Is Permitting The Sale to Anthos In CrossFit’s Best Interest?
On July 28, 2012, message boards on www.crossfit.com blew up regarding a potential sale by a non-managing equity partner to Anthos Capital, a venture capital firm. Since then, a Facebook fan page and a blog have been created, the latter offering developments in the case. But what exactly is going on? There are two litigation fronts (and possibly a third in Santa Clara County), one in family court located in Yavapai County (Arizona) and Delaware Chancery Court. The big issue, and the focus of this post, is the battle being waged in Yavapai County, namely, a conditional sale by Lauren Glassman of her 50% interest in CrossFit to Anthos.
And when Yavapai County Superior Court Judge Kenton Jones ultimately decides whether to allow Lauren Glassman to sell her shares to Anthos Capital, the most important consideration should be what’s in the best interest of CrossFit – the company. What do I mean by CrossFit’s best interest? No, I’m not talking about what’s in the best interest of Greg Glassman, CrossFit HQ staff, or the affiliate owners. These interests matter very little to whether the conditional sale is approved. Nor does it matter what Lauren Glassman desires or what she feels she’s entitled to, or that Anthos is willing and able to shell out $20 million cash to acquire half of CrossFit. What truly matters is whether this sale is in the best interest of CrossFit – the company.
CrossFit is formed as a corporation. And as a corporation, it is a distinct legal entity with its own interests, including survival. If Judge Jones tackles the issue from this perspective, and so long as Greg Glassman can demonstrate an ability to substantially match Anthos’ purchase price, the sale should be denied. If the sale is permitted to go forward, corporate deadlock is inevitable, which will likely lead to the dissolution of CrossFit and the impetus to spin off litigation that will last years. And, quite frankly, Lauren Glassman lacks persuasive reasons why the sale should go forward.
For those who know little about this dispute, some factual background and discussion of Arizona law are necessary. But first a couple caveats. This case involves family law. I don’t practice family law and have zero interest in ever doing so. It’s a nasty area, and reading through the documents reinforces my decision. And while there are certainly nuances unique to divorce proceedings, the general litigation flow and judges possessing inherent flexibility to equitably resolve issues and matters is similar to civil litigation. Another caveat is that I identify myself as a CrossFitter, having trained at a couple affiliates for several years. But I have no financial interest or other vested interest tied to CrossFit or the CrossFit brand. And the end of CrossFit the business will not stop me from putting myself through the torture of Fight Gone Bad. This is simply a post voicing my thoughts, as a lawyer, from the peanut gallery.
A Little Community Property 101
CrossFit, the business, was incorporated while Greg Glassman and Lauren Glassman were married. They lived in California, which is a community property state. Years later the couple relocated to Arizona, also a community property state. In community property states, assets acquired during marriage are presumed to be community property. There is no dispute that CrossFit stock is community property because it was acquired during marriage and there’s no contrary evidence overcoming the presumption. So the marital community owns 100% of CrossFit, with Greg Glassman and Lauren Glassman each possessing a 50% interest in the community property.
Lauren Glassman commenced divorce proceedings approximately 2 ½ years ago in Yavapai County, which encompasses the Glassman’s home in Prescott, Arizona. Under A.R.S. § 25-315, the filing of a divorce petition apparently triggers an order preventing the sale, transfer, concealing or disposition of community property. This order makes sense because assets need to be identified and accounted for, followed by a determination of whether those assets are community property or separate property, followed by dividing and distributing assets to the former spouses. This case hinges on the distribution of CrossFit stock.
Significantly, Arizona doesn’t require “in kind” distributions, which entitles the spouse to a portion of the asset itself rather than its equivalent cash value. If Arizona required in-kind distributions, the stock would be split, Lauren Glassman would receive her 50% share. And there’d be nothing, as far as I know, stopping her from selling the shares to Anthos. However, even though Arizona doesn’t require “in-kind” distributions, there are situations where the value of one particular asset substantially outweighs the aggregate value of all other assets. Under those circumstances, the Arizona court may be forced to distribute the valuable asset in-kind. And to nobody’s surprise, the value of the CrossFit stock dwarfs the aggregate value of the Glassman’s other community property.
But does this mean Lauren is automatically entitled to 50% of the stock? Not necessarily. Up until June 2012, Lauren and Greg, through their lawyers, were negotiating a price and terms to purchase Lauren’s 50% share. One proposal on the table was $17.5 million payable over 5 years. While the parties were negotiating, Lauren was secretly negotiating with Anthos, a venture capital firm that had been trying to buy into CrossFit since spring 2011. And it appears that Lauren began negotiations with Anthos as early as August 2011 when she demanded the right to inspect and copy a number of key CrossFit financial documents.
Lauren’s Sale to Anthos is Conditional Upon the Occurrence of One of Two Things
In June 2012, Anthos announced that it purchased Lauren Glassman’s shares for $20 million cash, but given the above injunction, the agreement was conditioned on, either, Greg Glassman consenting to the sale, or Judge Jones lifting the automatic injunction by December 31, 2012. Greg Glassman surely didn’t consent. So on July 26th, Lauren Glassman filed a motion requesting that the court (Judge Kenton Jones) lift the injunction and allow the sale to proceed. In August, Greg Glassman responded, and submitted proposals from two private equity firms that would enable Greg and/or CrossFit to buy Lauren’s shares with a lump sum payment. Oral argument on the sale issue was scheduled and held on September 5th, but on August 31st CrossFit the company, moved to intervene in the divorce proceedings.
At the September 5th hearing, argument on the sale was presented to Judge Jones, but apparently he ordered a briefing schedule and oral argument on the intervention date. As far as I can tell, the oral argument has not occurred, and the matter not yet decided. And I suspect that Judge Jones will decide the intervention issue before the sale issue.
Reasons Why Judge Kenton Jones Should Deny Lauren Glassman’s Motion
There are two reasons the motion should be denied. The first is that CrossFit and Anthos have substantial philosophical differences and the second is the relationship between the parties is toxic and irreparable. This combination makes corporate deadlock inevitable and sets the company on the path to corporate dissolution.
The philosophical differences existed from the get-go when Anthos expressed interest in acquiring equity in CrossFit during spring 2011. Apparently, Anthos voiced its opinion to key CrossFit people that CrossFit’s current business model and strategic partnerships were less than desirable and there were many untapped revenue sources. While most of the evidence I’ve seen supporting these differences has been from self-serving affidavits, Lauren Glassman admits these differences exist in her motion. But she minimizes the consequences by arguing Anthos will lack the power to change existing corporate policy. But this ignores reality. CrossFit, similar to any business, operates in a dynamic environment. CrossFit today is much different than CrossFit two years ago, which is way different from CrossFit four years ago. Businesses don’t operate in a static environment. And Anthos surely won’t act passively concerning future corporate policy when it has equal power to Greg Glassman and dropped a cool $20 million for that power.
The second reason is that existing CrossFit and Anthos can’t, and won’t, get along. What started off as CrossFit ignoring Anthos’ overtures turned downright nasty once it was discovered that Anthos was trying to enter through the back-door. The relationship is so toxic that Anthos’ lawyer sent a letter to CrossFit threatening defamation. The sum of two ownership groups with equal power but disparate philosophical differences, big egos and a damaged relationship before it started is the perfect storm for corporate deadlock. This reason would carry much less weight if CrossFit was publically traded and a global behemoth. And Lauren Glassman doesn’t even address this issue, although I didn’t have the benefit of reading her reply brief or her response to CrossFit’s motion.
Family law judges are often asked to resolve very tough issues and often have the unenviable task of deciding what’s in a child’s best interest. While fundamental differences exist between a child and a business, I nevertheless suspect Judge Jones will go through a similar analysis when looking at the situation from what’s in the best interest of CrossFit – the business. What makes sense to me is Judge Jones exercising discretion to give Greg Glassman a de facto right of first refusal. Because Lauren Glassman’s stock/interest arises from community property laws rather than contract, there is no contractual “right of first refusal.” This result protects CrossFit’s best interest while achieving the stated objectives of the spouses. Greg Glassman will retain control and not be forced to co-own a business with a group he is vehemently opposed to doing business with and Lauren Glassman will receive a lump sum payment for her shares without the risk of an installment payment being defaulted down the road. I’m not close enough to the situation to even suspect whether Lauren Glassman harbors ulterior motives in preferring the sale to Anthos, but even if she did, what she desires is irrelevant. If the stock is disposed of in this manner, the inevitable corporate deadlock, eventual dissolution and a flurry of spin-off litigation will be avoided.
What decision do you think is in the best interest of CrossFit – the company?