January 14, 2021

Controllers: Viva Zapata! Del. Chancery Refuses to Dismiss WeWork Lawsuit

This may sound strange to most of you, but when I took Corporations in the fall of 1984, corporate law was kind of a sleepy backwater.  Of course, the area awoke with a vengeance in 1985, but when I took the class, Van Gorkom, Moran, Unocal, Revlon, etc. weren’t even on the radar screen. In fact, one of the few things I do remember from that class was spending an inordinate amount of time on Zapata v. Maldanodo, a 1981 Delaware Supreme Court decision about the standards that would apply to a special litigation committee’s decision not to pursue a derivative action.

I’ve come across Zapata many times in reading Delaware cases, but it never seemed to be worth the time my professor invested in it – at least until now. That’s because Zapata v. Maldanodo featured prominently in the Chancery Court’s recent decision in In Re WeWork Litigation,  (Del. Ch.; 12/20).  Like almost everything associated with The We Company, the case is pretty convoluted.  It arose out of breach of contract claims against the company’s new controlling shareholder that were brought by a special committee that was established to negotiate the deal in which that shareholder acquired its controlling stake.

After the new controller acquired control, the company’s board established a new special committee, which determined that the other special committee lacked authority to continue the suit and moved to dismiss the case.  Noting that this was a case of first impression, Chancellor Bouchard decided to look to Zapata for guidance, and ultimately denied the motion to dismiss. This excerpt from a recent Shearman blog on the case explains his approach:

The Court determined to engage in an analysis akin to that developed for assessing special committee motions to dismiss derivative claims under Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981).  Zapata entails a two-part assessment (i) testing the independence, good faith and reasonableness of the investigation, and (ii) applying the court’s own independent business judgment as to whether the motion should be granted.

The Court denied the motion because it found (i) the new committee did not establish the reasonableness of its investigation and conclusions, and (ii) the special committee was authorized to pursue the litigation and it would be “fundamentally unfair” to dismiss the claims.

In applying the the Zapata test, The Chancellor found “significant shortcomings and errors” in the new special committee’s investigation and concluded that that it was clear that the previously established committee had the authority to file the lawsuit.

Now, just to make things more convoluted, Chancellor Chandler issued another decision in the  WeWork litigation on the same day.  In that decision, the Chancellor dismissed fiduciary duty claims that were duplicative of the contract claims addressed in the other opinion. This blog from Francis Pileggi has the skinny on that part of the case.

Shortly after issuing these two opinions and a third letter opinion addressing a discovery dispute in this litigation, Chancellor Bouchard announced that he planned to retire from the bench in April. There’s no indication that this lawsuit played a role in that decision, but as somebody who had to read this company’s goofy IPO S-1 filing, I wouldn’t be shocked if it did.

John Jenkins