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Comment by code4tee | Hacker News Reader

Quote: WeWork’s board said that it “regrets the fact that SoftBank continues to put its own interests ahead of those of WeWork’s minority stockholders.”

Of course they’re going do to that, it’s called fiduciary duty to their own stakeholders! Such diligence is something WeWork’s board seemed to casually overlook for far too long.

At this point why would SoftBank buy WeWork shares that are in all likelihood worth little or perhaps even worthless. They’re deciding to cut their losses and move on.

If I sign a contact to buy a house it still has contingency clauses. If 2 days before closing the house burns to the ground I can walk away. Obviously I don’t want to buy a burning pile of rubble. SoftBank is walking away from buying a burning house and that makes complete sense.

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Quoting from Matt Levine:

> That is a good little window into mergers-and-acquisitions lawyering. SoftBank’s agreement with WeWork isn’t public, but presumably it says something like “SoftBank can cancel the tender if there are any material government restrictions on WeWork’s business,” but it doesn’t say something like “SoftBank can cancel the tender if lots of customers cancel their WeWork memberships.” The very rough general rule in mergers and acquisitions is that if business conditions get worse, that’s the acquirer’s risk, but if there is some legal problem with the business then that’s the seller’s risk.

Emphasis mine

There are quite a few of those M&A contracts that contain clauses against the business conditions getting worse outside certain bands and some that allow withdrawal for exactly that: changing market conditions. Without the text of the contract there isn't much to say about any of this.

That's true but they may be able to cancel the contract based on a force majeure clause because of the global pandemic.

Or a government restriction due to the pandemic, if not the pandemic itself.

As Frere Jacques notes, it is almost pointless to speculate without the actual contract in hand.

For instance, large events often have cancellation insurance, but they have found that the terms are much narrower than they expected when they signed the insurance contract.

From the article:

> the co-working company and SoftBank agreed to a set of performance milestones that WeWork agreed to meet in exchange for the secondary liquidity. Such terms are customary in most financial transactions... SoftBank in its statement last week said that WeWork failed to meet a number of those performance requirements, and said that it was within its rights under the tender offer contract to walk away from the deal.

> but it doesn’t say something like “SoftBank can cancel the tender if lots of customers cancel their WeWork memberships.”

There's a squishy clause called a "material adverse effect" clause that exists in many corporate contracts, and often has precious little specificity/definition. If I had to guess (as a former lawyer), I'd speculate that an MAE clause is at least part of the justification for SoftBank's pullout.

> it’s called fiduciary duty to their own stakeholders

SoftBank has a fiduciary obligation to its shareholders. (Note: not all stakeholders. It has a duty to them. But it's not a fiduciary one.)

It also has a fiduciary obligation to WeWork shareholders, by virtue of its Board seat.

This case is, in summary, about how those duties conflict.

True although that scenario is hardly uncommon.

Lots of investors have board seats and there are decisions (like if to invest in the next round) where the desire of the board (get more money for a new round) may conflict with the desires of investors that have seats in the board (we think the company has run its course and don’t want to put more money in).

Like any VC SoftBank likely has lots of internal walls and controls to keep those decisions separate. Just because a VC has a board seat doesn’t tie them into perpetually funding every need of the company.

Regardless the case here seems to rely on the breach of conditions and WeWork seems to have offered little evidence that these breaches did in fact not occur. If they failed to meet the conditions SoftBank can walk away.

Conflict-of-interest is a human-invented notion that is rooted in the idea that the world is black and white, and it must be one or the other. That isn't the nature of how the rest of the universe operates.

All that is needed is a weighting factor between the two loss functions (in this case, obligations) to deal with cases like this, and to make the policy (in this case, term sheet) continuous and differentiable as well.

> All that is needed is a weighting factor between the two loss functions

Assuming this is sarcasm. If not, it’s an employment guarantee for litigators.

The ligitators can check to see if the loss function was evaluated correctly to within some sigma, and the ligitators can be robotic as well, in a couple decades from now. Most of what lawyers do is apply patterns they know from before for $900/hr, and that's exactly what machine learning is good at.

SoftBank is all about AI and I actually don't think AI lawyers would be a bad thing; it would be nice if they futurized their own corporate and investment structure by design instead of following today's defaults, including "fiduciary duty" in an absolute sense, which I think is an antiquated concept for a society 100 years from now.

SoftBank has the power to redesign concepts such as boards, shares, equity from the ground up, and they should be doing experiments with those ideas.

> Conflict-of-interest is a human-invented notion

That doesn't seem like a particular relevant critique here; it's not like naturally occurring corporate boards or some universal law of fiduciary duty are things we've observed outside of humanity. Why shouldn't human-invented heuristics apply to situations that as far as we know only occur in human interactions?

I'll admit, that does sound like the description of an onion'ey / college humor-ey thing I'd like to see. I makes me think of the Clubbing in the Wild video [1].

[1] https://www.youtube.com/watch?v=q8zwIphm5r4

>Conflict-of-interest is a human-invented notion

Literally every legal concept is a human-invented notion.

Sure, but to me, ALL human-invented notions are subject to interpretation and change over the times.

We had kingdoms, slaves, and eye-for-eye punishment before and we largely don't have those concepts today in the developed world.

The same is true for conflict-of-interest, fiduciary duty, and today's version of capitalism.

If I had said "we don't need slaves" 400 years ago, I would have been downvoted like crazy. And here I am, saying conflict-of-interest and fiduciary duty will be antiquated ideas, and I'm being downvoted here today. Let's have an open mind about the future, shall we? I'd rather in a community like this we put everything we blindly assume today on the table with an open mind and discuss how we can change or improve the system.

On a related note, AlphaGo is able to play against itself using a single CPU/GPU, and it gets better by doing so. Why can't a human play against itself and get better as well? Are we brainwashing ourselves into thinking we are unable to do that, and so we are not trying?

If I had said "we don't need slaves" 400 years ago, I would have been downvoted like crazy.

European countries began banning the slave trade in the 1400s...

And here I am, saying conflict-of-interest and fiduciary duty will be antiquated ideas, and I'm being downvoted here today

The first will never be an antiquated idea as long as conflicting interests exist. Conflicting interests don't need to be hostile to each other, they just need to be conflicting in the sense that their interests do not align. As I stated earlier, conflict-of-interest rules merely act to either prevent the conflict or require both sides to knowingly waive the conflict in their shared agent.

Fiduciary duty governs the heart of professional workers. It binds lawyers, accountants, etc., to the interests of their clients. This concept will continue to exist as long as their are professions and as long as professionals can have multiple clients.

If you play games against yourself you will get better. No mystery playing vs others exposes new game plays.

Morals change with time.

> Why can't a human play against itself and get better as well?

You can, it's called practicing. You are just limited by your resources and imagination. Playing with or against others accelerates your improvement curve.

Conflict-of-interest is not rooted in the idea that the world is black-and-white.

It's the opposite. It's rooted in the idea that the world is shades of gray, and so the conflict-of-interest rules try to (a) eliminate situations where you would have to choose between conflicting sides, or (b) get permission from both sides to remain after advising them of the conflict.

Trying to turn this into some silly algorithmic calculation is a fundamental misunderstanding of what conflict of interest is or even that most conflicts are not objectively valuable terms that can be resolved numerically.

In this case SoftBank could recuse its board members from any discussion of this matter, which would sidestep the problem. The SoftBank board's duty to SoftBank investors is much more important than any loss of control in WeWork that would stem from recusing itself.

Wouldn't the responsibility be to the partners in Vision Fund rather than SoftBank's share holders?

Cue: Kenny Rogers music:

"...You gotta know when to fold'm.... know when hold'm.... know when to walk away... and know when to run!"

Has anyone estimated how many months WeWork has until it collapses?

probably better to measure in WEeks.

Lol. We-eeks.

Is this informed by any data or facts whatsoever?

Last time I checked, WeWork was a going concern with 600,000 customers more or less happy with their service. What would tank them? Are their lease obligations too large and can't be renegotiated?

This entire thing is blown so far out of proportion. Like Tesla, it seems like a company that mostly makes products people like, whose equity is extremely hard to value. Maybe WeWork is worth $40 billion, maybe it's more like Regus and worth $4. This only affects you if you're a shareholder. As a WeWork customer, I absolutely couldn't care less about any of this nonsense.

I'm reminded of a classic finance quote: "If I owe you $100, I have a problem. If I owe you $100 million, you have a problem." This summarizes the dynamic between WeWork and its landlords right now.

"WeWork was a going concern with 600,000 customers more or less happy with their service."

This may have been true in December 2019, but with a global patchwork "stay at home" regulations in place, I suspect co-work spaces (especially of the open floor plan variety) are devoid of paying customers. That presumes they're even allowed to be open right now.

I don't remember offhand what the average WeWork customer generates in revenue or if the bulk of those customers are month-to-month vs. mid- to long-term contracts. If the former I don't see why those customers would continue to pay for space and services they don't have the ability to use.

I know a lot of people, including myself, who have cancelled membership to WeWork due to Coronavirus.

I intend to join again when we're allowed to leave our houses.

They were basically insolvent when the extra Softbank cash failed and the IPO failed. And that was before COVID-19.

But you make a good point: They owe so much in leases they have huge negotiating power, and with COVID-19 they probably have even more since nobody's renting space right now.

Having a lease is not the same as “owing the bank money” to go with the loan analogy. Yes it’s painful for landlords but the landlords have options. If they kicked WeWork out they’re not just out the money in the way a bank is if a borrower defaults. There’s some short term pain but if WeWork has long leases at some point it benefits the landlords to just kick them out and move on.

Landlords have mortgages to pay. Bondholders hold those notes. There is very little slack in the system for this scale of default.

Some landlords have mortgages to pay.

How many WW properties are still owned by Adam Neumann?

This whole thing frustrates me so much. It's like people are just spouting off random opinions not substantiated by any data or real-world experience...at all.

I just looked it up. WeWork has 848 locations globally. These locations aren't in houses...they're in gargantuan, tall office buildings, worth tens/hundreds of millions of dollars each. If Adam Neumann is a billionaire, AND if he has most of his wealth in commercial real estate (I'm sure he doesn't), he might own...5-10 of these. The rest are owned by REITs like Simon Property Group, Thor Equities, CB Richard Ellis (CBRE), Jones Lang LaSalle (JLL), and others.

I think you’re missing the point. There was a huge controversy a while back where it appeared as though Adam Neumann was fleecing the company - personally trademarking the “We” brand and selling it back to the company, buying up certain office space and leasing it back to WeWork.

Yes it is. It is exactly the same thing. A landlord is an unsecured creditor just like a lender with a loan that isn't backed by pledged collateral. In general, any unsecured creditor, whether bank, landlord, etc can sue or take other legal action to recover what they're owed. Though they might not win.

What the common discourse around this situation misses is how the landlords are very much on the hook if WeWork blows up. Especially given the broader economic contraction, there is no scenario where the landlords will force WeWork into destruction/non-operation. WeWork might file for chapter 11 bankruptcy and there's going to be some losses, but the odds of this business simply saying, sorry guys, we're closed, pack up your shit and go home, are effectively zero.

If you have some time, read a few books about how huge debt crises get resolved. It's fascinating. My friend Drew is a huge "bankruptcy geek" and eats this shit up.

A good starter book: "This Time It's Different", often referred to as "Rheinhart and Rogoff" by the authors names. https://www.amazon.com/This-Time-Different-Centuries-Financi... - great overview of how many nation-state debt crises got resolved. In general, most parties end up taking a haircut (not a total loss) and everyone gets on with their life.

Sears and Radio Shack are interesting cases from the corporate (not government) world. There are entire specialist law firms and financing companies that deal just with distressed debt.

What's crazy to me is how much this stuff repeats. Argentina has been a basket case almost nonstop for the last 20 years and yet, people still lend to them. Why anyone would continue to do this over and over befuddles, but just goes to show how crazy things can be.

Debt: The First 5000 years is also a great read on the topic.

https://www.amazon.com/Debt-Updated-Expanded-First-Years/dp/...

My understanding is that WeWork's customers are on short term, easily cancelled leases, while WeWork's own leases are long term. In a downturn for office space, that is a recipe for disaster, and it's not like WeWork was particularly stable before the current crisis.

As opposed to Tesla, WeWork's product is fairly fungible, so if general price levels for office space collapse, they don't have much of a moat to lock in customers.

Anecdotally wework had a two month deposit from my former company which they are refusing to refund - my guess is 4 weeks until the civil suits start stacking up, 6 weeks until the executives bail out in Golden parachutes to cushy FANNG positions, and 8 weeks until low level employees are left holding the bag.

I agree with the basic timeline but suggest doubling the timeframe.

The fact they're suing does imply that there were not contingency clauses. Otherwise, why piss off your largest investor/shareholder/backer?

The "pissing off Softbank" horse has left the barn. Now WeWork is just trying to extract as much unburned rubber from its tire fire as it can.

To extract any rubber at all, they will need to win. Given they have a binding agreement with Softbank (per the article), and they are willing to call in the lawyers, they must think they have a case...

Whilst IANAL, in my legal dealings I have been consistently surprised by how weak a case a desparate party is willing to bring to court.

Not a good analogy. The house already pretty much burned down before SoftBank agreed to (second) round of investment.

No it had not.

I am a long way away but from what I can ell from he news I follow it has a good core business. It was run by a crook, who still has his hooks in, but the real estate business was sound.

Until all the income from short term leases evaporates due to curfews and the long term leases they pay keep ticking....

It is a good core business. The press is just trying to spin this into some big exciting story as they are wont to do, this time playing up the "How the mighty fall" and "David v Goliath" angle.

I am a paying wework customer as well as a person who owns commercial real estate. There's not much to see here. Some investors paid too much. Let's all let them take their losses and move on. I'm tired of hearing every tech-hating, New York Times-reading, "in the know" person having some huge opinion on this.

Literally the entire real estate industry thought WeWork would go bankrupt in the first downturn, due to the focus on short-term leases and the mismatch with WeWork's underlying long-term leases.

Well, here we are.

You might try finding more diverse news sources. Even comments on HN pointed out this particular issue.

> If 2 days before closing the house burns to the ground I can walk away.

The seller would be in default rather than you having a contingency. I'm sure there's plenty of case law in every jurisdiction covering this scenario.

Maybe SoftBank had no intention of buying out WeWork and were just using it as some sort of ploy to dig deeper into their books, etc.

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