WeWork insiders duped sellers of mobile app startup in 2019 deal, suit says
2021 CORPGDBRF 0047
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By Daniel Rice
Westlaw Corporate Governance Daily Briefing
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March 25, 2021
(March 25, 2021) - Three executives at WeWork Cos. Inc. duped the owners of a mobile app startup into a 2019 merger that significantly overvalued the office space provider's shares, the startup's executives say in a Delaware federal court lawsuit.
WeWork acquired Prolific Interactive LLC in exchange for a mix of cash and stock in June 2019, just months before WeWork's failed initial public offering.
The sellers' complaint, filed March 22 in the U.S. District Court for the District of Delaware, says WeWork co-founder Adam Neumann and executives Arthur Minson and Rohit Dave made false representations about the value of WeWork's stock in negotiating the deal.
Neumann, Minson and Dave represented that WeWork's shares had a value of at least $110 per share, for a total company valuation of $47 billion, the complaint says. Prolific's owners relied on the represented value of the stock in agreeing to sell their business to WeWork for $36 million in cash and stock, plus another $24.5 million in restricted stock units, according to the suit.
Former Prolific equity owners Bobak Emamian, New Angel Capital LLC, George Investment Partners LP, Devon George and Hassan Emamian filed the suit through the designated sellers' representative, Shareholder Representative Services LLC.
Merger representations
The lawsuit says Prolific was in growth mode when approached by WeWork about a potential merger.
Prolific had developed more than 100 apps for leading businesses and posted annual revenue of $22.8 million for 2018 with an increase expected in 2019, the complaint says.
Neumann began conversations with Prolific co-founder and then-CEO Bobak Emamian about a potential merger starting in late 2018, according to the suit. The complaint says Neumann touted WeWork as being worth at least $110 per share and poised for an even higher valuation once it launched an IPO.
The Prolific owners eventually agreed to the cash-and-stock deal, with the sellers on average electing to receive about 60% of the consideration in the form of WeWork stock, the complaint says.
Inflated valuation?
According to the suit, the sellers learned after closing that the defendants had grossly overstated the value of WeWork's stock. WeWork's business model, corporate governance and financial position came under scrutiny in connection with its attempted IPO in the fall of 2019.
In a registration statement for the offering, WeWork disclosed operating losses and several acts of self-dealing by Neumann.
WeWork tried to save the IPO by progressively slashing the company's valuation to between $10 billion and $12 billion, but investors would not buy at even those reduced prices, and WeWork eventually abandoned the offering.
In October 2019, WeWork reached an agreement for investor SoftBank Group Corp. to provide several billion dollars in equity financing and acquire up to $3 billion in WeWork shares through a tender offer. In the tender offer, Softbank agreed to pay at least $19.19 per share, or about 17.4% of the $110 per share valuation used for the Prolific deal, according to the complaint.
The suit says the valuation of WeWork's shares for the SoftBank tender offer and other facts about WeWork's finances that later came to light show that the defendants knew or should have known that WeWork's shares were not worth $110.
Neumann, Minson and Dave violated the antifraud provisions in Section 10 of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j, and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, the complaint says.
The defendants are also liable under Section 20(a) of the Exchange Act, 15 U.S.C.A. § 78t(a), because they acted as control persons for WeWork, the sellers say.
John A. Sensing and Christopher Samis of Potter, Anderson & Corroon LLP and Thomas E. Redburn Jr. and Maya Ginsburg of Lowenstein Sandler LLP are representing the former Prolific owners.