As most of you know we are true believers in appropriate corporate governance. While not the most exciting of topics the cost of getting this wrong can be lethal. Case in point The We Company.

I never really understood all the excitement about WeWork. Essentially WeWork was renovating office space and offering “free” beer, amongst other things to its new clientele a.k.a members. That does not seem to me to be a dynamic new business worth a $47 billion dollar valuation in my view. Softbank’s Masayoshi Son thought otherwise. Add to that the troubling financial fact that they were buying long (entering into long-term commitments) and lending short (entering into short-term leases) you are asking for a disaster – which is what they got. The duration risk is enormous and not changing anytime soon.

It is pretty clear to an objective observer that the vested interests in We were more interested in self-dealing and building up valuations as opposed to securing those valuations. Nonetheless there were real world implications of these prioritizations.

The first sign of a problem

The 300 plus pages of the initial registration statement contains 31 pages of “Risk Factors” with another nine pages devoted to “Certain Relationships and Related Party Transactions”. This is a tell. “We have engaged in transactions with related parties, and such transactions present possible conflicts of interest that could have an adverse effect on our business and results of operations.” This section of the disclosure goes on to inform the reader that “We have entered into a number of transactions with related parties, including our significant stockholders, directors and executive officers. For example, we have entered into several transactions with our Co-Founder and Chief Executive Officer, Adam Neumann, including leases with landlord entities in which Adam has a significant ownership interest.” Indeed.

One must wonder how the We Conflict of Interest Policy was working. Insight into that “policy” was alluded to in the Risk Factors to wit, “Pursuant to our related party transactions policy, all additional material related party transactions that we enter into require either (i) the unanimous consent of our audit committee or (ii) the approval of a majority of the members of our board of directors. Nevertheless, these transactions, individually or in the aggregate, may have an adverse effect on our business and results of operations, and we may have achieved more favorable terms if such transactions had not been entered into with related parties.”

Our growth and success depends on our ability to maintain the value and reputation of our brand and the success of our strategic partnerships. That is a true statement, reputation is directly correlated to enterprise value.

Our future success depends in large part on the continued service of Adam Neumann, our Co-Founder and Chief Executive Officer, which cannot be ensured or guaranteed. Presumably that statement pertaining to success had to do with the success of the company, not Mr. Neuman’s own success. As we will see later that was not the case.

We have not yet determined whether our existing disclosure controls and internal controls over financial reporting are compliant with Section 404 of the Sarbanes-Oxley Act. Additionally, our current internal control systems and procedures may not be adequate to support our rapid growth. Any failure of our internal systems, controls and procedures could have an adverse effect on our stated results of operations and harm our reputation. One would hope that after nine plus years of operation that a more robust statement about internal controls over financial reporting being compliant with Sarbanes-Oxley could have been made.

The amount of self-dealing is staggering

A very interesting part of the We construct was the relationship between The We Company (the holding company) and the We Company Partnership (the operating company).

The registration statement declares: “The We Company has unilateral control over all of the affairs and decision-making of the We Company Partnership.” It is further explained that “Furthermore, the general partner of the We Company Partnership cannot be removed as the general partner of the We Company Partnership without the approval of The We Company.” It is good to be King.

Of course, The We Company/We Company Partnership is not to be eclipsed by the WPI Fund/Ark “tie-up”. Initially two separate entities the WPI Fund and Ark were to consolidate into ARK to be managed by a We director (Steven Langman) “The entities that currently advise and manage the WPI Fund are each indirectly owned 50% by us and 50% by affiliates of the Rhône Group.”

“In connection with the formation of ARK, we agreed that ARK would be the exclusive general partner and investment manager for any real estate investment vehicle managed by, or otherwise affiliated with, The We Company and its controlled affiliates and associated persons.”

For Mr. Langman’s hard work in that conflict-ridden structure Mr. Langman was to be awarded 454,546 shares of our Class A common stock.

This is all separate and aside from the numerous “collateralized loans” (collateralized by We shares) issued to Mr. Nueman that totaled $394.4 million “for services previously rendered.” N.B. Other loans to insiders in the amount of nearly $21 million were also listed in the registration statement.

“In 2018, we made payments totaling $158,000 to an immediate family member of Adam Neumann, in connection with the family member’s role as the host of WeWork’s Creator Awards ceremonies.[1] In addition during 2017 and 2018, we made payments totaling $189,054 and $162,825, respectively, to an immediate family member of Adam Neumann, who is employed as the head of our wellness offering. Adam Neumann does not have a direct financial interest in either transaction.”  That is $509,879.00 in company funds to immediate family members of Mr. Neumann.

Those are but a few nuggets extracted out of the initial registration statement. There is more, a lot more.

“Our board of directors recognizes that transactions with related parties can present potential or actual conflicts of interest and may raise questions as to whether those transactions are consistent with our best interests and the best interests of our stockholders. Therefore, our board of directors has adopted a written policy on transactions with related parties, which is defined as a director, executive officer, nominee for director or greater than 5% beneficial owner of any class of our capital stock, and their immediate family members.”

Raise questions? A classic example of having a “written policy” and then not enforcing it. Although, as previously noted these matters had to be approved by the audit committee of a majority of the board.

When governance doesn’t matter

These are just some of the glaring deficiencies in governance. There are legitimate reasons to question the “new business” model offered by We. But one has to wonder about the current investors in terms of their oversight of their investment into We, if any oversight was conducted at all.

In August of this year David Trainer penned an article in Forbes entitled, WeWork Is the Most Ridiculous IPO of 2019. “WeWork has copied an old business model, i.e. office leasing, slapped some tech lingo on it, and suckered venture capital investors into valuing the firm at more than 10x its nearest competitor. The company also burns tons of cash, carries huge risk factors in a recession, and sports some of the worst corporate governance practices I’ve ever seen.” That was in August of 2019.

Further questioning of the “sophisticated” money should be undertaken. How is it investors like JP Morgan and Softbank allowed for such an incestuous governance structure let alone contemplate foisting it upon more traditional investors? Did the imprimaturs of Skadden, Arps, Slate, Meagher & Flom LLP, & Simpson Thacher & Bartlett LLP and Earnst & Young in the registration statement help or hurt in perpetrating this myth?

It has been reported that in order to rid We of Mr. Neuman’s outsized influence Softbank struck a “deal reportedly included the purchase of just under $1 billion of Neumann’s stock, along with an estimated $185 million “consulting fee” just for giving up his seat on the company’s board.” This does not include a reported $500 million line of credit extended to Mr. Neuman so that he can pay back JP Morgan. Not bad for nine years’ worth of work.

Lastly, the New York Times has reported that up to 6,000 employees are set to lose their jobs over the next five years as the full story of this fantasy comes to be known.

As a result of the We fiasco Softbank was said to have conducted a review of various investment in its Vision Fund. A recent posting on Zerohedge stated, “SoftBank’s auditors at Deloitte & Touche reviewed the final valuations of Vision Fund’s unicorns. Along with Vision Fund’s limited partners, who used Duff & Phelps and Ernst & Young, so far, found no wrongdoing in the fund pumping up valuations of its unicorns.” How can that be? This was a company that was previously valued at $47 billion dollars and currently worth about $10 billion That is about 2.7 times the amount of Belgian based IWG – a profitable competitor.

At least they were “sophisticated” investors.

[1] Recipients of Creator Awards are then eligible for investment from the Creator Fund. The Creator Fund is a consolidated subsidiary owned 99.99% by related party noncontrolling interest holders and funded in large part by Softbank.

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