Adam Peters – WeWork, once America’s startup star-child, is now facing backlash in the form of a class action lawsuit brought by its minority shareholders. On November 4, former WeWork employee Natalie Sojka filed a lawsuit in San Francisco County Superior Court against Adam Neumann, WeWork’s founder and former CEO, SoftBank, and members of WeWork’s board of directors, accusing them of “using their control of The We Company to benefit themselves to the detriment of the company’s minority shareholders.” At the core of the lawsuit, which hopes to receive class certification, is the allegation that Neumann and the WeWork board breached their fiduciary duty to the company’s minority shareholders by arranging and approving a “self-interested” transaction.
The self-interested transaction the complaint allegedly arose when Softbank, a Japanese based holding company, bought out WeWork in a $9.5 billion takeover deal. Not only was this deal an attempt to save face as the public began to realize WeWork’s glaring corporate failures, but it also left Neumann, perhaps the man most responsible for WeWork’s collapse, with a $1.7 billion payout which allowed him to escape the wreckage unscathed.
Sojka’s lawsuit focuses primarily on Softbank’s buyout and whether it is subject to the “entire fairness standard,” a legal safeguard designed to prevent controlling shareholders from engaging in “self-interested transactions” involving “substantial personal benefits that are not shared by the company’s minority shareholders.” Softbank’s buyout was detrimental to WeWork’s minority shareholders. The purpose of Softbank’s buyout was to leverage its money to oust Neumann from the company. However, by doing so, Softbank artificially raised the valuation of WeWork and misled shareholders who were unaware of the company’s rocky footing and unsavory business practices.
For years, WeWork operated at a loss due to its overly ambitious business model and maverick founder, Adam Neumann. In 2017, the company began spending money and buying property at a rate which was unstainable. Neumann made a number of questionable purchases that concerned many of the board directors as the purchases had little to no connection to WeWork’s core business. Some of these purchases included an event planning site Meetup.com, a search engine optimization company, Conductor, and the Flatiron Academy Coding School. WeWork also opened an elementary school in 2018 called WeGrow after Neumann complained that he could not find adequate schooling choices for their five children in Manhattan.
However, it was not just the company’s purchases which concerned the board’s directors. Neumann himself also seemed to have a spending problem. For years, WeWork had been renting jets for Neumann to fly in—unsatiated, Neumann requested an upgrade. In 2018, a $63 million G650ER private jet arrived at the WeWork facilities all while the company itself was spiraling out of control.
To defend themselves against this claim, the companies and their controlling shareholders have to prove that neither the process behind the transaction, nor the price procured, were unfairly influenced by personal considerations—standards known as “fair dealing” and “fair price.” What’s even more interesting about these suits is that the burden is on the defendant, rather than the plaintiff, to justify the legitimacy of the transaction in question—a battle many commenters believe is futile.
While the future of WeWork and the pending lawsuits are uncertain, it is undeniable that Softbank and Neumann’s overly ambitious business model has left many shareholders at a loss. Thousands of WeWork employees are about to be laid off in an effort to save the company—a tactic some critics believe is legally questionable. The rise and fall and WeWork is an example of our society’s sometimes blind trust to new-age tech startups. WeWork began as a company estimated to one day be worth $1 trillion—now, it faces serious backlash from those it has left empty-handed.
