By Matt Digney
The “Golden Parachute” is a term that startup entrepreneurs and CEOs are familiar with and seemingly all pursue in one way or another.[1] A typical “Golden Parachute” scenario plays out when the executives of a company – typically a startup – are dismissed after their company is bought out, but receive massive departure packages that can measure well into the billions of dollars.[2] While a massive payday and a seat on the Board of Directors of the new entity may seem like a swift and easy transition into an early retirement, not all goes as planned all of the time, because this process can sometimes leave minority shareholders in a much worse position than they expected to be in. Just ask WeWork ex-CEO Adam Neumann.
In one of the most highly publicized IPO failures in recent memory, WeWork, a commercial real estate company which is a self-described community of shared co-working spaces,[3] saw its value plummet by over 66% after its IPO failed to get off the ground, leading to a bailout that some described as a “fire sale.”[4] In a timespan of less than 10 months, WeWork went from having a valuation of $47 billion to needing a bailout in the form of an $8 billion cash infusion from one of its largest investors, Softbank, to stay afloat.[5] Softbank is a multinational conglomerate group which, through its “vision fund,” had already been one of WeWork’s largest investors, funding billions of dollars to the business. The “fire sale” bailout in question occurred in the eleventh hour to stop WeWork from completely collapsing, and it resulted in Softbank essentially taking control over WeWork at an extremely discounted price. This bailout resulted in a valuation decrease of almost $40 billion, with shareholders and investors assuming $35 billion of that loss.[6]
Despite being the driving force behind one of the largest and most highly publicized IPO flops in recent history, former CEO Adam Neumann managed to make a quick and profitable escape from the sinking ship, with a $1.7 billion exit package, coupled with a $185 million consulting contract paid out by Softbank.[7] This exit did not proceed without some controversy, as many people were not on board with the modern, celebrity-like CEO long before the collapse of the IPO.[8]
Neumann had been no stranger to controversial leadership techniques, as he was known for shelling out top dollar for mandatory company retreats that featured celebrity performers, costing the company millions.[9] More controversial decisions included massive investments using company funds into an indoor wave pool business and a “superfood” business owned by one of his friends whom he met surfing.[10]
But the allegations of mismanagement do not end there.[11] Reports from Business Insider show some of Neumann’s “antics” including smoking marijuana on a private jet, serving tequila shots immediately following layoff discussions with employees, and attempted to trademark the word “We” for himself, before causing the company to purchase the trademark application for just under $6 million.[12] This “mismanagement” did not go unnoticed by many of the employees of WeWork and has started to surface after the IPO collapse.[13]
Neumann is no stranger to having allegations levied against him.[14] According to the New York Times, Neumann has faced at least two lawsuits over the past year – one gender discrimination suit and one pregnancy discrimination suit.[15] Now, after his escape from WeWork, Neumann faces a legal challenge that will be precedential in terms of shareholder litigation surrounding multi-billion dollar losses.
Former WeWork employee Natalie Sojka filed a class action lawsuit last week against ten defendants, including Adam Neumann and SoftBank Chairman Masayoshi Son, accusing the defendant-directors of breaching their fiduciary duties to similarly situated minority-shareholders, abusing control, and creating corporate waste, among other claims.[16] It is reported that the lawsuit filed by Sojka seeks to prevent Softbank from “rubber-stamping” future transactions with Neumann, as aggrieved shareholders accuse the directors of WeWork and Softbank alike of using their positions to enrich themselves at the expense of WeWork shareholders and the company itself.[17]
These new waves of lawsuits bring a feeling that directors and shareholders of WeWork have unfortunately become all too familiar with as of late – uncertainty. The $30 billion shareholder loss is one of the largest IPO collapses that many financial reporters have ever witnessed.[18] Courts in most jurisdictions generally offer a remedy to minority shareholders, premised on the notion that controlling shareholders and directors owe the minority shareholders a fiduciary duty and must honor their reasonable expectations.[19] While the amount that the class action lawsuit is seeking is unspecified at this point, the complaint contains demands for punitive damages as well.[20]
An alternate explanation for this collapse, outside of the allegations of mismanagement, is that WeWork had a flawed and unsustainable business model in general, that resulted in the hemorrhaging of money through the constant purchase of expensive commercial real estate in top markets throughout the world. As Amol Sarva, founder and CEO of Knotel, a company who provides companies with “flexible workspace solutions,” explains in a short documentary from Bloomberg, WeWork may be a victim of their own immediate success, a classic “the first mouse to chase the cheese is the one that gets caught in the trap” type of scenario.[21]
Whether this is a case of gross
mismanagement and self-dealing as Sojka’s complaint suggests, or the first
showing of unsustainable growth in a company that is essentially a massive
commercial landlord, will be played out in the courts in the coming months.
Until then, investors will shift their focus to the next billion-dollar startup
IPO, and corporate directors around the country will find comfort in the fact
that they are not in Neumann’s shoes at the moment, while looking to the future
to make sure their company does not become the next WeWork-sized failure.
[1] See Kenneth C. Johnsen, Golden Parachutes and the Business Judgment Rule: Toward a Proper Standard of Review, 94 Yale L.J. 909, 909 (1985).
[2] See id.
[3] Our Mission, WeWork, https://www.wework.com/mission (last visited Nov. 19, 2019).
[4] Ellen Huet, The Spectacular Rise and Fall of WeWork, Bloomberg (Nov. 7, 2019, 9:06 AM), https://www.bloomberg.com/news/videos/2019-11-07/the-spectacular-rise-and-fall-of-wework-video.
[5] Id.
[6] Id.
[7] Rosabeth Moss Kanter, Opinion, WeWork’s Saga is a Cautionary Tale About Golden Parachutes and CEO Pay, CNN Business (Nov. 7, 2019, 5:38 PM), https://www.cnn.com/2019/11/05/perspectives/adam-neumann-golden-parachute-wework/index.html.
[8] Huet, supra note 4.
[9] Theron Mohamed, ‘It Seems Insane Now’: WeWork Employees Bought into Cofounder Adam Neumann’s Vision but Grew Worried as Red Flags Mounted, Business Insider (Nov. 8, 2019, 5:56 AM), https://www.businessinsider.com/wework-employees-startup-rise-fall-new-yorker-2019-11.
[10] Huet, supra note 4.
[11] Rebecca Aydin, The WeWork Fiasco 2019, Explained in 30 Seconds, Business Insider (Oct. 22, 2019, 11:12 AM), https://www.businessinsider.com/wework-ipo-fiasco-adam-neumann-explained-events-timeline-2019-9#here-are-some-more-details-you-might-want-to-know-2.
[12] Id.
[13] Mohamed, supra note 9.
[14] Jonathan Stempel, WeWork, Ex-CEO Neumann, Softbank Sued over Botched IPO, Plummeting Value, Sharenet (Nov. 8, 2019), https://www.sharenet.co.za/views/views-article.php?views-article=146065.
[15] David Yaffe-Bellany, WeWork’s Ousted CEO Adam Neumann Is Accused of Pregnancy Discrimination, N.Y. Times (Oct. 31, 2019), https://www.nytimes.com/2019/10/31/business/wework-neumann-discrimination-complaint.html.
[16] See Stempel, supra note 14.
[17] See id.; Huet, supra note 4.
[18] Huet, supra note 4.
[19] Benjamin Means, A Contractual Approach to Shareholder Oppression Law, 79 Fordham L. Rev. 1161, 1163 (2011).
[20] Stempel, supra note 14.
[21] Huet, supra note 4.