When WeWork was saved from bankruptcy last year, its oldest backers thought they had secured a route to profitably cash out of the troubled office-sharing group: selling their shares to SoftBank.
For months, Benchmark Capital had little reason to believe the Japanese group would walk away from part of a WeWork rescue package that would return multiples on the Silicon Valley venture firm’s eight-year-old bet on the company.
ut that is exactly what happened this month when SoftBank dropped plans to buy up to $3bn in shares from its employees, existing investors and controversial co-founder Adam Neumann. The Japanese investor claimed multiple closing conditions had not been met, citing outstanding regulatory investigations, litigation and the pending closure of a Chinese joint venture.
The deal’s collapse has set the stage for months of legal battles between SoftBank and WeWork, following a lawsuit brought by two of WeWork’s most senior board directors, Benchmark’s Bruce Dunlevie and former Coach chief executive Lew Frankfort.
The lawsuit capped weeks of heated interactions with SoftBank executives including chief operating officer Marcelo Claure — who has been tasked with turning round the property company — as it became clear the deal was in trouble.
It has also revived old tensions between Benchmark and SoftBank from an earlier feud over the future of ride-hailing company Uber in 2017, an early touchstone for the kinds of battles that SoftBank, which this week warned of a $12.5bn annual operating loss in the face of coronavirus upheaval, has faced as it pours money into Silicon Valley companies.
The legal fight comes at a difficult moment for WeWork, which was already trying to revive its broken business model before the coronavirus pandemic ravaged the global economy.
On Tuesday, Mr Claure and the newly appointed WeWork chief executive Sandeep Mathrani are expected to put on a brave face for an all-hands meeting where they will detail the state of the business and plans to repurpose tens of millions of square feet of office space.
But tensions have already spilled into public view. In late March, a statement from Mr Dunlevie and Mr Frankfort called SoftBank “unethical” for threatening to go back on the agreement, vowing to take “all necessary actions” to ensure the tender’s completion.
Soon after, the arguments became so heated that both sides came together and agreed to tone down their comments in public, according to people familiar with the discussions.
“More often than not, [investor disputes] are resolved informally within the board between the shareholders,” said Ilya Strebulaev, professor of finance at the Stanford Graduate School of Business. “In both cases, the corporate structures and the companies were unusual to start with,” he added, referring to the fights at Uber and WeWork.
WeWork’s special committee had viewed the share purchase as necessary compensation for the price cut investors stomached when SoftBank slashed the company’s valuation from $47bn to $8bn following its failed initial public offering last year, people familiar with its thinking said.
The committee had also entertained a competing rescue package from JPMorgan, but the Wall Street giant refused to bankroll the $3bn tender or new loans SoftBank offered to Mr Neumann.
Meanwhile, people close to SoftBank questioned the special committee’s motivation for attempting to push through the deal, noting that Benchmark intended to cash out about $350m of its stake in WeWork through the tender.
SoftBank’s chief legal officer Rob Townsend said this month it would have been “irresponsible” for the Japanese group to go forward with the offer, directly naming Benchmark as one of the main beneficiaries of the deal, alongside Mr Neumann.
“Read the [SoftBank] press release . . . and who it mentions by name,” said one adviser involved in the dispute between SoftBank and Benchmark. “It is unusual for firms to piss on each other in public.”
Benchmark, SoftBank and the WeWork special committee declined to comment. SoftBank has said it will “vigorously” defend itself against the lawsuit, calling it a “desperate and misguided attempt” to rewrite the tender agreement.
The battle at WeWork has revived memories of an earlier face-off at Uber after Benchmark moved to oust its chief executive Travis Kalanick.
At first, Benchmark opposed attempts by SoftBank to buy a multibillion-dollar stake in Uber, thinking that the Japanese group intended to support Mr Kalanick. It told other Uber investors it would not sell its shares and voted against an initial SoftBank proposal seeking exclusive rights to a deal.
Eventually the two sides reconciled, with Benchmark agreeing to drop a lawsuit against Mr Kalanick and selling about $900m worth of shares to SoftBank and other investors.
But Bill Gurley, the Benchmark partner in charge of its Uber investment, has publicly criticised the Japanese investor and its massive $100bn Vision Fund, accusing it of using “capital as a weapon” in competitive markets such as ride hailing and food delivery.
“It’s one of the toughest things a board has ever had to analyse — any board in the history of business,” Mr Gurley said about SoftBank’s influence on new industries during a television appearance last year.
At WeWork, Benchmark and other investors had viewed the Japanese investor as one the biggest enablers of Mr Neumann’s growth-at-all-costs mentality and unpredictable antics. The tender offer had partly been aimed at removing Mr Neumann’s grip on WeWork, clearing up the company’s complex ownership structure.
Instead, SoftBank’s latest move has added to the anger brewing in Silicon Valley against the Japanese investor’s pattern of abandoning deals.
WeWork is pressing for the $3bn tender to go ahead as originally planned, arguing that SoftBank will be unable to prove that any material fines will emerge from investigations by the Securities and Exchange Commission and Department of Justice.
The company’s lawyers have filed for an expedited trial in front of Andre Bouchard, the chancellor of the Delaware Court of Chancery and an experienced hand in complex corporate disputes.
An expedited trial could wrap up the matter within four months, though the timing could also slip because of the coronavirus pandemic, one person briefed on the matter said.
The special committee and SoftBank could also come to a new agreement over the tender, which would require new antitrust approvals, people briefed on the matter said.
