Chancery Sustains CEO’s Contract Claims in WeWork Litigation
In re WeWork Litig., Consol. C.A. No. 2020-0258-AGB (Del. Ch. Oct. 30, 2020).
A company facing a liquidity crisis (the shared working space company, WeWork), its outgoing CEO (Adam Nuemann), and two related SoftBank investment entities that collectively owned more than forty percent of the company’s equity entered into a Master Transaction Agreement (“MTA”). The MTA was designed to provide funding to the company, facilitate the CEO’s exit, and provide liquidity to minority stockholders. The MTA required a specific sequence of transactions from the entities: (1) equity financing; (2) stock purchase via a tender offer; and (3) debt financing after the closing of the tender offer. The tender offer’s closing was subject to certain conditions, which the parties to the MTA were required to use their reasonable best efforts to meet.
Notwithstanding the CEO’s refusal to consent, the company and the entities agreed to an amendment to the MTA that permitted the debt financing to commence before the tender offer closed. The debt financing resulted in the entities owning more than fifty percent of the company’s equity, and having control of the company. After the termination of the tender offer due to alleged difficulties in meeting the closing conditions, a special committee of the company sued the investment entities in Delaware, as did the CEO, for breach of the MTA and breach of fiduciary duties. The actions were consolidated and the defendants moved to dismiss the CEO’s claims in part.
The Court of Chancery upheld most of the CEO’s breach of contract claim at the pleadings stage. As the Court noted, determining whether a party used reasonable best efforts to meet closing conditions for a tender offer is an inherently factual inquiry, which is often not amenable to resolution at the pleadings stage. Here, the Court could not consider the factual record advanced by the defendant, which exceeded the complaint’s allegations. And it was reasonably conceivable from the CEO’s allegations, afforded all reasonable inferences at the motion to dismiss stage, that one of the SoftBank entities failed to use reasonable best efforts, preventing dismissal. The Court also upheld the CEO’s claim that the amendment to the MTA potentially constituted a breach because the amendment may have required the CEO’s written consent under the MTA’s terms as a change to the transaction affecting his rights. The Court reasoned that altering the ability of the entities to provide debt financing without first completing the tender offer affected the CEO’s rights under the MTA. The Court, however, dismissed the CEO’s fiduciary duties claims, which duplicated his contract claims under the MTA.