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Co-founders’ financial demands threaten to derail Spartan’s Tough Mudder takeover

The co-founders of Tough Mudder, Will Dean and Guy Livingstone, have been accused of a playing a ‘game of brinkmanship’ with the company’s largest lender Active Networks, which threatens to push the firm into bankruptcy and derail its sale to rival mass-participation business Spartan.

Dean and Livingstone have been accused of ignoring the best interests of creditors in demanding what SportBusiness understands is a combined $44m (€39.6m) from Active Networks to sanction the sale of the indebted company – some distance from the sum allocated to them in Spartan’s offer. They had asked for $40m but the figure increased to $44m when Active missed a deadline to meet their demands.

Sources say Spartan made a ‘seven-figure’ offer for Tough Mudder in November last year and agreed to acquire the trade debt across all Tough Mudder entities. The offer is thought to have included provisions to pay Dean and Livingstone around $1.5m.

On 7 January it emerged that the obstacle racing event organiser is the subject of Chapter 11 Bankruptcy proceedings in the US after three companies – Valley Builders, Trademarc Associates and David Watkins Homes – filed a petition in the United States Bankruptcy Court of Delaware claiming they are due a total of $854,558.40.

As part of the deal, Spartan offered to write off these liabilities as well as Tough Mudder’s debts to its largest lender, event registration software company Active Networks, believed to be worth over $18m.

Having failed to agree a deal, Spartan has now filed a statement in support of the three creditors in Delaware and their calls for an emergency motion to appoint a Chapter 11 trustee.

Chapter 11 is a form of bankruptcy that involves a reorganisation of a debtor’s business affairs and would not signify Tough Mudder’s demise. A court-appointed trustee would take control of the business and do what they felt was best for the creditors, customers and employees with no thought to what benefits its shareholders. Such a trustee would be likely to look favourably on Spartan’s offer to buy Tough Mudder because it would ensure the company would continue to be viable and various creditors would get paid.

In the statement submitted to the bankruptcy court on 9 January, Spartan outlined its frustrations that the inter-company standoff has thwarted its attempts to negotiate a takeover through conventional means, and argued the dispute has damaged the value of the Tough Mudder business. But it also signalled its continued interest in ‘certain Tough Mudder assets’ and its willingness to ‘consummate a transaction through a bankruptcy court proceeding’.

“While Spartan was aware that various intercompany disputes existed between Tough Mudder’s co-founders and its lender, Spartan was hopeful the parties could sufficiently resolve their intercompany disputes to enable Tough Mudder to consummate its proposed transaction,” the statement said.

“Upon information and belief, the co-founders and Active did not participate in mediation or otherwise agree on a Binding Intercompany Settlement. It appears to Spartan that the intercompany disputes have now rendered Tough Mudder incapable of continuing operations. Tough Mudder has essentially gone dark and ceased its regular day to day operations.”

Active Networks, which is owned by card payment processing firm Global Payments, is thought to have extended over $18m in credit to the obstacle racing company through an unusual ‘active exchange’ agreement, under which it pre-purchased tickets for future Tough Mudder events. Active is understood to have encouraged majority shareholder Dean to resign from the company’s board of directors and as chief executive in December 2018 and appoint independent board members, including a restructuring specialist as a condition for continuing to lend to the firm. The company’s new board began exploring options to sell Tough Mudder to a buyer after concluding that it was unlikely to be able to repay the debt.

The restructuring was the subject of a lawsuit in February 2019 in which co-founder Livingstone alleged that Active had violated contract requirements and favoured Dean in the negotiations, causing him to sustain $4.3m in losses.

Following the restructuring, Dean’s replacement as president and chief executive Kyle McLaughlin began negotiations with Spartan for it to acquire all of the Tough Mudder business in the US as well as its businesses in the UK, Germany and Canada through a series of transactions.

As reported by SportBusiness, Spartan entered into an option agreement to acquire the UK, German and Canadian affiliates on 23 December last year, but Spartan alleges that Dean stepped in to block the transaction by appointing himself director of the UK affiliate in January. The Companies House listing for Tough Mudder in the UK reveals Dean’s appointment as director on 28 December 2019.

“Since that time in late December 2019, the UK entity has not been in regular operations and has taken no actions with respect to the UK/Canada Option Agreement,” said the Spartan statement to the Delaware court. “The existing UK director does not appear to be acting in the best interests of the UK company’s creditors. There is a potential that the UK entity will soon be in a formal administration under English insolvency law.”

Shortly after Dean’s appointment as director of the UK affiliate, McLaughlin resigned as chief executive, issuing a statement in which he said his position had become untenable. “My hands had been tied, and I was left without the ability to effectively lead the company or influence a positive outcome of an ongoing negotiation between Tough Mudder’s shareholders and Active Networks,” he said.

One well-placed source accused Dean of playing ‘a game of brinkmanship’ and placing the company in a state of limbo in order to force Active to meet his and Livingstone’s financial demands.

SportBusiness understands Active Networks took Dean’s actions to be a breach of contract and immediately called in its debt to Tough Mudder and began to withhold ticketing revenues for Tough Mudder events. Tough Mudder management responded by switching off registration for these events.

Sources say staff have not turned up to work at the company since the beginning of the year and that it is not providing any customer service in what has traditionally been its busiest month for registrations.

Giles Chater, managing director for Tough Mudder, Europe, also resigned on 3 January, accusing Dean of a “callous contemptuous attitude” towards the company’s creditors, customers and employees in his resignation letter.

“We have a clear duty to prioritise the interests of our creditors and in failing to do so you have placed me in a morally and professionally compromising position – continued occupancy of which may expose me to personal liability I’m unwilling to risk,” he wrote.

McLaughlin and Chater have both let it be known they would both be interested in returning to work for the company if the sale to Spartan goes through. They say the underlying Tough Mudder events business continues to be profitable but that legacy debts, sustained after a series of strategic missteps between 2012 and 2018, have been holding the business back.

“It is very disappointing that self-interests have put Tough Mudder in jeopardy so unnecessarily,” McLaughlin told SportBusiness. “I’m still hopeful that the parties who have the power to influence a positive outcome can put their personal interests aside and do the right thing for the greater good of the hundreds of employees, thousands of customers and numerous small businesses that have made Tough Mudder a big part of their lives.

“I care deeply about the Tough Mudder community, and if there is an opportunity to get back to work after a deal has been reached, I’m ready to go.”