On The Case

Amid WeWork board strife over SoftBank suit, dissident directors win access to Skadden discovery

(Reuters) - In one of the strangest internal corporate battles I’ve ever covered, two members of the board of WeWork have won the right to access privileged communications between the company and its counsel from Skadden, Arps, Slate, Meagher & Flom – and the right to depose a Skadden M&A partner – in a ruling Friday by Chancellor Andre Bouchard of Delaware Chancery Court.

Skadden partners George Zimmerman and Graham Robinson did not respond to an email requesting comment on behalf of the firm and the company.

The board members who were granted access to the Skadden materials - Bruce Dunlevie of Benchmark Capital and former Coach CEO Lew Frankfort - are members of a special WeWork committee that negotiated a bailout agreement last fall between the then-tottering company and its investor SoftBank. The agreement effectively gave SoftBank control over WeWork’s board and management. Existing WeWork shareholders were to be bought out in a $3 billion tender offer.

In April, SoftBank abandoned the tender offer. The special committee sued SoftBank in Delaware Chancery Court for breach of contract and breach of fiduciary duty. Wilson Sonsini Goodrich & Rosati, which represents Dunlevie and Frankfort as members of the special committee, styled the complaint with WeWork (technically, the We Company) as the plaintiff.

But by then, four of the company’s eight board seats had been designated by SoftBank, including the seat held by WeWork’s current CEO. SoftBank, which moved to dismiss the special committee’s lawsuit, also called on April 17 for the WeWork board to confirm that the special committee was not authorized to sue on the company’s behalf. SoftBank argued, among other things, that Dunlevie and Frankfort were conflicted because they stood to benefit personally from the aborted tender offer.

Dunlevie and Frankfort countered that the SoftBank agreement, as well as the 2019 board resolution designating them to negotiate the deal, authorized the special committee’s suit. They also argued that every other board member was conflicted.

The company’s solution to the impasse, as Chancellor Bouchard recounted in Friday’s opinion, was to hire an executive search firm that, in turn, would bring in two new independent board members whose only job during their temporary term would be to decide whether the Dunlevie and Frankfort special committee could continue with the SoftBank suit. Dunlevie and Frankfort, who voted against bringing in new directors, asserted that Skadden had apparently devised the hiring of temporary directors and worked with the company’s management to implement the plan. Six board members voted to bring in the new directors, whom Chancellor Bouchard described in his opinion as the “new committee,” but the special committee said the vote was tainted because the board was beholden to SoftBank.

On July 28, the new directors informed the WeWork board that the Dunlevie and Frankfort committee was not authorized to bring or proceed with the suit. The new committee, which was advised by independent counsel, instructed WeWork’s board to move to dismiss the complaint under Delaware’s Rule 41, which allows plaintiffs to end cases they’ve brought. On July 30, Skadden filed a Rule 41 motion to dismiss WeWork’s suit against SoftBank. It argued that WeWork’s board had adhered to the principles of good corporate governance by appointing temporary, independent directors to decide what to do about the special committee’s suit and was continuing to practice good governance by following the instruction of those independent directors.

The special committee, as you might expect, was not willing to walk away meekly. As committee counsel William Chandler of Wilson Sonsini explained in an Aug. 6 letter to Chancellor Bouchard, Dunlevie and Frankfort contested the authority of temporary directors appointed by an allegedly conflicted board at the behest of a CEO installed by SoftBank. Wilson Sonsini insisted that the special committee needed discovery from WeWork’s counsel at Skadden, including privileged communications about the creation and working process of the new committee, in order to oppose the dismissal motion.

In ensuing briefs earlier this month, Skadden and Wilson Sonsini hashed out the question of whether Dunlevie and Frankfort are entitled to see communications between the company they serve as directors and lawyers for that company. Both cited the 2013 Chancery Court ruling in Kalisman v. Friedman (2013 WL 1668205), which held that board members are presumed to have access to material from the company’s lawyers but established certain exceptions, including an exception for board members with interests adverse to those of the corporation. Skadden argued for the application of that exception.

By its actions, Skadden argued, the special committee showed that it did not consider Skadden to be its counsel, instead relying on lawyers from Wilson Sonsini in its antagonistic communications with the rest of the board. In a situation like this, when management is stuck between warring board factions, the Skadden brief said, corporate managers need to be able to consult freely with counsel for the company without worrying about their communications being disclosed.

Wilson Sonsini responded that Dunlevie and Frankfort were not adversaries of the board but rather joint clients acting in the interest of the corporation. (As if to underscore the controversy over who speaks for the company, both briefs were filed on behalf of WeWork.)

Chancellor Bouchard sided with Wilson Sonsini and the special committee. The precise question in this dispute, he said, was a matter of first impression in Chancery Court: Does a corporation’s management have the authority to bar corporate directors from access to privileged information from the company’s lawyers? The key consideration, the chancellor said, is the distinction between corporate management and corporate directors. Skadden represented management, the Chancellor wrote – but under Delaware law, directors have the ultimate responsibility for their corporations.

“In claiming the right to shield company privileged information from the entire board, (WeWork) management turns these bedrock principles of Delaware law on their head,” Bouchard wrote. “Directors of a Delaware corporation are presumptively entitled to obtain the corporation’s privileged information as a joint client of the corporation and any curtailment of that right cannot be imposed unilaterally by corporate management.”

Friday’s ruling, of course, leaves open the ultimate question of who represents the true interests of WeWork – Dunlevie and Frankfort’s special committee or a board allegedly controlled by SoftBank? But now that determination will be informed by privileged materials from Skadden.

SoftBank lawyers Jordan Eth of Morrison & Foerster and Elena Norman of Young Conaway Stargatt & Taylor didn’t respond to an email request for comment.