeWork shareholders.