CrossFit TRO Anthos Sale

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Documents pertaining to the TRO filed by CrossFit against Lauren Glassman pertaining to the Anthos sale.

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<p>EFiled:Aug31201212:35PMEDT TransactionID46205653 CaseNo.7717VCG INTHECOURTOFCHANCERYOFTHESTATEOFDELAWARE ) ) ) ) ) ) ) ) ) ) ) )</p> <p> LAURENGLASSMAN, Plaintiff/Counterclaim Defendant, v. CROSSFIT,INC.and GREGGLASSMAN, Defendants/Counterclaim Plaintiffs. </p> <p>C.A.No.7717VCG</p> <p>MOTIONFORATEMPORARYRESTRAININGORDER Defendants/CounterclaimPlaintiffs CrossFit, Inc. ("CrossFit" or the "Company") and GregGlassman("Mr.Glassman"and,withCrossFit,"CounterclaimPlaintiffs"),byandthrough their undersigned counsel, hereby move the Court for an Order temporarily restraining and enjoining Plaintiff/CounterclaimDefendant Lauren Glassman ("Ms. Glassman" or</p> <p>"CounterclaimDefendant") and her affiliates, employees, agents and any person acting on her behalf from consummating any sale of equity in CrossFit to thirdparty Anthos Capital ("Anthos").Thegroundsforthismotionareasfollows: INTRODUCTION 1. In June of this year, Ms. Glassman, a director and coowner of CrossFit,</p> <p>announced her intention to sell her equity interest in the Company an equity interest that is currentlyheldintrustaspartofongoingArizonadivorceproceedingsbetweentheGlassmans, and subject to an injunction issued by the Arizona court that prohibits either party from transferringtheirshare.Sheseparatelycommencedthislitigation,allegingthatMr.Glassman andCrossFithadbreachedtheirfiduciarydutiesinundertakingtheacquisitionofasmallaircraft forcorporateuse. RLF16871876v.1</p> <p>2.</p> <p>Since this suit commenced, CounterclaimPlaintiffs have learned from both</p> <p>Plaintiff'sowncounselandcounselforAnthosthatMs.Glassman'spurportedsalewasmade possible by Ms. Glassman's secret disclosure of confidential Company documents: providing them to Anthos as "due diligence" materials without the knowledge or permission of the Company,andwithnosafeguardstoprotecttheCompanyfromAnthos'furthermisuseofthose materials. 3. It is wellsettled that a fiduciary may not share confidential company materials</p> <p>withthirdpartiesforherownenrichment.YetthatisexactlywhatMs.Glassmanhasdone. 4. Thesale,ifconsummated,wouldcauseseriousharmbothtoCrossFitandtoMr.</p> <p>Glassman. Asaninitialmatter,Anthoswouldhaveacquired50%ownershipoftheCompany withthebenefitofunauthorizedaccesstoconfidentialcompanyinformationasignificantharm in itself. Beyond that, Anthos has stated that it intends to make significant changes to the Company's(highlysuccessful)businessmodelchangesthatbothCrossFitandMr.Glassman believewouldbehighlydetrimental.ThesalecouldalsoresultinCrossFitlosingitsstatusasa subchapterScorporation,whichwouldhavesignificanttaxramificationsaswellasimposenew administrativeburdensuponthecompany. 5. Nonetheless,Ms.GlassmanhasproceededtopetitionthedivorcecourtinArizona</p> <p>toliftitsinjunctiontopermithertoconsummatehersaletoAnthosandprematurelydividethe estate.AhearingonMs.Glassman'smotionisscheduledforSeptember5,2012.Counterclaim PlaintiffshaveeveryexpectationthattheArizonacourtwillnotpermitthesaletogoforward.In theeventthatitdoes,however,Ms.Glassmanhasindicatedthatsheintendstoconsummatethe transaction immediately. CounterclaimPlaintiffs requested that Ms. Glassman agree to delay any closing until this Court had the opportunity to adjudicate the counterclaims. She refused.</p> <p>RLF16871876v.1</p> <p>2</p> <p>Accordingly, CounterclaimPlaintiffs are forced to bring this motion, requesting a temporary restrainingordertohaltthesale,protectCrossFit'sconfidentialmaterialsandenforceitsrightsto loyaltyandcarefromitsdirectorsintheeventthattheArizonacourtpermitsthesaletoproceed. FACTUALBACKGROUND1 6. CrossFit is a Delaware corporation that develops fitness programs for use at</p> <p>affiliated gyms. CrossFit offers a unique fitness and strength program, publishes a fitness journal, and provides seminars, training, and consultation services regarding its product throughouttheworld.(Counterclaims15.) 7. CrossFit also partners with other companies in the athletics and fitness market,</p> <p>includingapartnershipwithReebokInternational,topromoteitsbrandthroughvariousfitness relatedeventsandcompetitions,suchastheannualCrossFitGames,whichappearsonESPN's networkpursuanttoacontractbetweenthetwocompanies.(Counterclaims16.) 8. CrossFit has grown exponentially over the past decade and now has over 4400</p> <p>affiliatesworldwide.ThatgrowthisaresultofboththebenefitsoftheCrossFitsystemandalso CrossFit's unique culture, which offers an alternative to conventional gym membership or individualworkoutregimens.(Counterclaims17.) 9. Mr. and Ms. Glassman jointly own 100 percent of the shares of CrossFit as</p> <p>communityproperty.(Counterclaims18.) 10. Mr. and Ms. Glassman commenced divorce proceedings on March 25, 2010.</p> <p>(Counterclaims22.) 11. APreliminaryInjunctionenteredaspartofthedivorceproceedingshasenjoined</p> <p>the "transferring, encumbering, concealing, selling, or otherwise disposing of" the Glassmans' 1</p> <p> ThebackgroundtothismotionissetforthmorefullyintheVerifiedCounterclaimsfiledon August8,2012.</p> <p>RLF16871876v.1</p> <p>3</p> <p>community property including their sole ownership of CrossFit without written consent of the parties or the permission of the court. See Ex. 1 (Preliminary Injunction), at 2. That PreliminaryInjunctionisstillinforce.Asaresult,neitheroftheGlassmanscansellanyportion oftheCrossFitshareswithouttheother'sconsentoracourtorder.(Counterclaims28.) 12. However,Ms.Glassmannowseekstoliftthisinjunctionanddisposeofherentire</p> <p>stake to Anthos, a Californiabased private investment firm interested in making an equity investmentinCrossFit.(Counterclaims30.) AnthosSeekstoAcquireEquityinCrossFit 13. CrossFit'sdealingswithAnthosgobacktoAugust2010,whenAnthossoughtan</p> <p>introductiontoCrossFitmanagement.Anthosspokewithlowerandmidlevelmanagement,but discussionsdidnotproceedbeyondthatlevelatthattime.(Counterclaims30.) 14. Anthos renewed its interest with vigor in April 2011, making contact with Mr.</p> <p>Glassman and other senior CrossFit management. Over the next several months, Anthos employees particularly Bryan Kelly ("Kelly"), a managing partner, and Chris Jacobson ("Jacobson") an associate met with Mr. Glassman and other members of CrossFit's managementtodiscussboththeCompany'soperationsandAnthos'viewofhowtheCompany shouldbemanagedanditsrevenuemaximized.(Counterclaims31.) 15. Anthos' aim in acquiring equity in CrossFit was not merely to act as a passive</p> <p>investor.Rather,AnthosexpressedadesiretochangeCrossFit'scoreapproachtoitsbusiness. Rather than encouraging affiliates to focus on a simple, backtobasics approach to fitness, Anthosexpressedaninterestinturningthe4000plusCrossFitaffiliatedgymsintopointsofsale fortshirts,nutritionsupplements,exercisevideos,andthelike.Likewise,Anthoscontinuously voiced its intention to "help" CrossFit "get out" of its agreements with certain commercial</p> <p>RLF16871876v.1</p> <p>4</p> <p>partners,andrepeatedlyrequestedconfidentialinformationfromtheCompanyinordertodoso. Not coincidentally, Anthos has relationships with competitors of one or more of CrossFit's currentcommercialpartners.(Counterclaims34.) 16. CrossFit management viewed Anthos' proposed changes to the Company's</p> <p>businessmodelasentirelyantitheticaltotheCompany'sphilosophyandbrandidentity.CrossFit management believes that, if implemented, the Anthos approach would alienate CrossFit's clienteleandaffiliates,andseverelydevaluetheCompany.Accordingly,CrossFitmanagement rejectedAnthos'offers.(Counterclaims35.) 17. BrianMulvaney,aCrossFitrepresentative,furtherexplainedinanemailtoKelly</p> <p>that"CrossFit,Inc.isselffundingforalloftheinitiativeswecareabout.Addingotherpeople's moneytotheequationrepresentsmorethreatthanopportunity."(Counterclaims35.) Ms.Glassman'sTransactionWithAnthos 18. During the Spring of 2012, Mr. Glassman had extensive discussions with Ms.</p> <p>Glassmanaboutasaleofher50%interestintheCompany.Mr.Glassmanmadeaninitialoffer tobepaidoutoverfiveyears,inorderfortheCompanytoreacquirehershares.Ms.Glassman counteredwithanoffersheetthathaddifferentoptionsandbuyouts,theshortestonebeingover fifteen years,whichactuallyresultedinalower netpresent valuethanwhattheCompany had proposed.TheCompanynonethelessproposedatiereddealatahigherpriceoverthesamefive year period. Itappearedthatthepartieshadreached anagreement inprincipleonprice terms andthediscussionshadreducedtotermsregardinglifeinsurancebeneficiariesandothersmaller issues thus ensuring that the Company could maintain its existing, and highly successful, businessmodelandculturefreefromoutsideinterference.(Counterclaims67.)</p> <p>RLF16871876v.1</p> <p>5</p> <p>19.</p> <p>The parties went forward with this plan and were down to the minutiae of the</p> <p>divorce settlement when Ms. Glassman's attorneys announced that the offers were withdrawn and the deal was rejected. In fact, unbeknowst to CounterclaimPlaintiffs, Ms. Glassman was negotiatingwithAnthosaboutsellingherinterestintheCompanytoAnthos.(Counterclaims 68.) At no point did she give either Mr. Glassman her husband or the Company an opportunitytomatchorcountertheAnthosproposal. 20. Additionalfactsrelatedtothisagreementhavenowcometolight.Itappearsthat,</p> <p>on June 13,2012,Ms.Glassmanenteredintoasocalled NonDisclosureAgreement("NDA") with Anthos sothat shecould share"proprietary and confidential information" with Anthos to furtherapotentialsaletoAnthosofherinterestintheCompany.SeeEx.2(NDA) 21. Anthos has admitted that it received "due diligence" materials from Ms.</p> <p>Glassman.Ex.3(LetterfromA.DunningdatedAugust6,2012). 22. Following this admission, Ms. Glassman provided CounterclaimPlaintiffs with</p> <p>copiesofthematerialsthatshegavetoAnthos.Ex.4(CoverletterfromG.Park).These"due diligence" materials included extensive confidential information, including: CrossFit payroll information (including salary information for individual employees), confidential CrossFit contracts(including those related to sponsorship arrangements and key marketing efforts), internalboarddocuments,andnonpublicfinancialstatements. 23. Ms.GlassmanenteredintotheNDAandprovidedthe"duediligence"materialsto</p> <p>Anthoswithoutanypriornoticeto,orpermissionfrom,theCompanyortheBoardofDirectors. CrossFit was neither a party to the NDA nor was it identified as a thirdparty beneficiary. (Counterclaims71.)Accordingly,CrossFitwasgrantednoabilityundertheNDAtoenforcea remedy for a breach of its terms should Anthos misuse the confidential Company information</p> <p>RLF16871876v.1</p> <p>6</p> <p>providedtoitbyMs.Glassman. SeeEx.2.Ms.GlassmanandAnthosclearlyunderstoodthe consequences of a breach of the NDA noting that it would "cause irreparable harm" and granting her the right to enjoin a breach or threatened breach but no such safeguards were providedtotheCompany.Id. 24. The NDA is less than two pages long and contains woefully inadequate</p> <p>protections. If the Company had been advised of the NDA or of Ms. Glassman's desire to disclose "proprietary and confidential information" to Anthos, it would have objected. (Counterclaims72.) 25. Ms. Glassman knew that the Company would object to her disclosure of</p> <p>"proprietary and confidential information" to a third party. She intentionally concealed these activitiesfromtheCompanyandtheBoardofDirectors.Indoingso,shebreachedherdutiesto theCompanyandputherpersonalfinancialinterestsbeforetheinterestsoftheCompanyandits shareholders.(Counterclaims73.) 26. OnJune20,2012,shortlyafterMs.GlassmanenteredintotheNDAwithAnthos</p> <p>andwithoutpriorwarningtotheCompany(astheCompanyhadnoknowledgeoftheNDAor Ms. Glassman's negotiations with Anthos), Kelly informed Mr. Glassman that Anthos had "enteredintoadefinitiveagreementtopurchase[CounterclaimDefendant's]50%interestshare." Ms.Glassmanhassubsequentlyproduceda"PurchaseandSaleAgreement"whichpurportstobe afinalsalecontract.(Counterclaims74.) 27. This Agreement is contingent on, among other things, the "separation" of Ms.</p> <p>Glassman'sinterestinCrossFitfromthatofherhusband,eitherbyhisconsentorbycourtorder. Ex.5(PurchaseandSaleAgreement)5.1,6.1.Thesaleisalsopredicatedonthecondition that there be no "action, suit, claim [etc.] pending or threatened against Seller or Purchaser</p> <p>RLF16871876v.1</p> <p>7</p> <p>which, if adversely determined, would be reasonably likely to question the validity of the transactioncontemplatedbythisAgreement."Id.5.5.Anthos,however,maywaivethislatter condition.Id.5. 28. On July 26,2012, Plaintiff filed a motion in the divorce proceedings in Arizona</p> <p>SuperiorCourttoliftthepreliminaryinjunctioninordertopermitherproposedsaletoAnthosto goforward.AhearingonthatmotionispresentlyscheduledforSeptember5,2012. 29. The announcement of this sale has caused considerable dissatisfaction among</p> <p>CrossFit'saffiliatebasethethousandsofgymsacrosstheworldthatlicensetheCrossFitbrand andapproach.AffiliateshavecontactedCrossFittovoicetheirconcernthatAnthos'acquisition would diminish their autonomy and harm the brand. Affidavit of Dale Saran, 11. CrossFit management anticipates a significant risk of affiliates leaving CrossFit if the transaction is completed.Seeid. 30. A further concern raised by the potential acquisition is the risk that the sale to</p> <p>AnthoswouldrequiretheCompanytoconvertfromanSCorporation(permittingsingletaxation of proceeds) to a CCorporation, imposing doubletaxation (once as corporate earnings and a secondtimetoshareholders)andothernegativetaxconsequencestoitsshareholders,including Mr.Glassman.AffidavitofKenSmith7(1). 31. CounterclaimPlaintiffs further contend that Ms. Glassman's subsequent conduct</p> <p>in opposing the acquisition of the aircraft a purchase that she discussed with CrossFit managementasearlyasMarch,2012hasbeenpurelytacticalandinfurtheranceofherbreach ofduty.Thatis,heroppositiontotheaircraftpurchase,andthisentirelitigation,ismotivated not by any reasonable concern about the Company's fiscal health, but by a desire to create</p> <p>RLF16871876v.1</p> <p>8</p> <p>gridlock intheCompany'soperationsto forcemanagementto agreetothesaleofherinterest. (Counterclaims7583.) 32. PlaintiffwasfullyawareoftheCompany'spendingacquisitionoftheairplanefor</p> <p>months and raised no objection. Plaintiff had access to the Company's financial statements disclosing that purchase in her capacity as a director. Plaintiff also received those documents pursuant to her requests as a shareholder. Ms. Glassman emailed Ken Smith of CrossFit, inquiringaboutthepurchaseandaskingfollowupquestionsinMarch,2012. 33. However,itwasnotuntiloverthreemonthslaterafterreachingheragreement</p> <p>with Anthos, by which she would sell her entire equity position in the Company, that she commencedthisactionandsoughttohaltthepurchaseoftheaircraft. 34. At no point during this threemonth period did Ms. Glassman seek to halt the</p> <p>purchaseorconveneaboardmeetingtoaddressthetransaction. 35. This delay, followed by Ms. Glassman's immediateresort to litigation, is strong</p> <p>evidence that CounterclaimDefendant was motivated not by her fiduciary duties to, or the financialwellbeingof,theCompany,butratherbyadesiretopressureCounterclaimPlaintiffs to acquiesce in her sale to Anthos rather than face constant inqui...</p>