History of the company
WeWork was established in New York in 2010 with the aim of making coworking spaces available for entrepreneurs, startup companies, freelancers, and other possible clients. Given the revolutionary and appealing business idea it was based on, the company has grown rapidly since its inception, not only becoming the leading coworking space provider in the world, but also prompting the whole business sector to an unprecedented thrive.
WeWork users can rely on coworking spaces, which are made available to them in the main business hubs around the globe, allowing them to access these spaces and carry out their working endeavors wherever they may be.
Business ModelWeWork’s business model mainly revolves around the rental of high-end real estate units from landowners, which are then sublet to their clients at higher costs. After renting offices, WeWork transforms them, enhancing their interior design to uniform all their offices, then including additional features such as cafes, shared offices, and community spaces. Hence, WeWork’s revenues derive from subscription plans entered into by their customers, who are willing to pay higher prices for the offices they occupy, in exchange for their flexibility.
However, it seems quite clear that this business model entails many potential risks for the service provider, as the cost of the rents may soar higher than the profits from subscriptions.
As a consequence, when difficult circumstances occur, such as the Covid-19 pandemic, the company may incur in significant losses.
Issues with their core business
WeWork's failure is a living proof of the challenges facing commercial real estate, including expensive leases for office spaces that no longer generate enough rental revenues for building owners to pay off their financing. This underlying problem is driven in turn by changes in office occupancy and rentals resulting from the post-pandemic rise in remote work.
WeWork's bankruptcy will put further downward pressure on the commercial real estate market. In cities like New York City and San Francisco, WeWork was a major tenant, renting around 20 million square feet of office space as of June 2023, representing the largest private rental portfolio of any U.S. company. The bankruptcy will result in a renegotiation or an outright cancellation of their leases, reducing income and increasing competition in the office lease market.
Funding Rounds and IPO
WeWork's operational model required the company to dispose of high quantities of cash in order to repay the tenants of the real estate it was letting, and hence many funding rounds were instituted by the executives of the company to acquire the necessary capital for its operational continuity. In Q4 2014 WeWork closed a Series D funding round of $355 million, which together with the prosperous ambition of the company, led to its $5 billion valuation, as it was reported by the WSJ.
Neumann met with SoftBank CEO Masayoshi Son, who eventually invested $10 billion in WeWork leading to a $47 billion valuation, ultimately rising to $49 billion. In August 2019, WeWork publicly filed for an IPO, but its filings generated a $1.9 billion loss on $1.8 billion in revenue in 2018 according to CNBC, and a $690 million loss on $1.5 billion in revenue for the first half of 2019. Eventually, WeWork went public at a $9 billion valuation in October 2021. However, the company faced losses and negative cash flows which led to a possible bankruptcy in August 2023. WeWork announced plans to renegotiate leases and cut operating costs to continue running for years to come, but ultimately filed for Chapter 11 bankruptcy in November 2023 with a $44.5 million valuation.
About Chapter 11:
Chapter 11 refers to a section of the U.S. Bankruptcy Code and represents a form of bankruptcy that entails the reorganization of the debtor's business, liabilities and assets.
As all Chapter 11 cases begin, WeWork filed a petition with the bankruptcy court of New Jersey on November 6th, 2023, which is the area where the debtor has the main place of business. The petition was a voluntary one, opposed to the otherwise "involuntary petition", which instead can be filed by creditors that meet certain requirements.
The main advantage of Chapter 11 is that the entity can proceed to operate during the reorganization process, which allows it to generate cash flow that can contribute to the repayment process of all debts. Most creditors favor this form of bankruptcy because it allows them to recover more, if not all, of their money during the repayment plan than if the company were to simply cease functioning in the business.
How does Chapter 11 work?
Along with the petition, the debtor must also file with the court all documents that can offer a fair overview of the company’s financial situation, namely:
schedules of assets and liabilities;
a schedule of current income and expenditures;
a schedule of executory contracts and unexpired leases; and
a statement of financial affairs.
However, the reorganization plan is the central feature of chapter 11. A proposed plan must designate classes of claimsamong similarly situated debt - and equity - holders, identify if the plan will “impair” these claims, explain how the plan will alter the claims held by the impaired classes. Through the plan, the debtor shall also explain how the plan aims guaranteeing equal treatment of every entity in each class the same as all class members.
Finally, the debtor must provide sufficient means to enforce the plan by, for example, selling debtor’s property, satisfying liens, or waiving a default by the debtor.
An important step in this entire procedure is the creditor’s voting for or against the reorganization plan. More specifically, only creditors that are adversely affected by the plan can vote. Indeed, as established in the In re Edgefield Inn, LLC (Bankr. D.S.C. 2014) precedent, “unimpaired classes (...) have no vote in the reorganization process.” Therefore, not impaired classes under the plan are “conclusively presumed to have accepted the plan.”
Under Chapter 11, §1126(c), a class of creditors accepts the plan if “creditors (…) that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such a class” vote to accept the plan. However, the vote must be given in good faith, otherwise the court has the faculty to disregard the voting.
Lastly, the court must approve and confirm the plan. Most likely, the plan will not gain approval where the following statutory criteria are not satisfied: pursuit of best interest of creditors, feasibility (in terms of reasonable probability of success of the plan), cram-down. The latter criterion refers to the situation where the court confirms the plan over a creditor's dissent, in the event that the debtor offers proof of the fact that it “does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.”
After the confirmation, the reorganization plan becomes a binding contract for all the parties involved, and the Bankruptcy Court maintains the authority to “interpret, enforce, or aid” the management of the reorganization plan.
Chapter 11 vs Chapter 7: the debtor in possession.
Another relevant feature of Chapter 11 that is particularly appealing to debtors, is that the company has the chance to hold the possession of all its estate and to transact in the ordinary course of business, without preapproval from the court.
For acts taken outside the ordinary course of business (e.g., unusual, controversial, questionable transactions), notice, hearing and court approval is generally required in advance.
On the other hand, under chapter 7 of the U.S. Bankruptcy Code, a trustee administers the debtor’s assets to satisfy creditors’ claims, therefore the company has much less range of operational autonomy and margin of discretion.
Relevant Italian legislation:
Chapter III of the Italian Crisis Code (Legislative Decree no. 14 of 2019), regulates the so-called "concordato preventivo in continuitá aziendale", which offers a very similar legal tool to reach a fair compromise with creditors through the mediation of the Court.
As provided by Chapter 11, under the Italian Crisis Code the debtor is expected to follow a specific procedure that requires the presentation of a "piano concordatario", which is the equivalent of a reorganization plan. The adequacy, economic sustainability and feasibility of the plan is then certified by an independent third-party expert who drafts a specific attestation.
Moreover, the legislation prescribes specific rules for the voting system of the plan by the creditors, a division in different classes and categories of creditors and the possibility for the debtor to keep running the business, but still under the supervision of the court.
Conclusion:
Chapter 11 plays a dual role: on the one hand it removes the holdout problem, preventing dissenting creditors from pursuing individual enforcement actions and binding them to comply with the clauses contained in the reorganization plan. On the other hand, it facilitates the conclusion of extrajudicial workout agreements, since the debtor's ability to proceed to Chapter 11 softens the position of potentially dissenting creditors to the extent that they are aware of the legal enforceability against them of the approved plan.
Although the ending of this endeavor seems pretty clear as far as WeWork is concerned, uncertainties revolve upon the future of the coworking industry. CEOs of WeWork’s competitors have recently gone out claiming the pandemic was not the sole cause for WeWork’s bankruptcy, still a relevant contributor for the epilogue, but rather its wrong business model. What is more, according to their public statements, co-working spaces are attracting not just freelancers and remote workers, but also organizations downsizing their permanent real estate footprint due to the rise of remote work. As the demand for coworking grows, WeWork’s decline may open doors for other providers and higher competition in the industry.
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