“New” Special Committee May Not Dismiss Case Brought by “Old” Special Committee

The Court of Chancery recently rejected a special committee’s motion to dismiss a case that had been commenced on the company’s behalf by a prior special committee. The decision clarifies the standard applicable to the unusual dueling-committee circumstances and offers several reminders of the rigorous assessment applicable to a board committee’s request to terminate litigation filed on the company’s behalf.


The decision stems from WeWork’s (the Company) failed late 2019 pursuit of an initial public offering. In its wake, the Company faced a liquidity crisis. Among the options considered was a proposal from the Company’s largest stockholder. The Company’s board formed a “Special Committee,” consisting of two directors, to evaluate strategic alternatives; the committee was empowered to “exercise all rights and powers of the Board” in connection with these potential transactions. Ultimately, the special committee authorized entry into a transaction that would have had the largest stockholder, among other things, purchase up to $3 billion of the Company’s stock in a tender offer, conditioned upon the roll up of a particular joint venture; the investor agreed to use its “reasonable best efforts” to achieve that outcome.

Months later, the investor terminated the tender offer and asserted that the closing conditions (specifically, the roll-up transaction) had failed. A few days later, the Special Committee, on the Company’s behalf, sued the investor, asserting that the investor breached its “reasonable best efforts” mandate and also breached the fiduciary duties it owed as a controlling stockholder.

In the meantime, the investor challenged the Special Committee’s authority and disinterestedness (noting that its members would benefit in the tender offer). The Company’s internal and outside counsel began discussing the formation of a new committee to “divest the special committee of litigation authority,” because the Company’s management “badly want[ed] to get out of the middle of the litigation [with the investor].” The full board, by a vote of 6-2, determined to engage an executive search firm to identify two independent candidates to join the board of directors for the purpose of serving on a “New Committee.” (It bears noting that the Court concluded that five of the board’s eight members had a conflict vis-à-vis the investor that had been sued: four had been appointed by the investor and a fifth was specifically identified in draft minutes (eventually deleted) as “not independent.”).

The New Committee, comprised of two newly identified directors, was then authorized to determine if the Special Committee had authority to pursue litigation against the investor and implement its decision. It was formed for “a two-month term automatically expiring on July 29, 2020” and each of its two members would receive $250,000 for their efforts. On July 28, the New Committee issued a report concluding that the Special Committee did not have authority to initiate or continue with the litigation and it was not in the Company’s best interest to continue the litigation. On that basis, the Company moved to dismiss the action.

The Court’s decision

The Court’s opinion addressed a matter “of first impression: Should a temporary committee of a board of directors created in response to the filing of a lawsuit against the corporation’s putative controlling stockholders . . . be permitted to terminate the lawsuit, which an earlier committee of the board filed on behalf of the corporation with the support of Company’s management and its outside counsel to enforce the corporation’s contractual rights against them?” Among the Court’s conclusions were the following:

  • Application of the Zapata standard: The parties disputed the standard applicable to such a motion and suggested several that might apply. Ultimately the Court held that the so-called Zapata standard was appropriate; Zapata is a reference to an eponymous Delaware Supreme Court decision determining when a board committee may dismiss derivative litigation initiated by a stockholder. It requires that the company prove the independence, good faith, and reasonable investigation of its committee; then the Court must apply its own independent business judgment to determine if the motion should be granted — i.e., assess for itself the decision to terminate the litigation. While not a perfect fit (because the pending case was not a shareholder derivative action), the Court concluded it was the best available fit, for in each scenario the query rested on an authorized board committee’s ability to dismiss viable corporate claims.
  • Court’s review of the New Committee’s good faith and reasonable investigation: On this score, the Court found that the New Committee fell short. For starters, the Court took issue with the New Committee’s textual analyses and conclusions concerning the board resolutions that empowered the Special Committee, finding it more reasonable to conclude the Special Committee had authorization to commence the litigation. This was corroborated by contemporaneous documents (omitted in the New Committee’s report) in which the Company’s counsel confirmed their understanding that the Special Committee could sue. The Court likewise disagreed with the New Committee’s conclusion that the Special Committee was “no longer sufficiently disinterested to fulfill its mandate to act in the best interests of the Company.” Here, the inquiry was whether the Special Committee’s two directors were conflicted because they were to benefit personally if the tender offer was completed. While a concern, the Court noted that this conflict was a “known known” when the Special Committee was formed, and was not contemporaneously considered to be a disabling conflict by those involved. It thus seemed to be “overstated” in the New Committee’s report and analysis. As the Court pragmatically concluded, “[i]n an ideal world,” it would be preferable that the Special Committee be bereft of any conflict, but as between allowing it to “complete the job it was asked to do” or terminating the litigation three months before trial, the Court opted for the former.
  • Application of the Court’s business judgment: Here again, the Court rejected the New Committee’s conclusion, reiterating that the Special Committee was authorized to litigate on the Company’s behalf and it would be “fundamentally unfair” to tendering stockholders to dismiss the litigation three months prior to trial. Importantly, the Court noted its concerns about the New Committee’s “ability to achieve an overall fair result” because of the constraints in which it operated. It had only two months to complete its work and a constrained mandate and did not have the option of taking control of the litigation if it believed it appropriate. The reason for this was deemed “obvious”: the New Committee was “the product of a conflicted Board vote taken at the behest of . . . the controlling force behind the Company.” The Court denied the motion to dismiss, leaving all to face a trial on the claims in three months’ time.


Needless to say, this is not a frequently occurring set of facts. It is not common for a company to form successive committees to evaluate potential or actual claims, let alone for those committees to question one another’s mandate or conclusions. But the Court’s decision (pending any appeal) clarifies that the Zapata standard will likely apply to the latter committee’s work. This decision also reminds that the burden in any such motion is on the company and that the court will engage in a holistic factual analysis to determine its comfort with a committee’s recommendation to end corporate litigation. Here, the Court questioned the committee’s work not based on its members’ independence but on the committee’s limited mandate, its formation for a strict two-month window, and its conclusions in the face of the discovery record (and the investor’s wishes).

This decision also reinforces that the Court’s fact findings will include the circumstances in which a committee was formed and that some skepticism may attach to the formation of a committee to perhaps usurp another (particularly in a relatively quick time period on overlapping facts). When empowering any special committee, directors, management, and their advisers should be mindful that the efficacy, authority, and independence of that committee are inexorably linked to the success of its recommendation.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.