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WeWork case questions board’s right to privileged communications

| Feb 1, 2021 | Corporate Litigation

Investors expected WeWork to be the next big thing. Once touted as the next Alibaba, the company appeared poised to reinvent the office space. Instead of a mass, open area with desks and cubicles, WeWork provided innovative and creative spaces while also offering operational services like legal and IT help. The concept was popular. WeWork was growing fast, with a valuation in the billions. The leaders needed more funding to keep up. The answer: going public. However, this move led to questions. Questions about WeWork’s culture and business structure.

Ultimately, this scrutiny led the company to pull its IPO filing documents. Why? It became apparent Adam Neumann, the founder, had taken some questionable steps when building the business. One notable example involves how he purchased the rights to the word “we” and then sold it back to the business for over $5 million dollars.

This was just the beginning of WeWork’s woes. In addition backing out of the IPO, the largest investor, SoftBank, decided it was time for a change. The best bet at the time appeared to be to cut ties with the company’s founder, Adam Neumann. This led to a series of legal disputes.

Why should board members care about this case?

This is more than the story of a founder/CEO gone rogue. The legal battles provide an opportunity to discuss and evaluate how business leaders run their organization. One important case involves the question of limitations on the information about the company boards can access.

Are there limits to information a board of directors can access?

That was really the heart of the matter in this case. What are the limits? How do they work? Do they apply here? In this case, a committee put together a set of privileged information. The background is convoluted, and involves an initial committee put together to help guide the transition noted above — essentially SoftBank’s attempts to oust Mr. Neumann. The committee put together a Master Transaction Agreement (MTA) designed to meet this goal that included a $3 billion tender offer. SoftBank ultimately terminated the MTA which led the initial committee to file a lawsuit for breach of contract. SoftBank attempted to dismiss the lawsuit due to conflict of interest as the issue directly impacted the members of the committee.

In order to reach a resolution, the group formed another committee to look into the initial committee’s ability to move forward with litigation. The initial committee requested information on the process used to put together this new committee, which was denied because the information was deemed classified.

Which brings us to our original question — is there a limit to the information that a board of directors can access? In Delaware, the answer is yes. Delaware law states that a board or committee can “withhold privileged information once sufficient adversity exists between the director and the corporation such that the director could no longer have a reasonable expectation the he [or she] was a client of the board’s counsel.”

Ultimately, the Court held that since state law requires business affairs to be managed by the direction of the board, the board was entitled to the privileged information in question. As such, the Court ordered the committee provide the board with the privileged material.

What does this mean for businesses incorporated in Delaware?

This case is yet another from the Delaware Court of Chancery to provide clarity on governance procedures and will serve as precedent for those who find themselves facing similar disputes in the future in this jurisdiction.