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10June - October 2012

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THIRD PARTY OWNERSHIP

Should Third Party Ownership be prohibited or should it be permitted under certain conditions?How to guarantee the game’s integrity and financial transparency?What are the real risks? What are the real benefits?What’s the situation in Europe? And South America?

12 OPINION ARTICLES

Richard Andrews; Jane Purdon; Victoriano Melero & Romain Soiron; Juan de Dios Crespo Pérez & Adam Whyte; Ariel Reck; Daniel Geey; Paulo Gonçalves; Fernando Veiga Gomes; Luca Ferrari; Mikhail Prokopets; Eduardo Carlezzo; Carol Couse.

And much more….

THE EPFL IN ACTION

Latest Legislation, Sports Regulations and Jurisprudence.

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06 OPINION ARTICLES

Some thoughts on Third Party

Ownership

I am delighted to accept the invitation of EPFL to give my view on Third Party Ownership (TPO) of football players. I will not do it in my capacity as legal advisor to the Italian Serie B, an entity, which is associated in the EPFL. In fact, this contribution is my independent -and negligible- view on this topic. My freedom of expression exercise will consider both the business drivers of the phenomenon as well as practical legal aspects concerning it.

Ownership

What we are talking about is third party “ownership”. Not of players, of course, but rather of rights and interest in potential revenues generated from increase of their “market” value as expressed and obtained on the “transfer market” (because yes,

despite “Bosman” there is still a transfer market and players’ value is still determined by the classic law of supply and demand). For many years, this line of business has been a common and legitimate practice in South America, where investors’ economic interests in players are duly registered in clubs’ accounts. As far as I am aware, TPO is a term used by the Premier League, Football League and Football Association’s rules prohibiting third parties from owning an economic interest in a football Player. A similar prohibition exists under French Football League’s regulations. I am not aware of any other national association banning TPO.

A good description is given by Ariel N. Reck and Daniel Geey: third party ownership relates to the sale to a third party (i.e. a private investor, another club or a company) of a future transfer value. The entity buying the share (or the previous club keeping it for a subsequent transfer) believes the player has the potential to be transferred for a higher fee than it paid for the transfer share. For the club employing the player, the sale of portions of the economic rights helps it to balance its books and find credit from alternative sources. While risks are high (i.e. the player might not fulfil his potential or get injured), so are the potential gains79.

Ownership vs Use

Before analyzing the prohibition, I believe it important to go back to basics, by considering the economic and business reasons, which make “third-party ownership” attractive to football clubs.

Why is a club interested in letting an investor put money on a player?

To put it simply, a club does not need to “own” a football player and even less to spend money on acquiring him. As a commercial concern, a football club must allocate its capital as effectively as possible. Typically, club’s finances should be used as working capital or invested to generate new business. Accordingly, a club will try hard to avoid locking up capital in assets. Whenever financially prudent, any company would much prefer to lease (i.e. use) assets rather than own them. A player is an asset of a football club. True, he is a very special asset: he can develop his skills and, by increasing or decreasing his effectiveness on the pitch, may increase or decrease his value.

The peculiarity of players being an asset of a club can be explained through the following empirical facts: (i) it is uncertain whether a player will improve, decrease or maintain his ability/value over time; (ii) some clubs will be interested in the possibility to benefit from an increase in their players’ value and realise such added value on the transfer market; others -fewer- will be willing to enjoy the full sporting benefit of the player’s increased ability despite the opportunity to obtain a premium return on the transfer market; however, most of the times for most of the clubs, it will be a case by case decision subject of course to the player’s consent; (iii)

80. Ariel Reck and Daniel Geey, UEFA’s FFPR & ‘third party’ rules: an English handicap, in World Sports Law Report, Vol. 9, issue 12, Dec. 2011.

Luca Ferrari,

Partner, CBA Studio Legale e Tributario

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a club’s management of a player’s employment contract is key to maximizing revenues on selling him, as the two critical factors will be the level of compensation and the expiry date of his employment contract.

Most clubs have very limited financial resources and simply cannot afford to buy players to complete the squad, at least not all the players that they may need and not all their first choice players. Furthermore, limited financial resources must be used to manage the club, including paying players and rewarding success on the pitch. That a costly player will increase in value during his employment at the club, and that such increase will be fully realised on the transfer market is all but certain. Investing money in the youth academy, in victory bonuses or for the improvement of the stadium’s hospitality facilities may well be better ways to use limited financial reserves.

Finally any cost incurred in acquiring a player will qualify such player as a capital asset of the club. Even conceding the chance of a capital gain on few of its players, the club will have to sustain high depreciation ratios over the duration of the contract.

In light of the above, it is not surprising that many clubs are very interested by investors’ availability to contribute entirely or in part to the cost of acquiring a player. Buying out such a “third party”, at market value, may be simply beyond the club’s possibilities. But most of the time a club will be genuinely interested in sharing, if not entirely avoiding, the financial risk and burden.

Furthermore, clubs are or should be preparing to comply with the UEFA Financial Fair Play regulations, which by their very nature and purpose incentivize clubs to take advantage of financial solutions made available by unrelated/third parties80.

Therefore, if one considers best practice in corporate management, capital allocation requirements, scarcity of financial resources and even UEFA’s Financial Fair Play agenda, TPO is a very good thing. Obviously this is not the point of view of English and French football regulators.

Third Party Ownership vs Third Party Influence

Surely readers of this contribution know about the Tevez saga, which took place in England in 2007. I am sure other contributors on the TPO theme in this edition of the EPFL Sports Law Bulletin will provide more details on this story. This case must have created such a “mess” that the English football regulators have decided to rule out the possibility that a third party can own an economic interest in a player registered in England. Here again, details of the Premier League (PL), Football League (FL) and FA regulations prohibiting TPO will undoubtedly be offered elsewhere in this issue. Suffice it to say here that after having originally only outlawed third parties’ influence over the club’s transfer and player employment decisions, English football’s governing bodies have subsequently taken the most radical approach to the problem. Under current rules, nobody can hold an economic interest in a football player (his contract, his transfer) registered in England and any investor holding any such an interest in accordance with foreign rules must be bought-out on the player’s transfer to a PL or FL club. I am not sure if the player, who in fact is not a “third party”, may own an economic interest in himself (his contract, his transfer).

By contrast, art. 18bis of FIFA Regulations on the Status and Transfer of Football Players still only prohibits third parties’ influence (TPI): no club shall enter a contract which enables any other party to that contract or any third party to acquire the ability to influence in employment and transfer-related matters its independence, its policies or the performance of its teams.

Whereas FA, PL and FL rules only affect English clubs (as much as the French equivalent ban affects French clubs), Art. 18bis is binding at national level (art. 1.3.a) and so applies globally.

As a result, TPO is banned in England and France but is permitted elsewhere, provided of course that it does not result in a TPI.

81. As this article is being finalised, the media are reporting about UEFA’s move against TPO. Apparently on PL and French Football League’s request, UEFA is considering outlawing TPO. According to SportBusiness.com release of July 26, ‘after UEFA stated in May that it is continuing to investigate initiating a ban preventing players who are subject to third party ownership from competing in its competitions, it has closed a potential loophole by stating teams cannot use money gained from selling stakes in players to balance their books for FFP purposes’. On the face of this latest UEFA decision, a club may balance books by using money received from another club, but not funds received from an investor purchasing, at its own risk, a stake in future transfer fees. The rationale behind this move is not entirely clear, except it being a concession to English and French lobbying trying to export their ban on TPO in order to protect their clubs from being at a competitive disadvantage when it comes to FFP compliance. However, until UEFA introduces TPO prohibition, it is still useful for a club to save money by not buying out existing owners of economic interest in the relevant player as well as negotiating a lower transfer fee with the selling club keeping a sell-on participation.

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06 OPINION ARTICLES

Considering the benefits of third parties’ investment as outlined in the prior section and balancing them with the risk of external influence on a club’s employment and transfer strategy, FIFA is holding on to its more flexible approach.

Everyone should be concerned about the risk of external influence over clubs and quite sensitive to the need to preserve their autonomy. Preserving clubs from any pressure or interference in utilizing and trading players is indeed in the interests of football’s integrity. Obviously, the English and French regulators don’t believe such influence can be avoided by any measure that falls short of an outright ban on TPO, including a sell-on fee granted to the player’s former (i.e. transferring) club.

However, considering the advantages deriving from the availability of funds to be invested in football talent and the possibility to reconcile investors’ interests with TPI prohibition, I am of the opinion that FIFA’s art. 18bis is proportionate and effective in preventing abuse while still granting clubs the advantage of reducing their financial burden and capital lock-up.

Protection of Third Party’s Investment and Compliance with Art. 18bis

Obviously, nobody would invest in a football player if the underlying interest is not secured. Whether it is a club, a bank or a fund, some degree of protection is required.

If you own a 50% interest in any transfer fee generated by the trading of a player, you need some control or protection as regards two important matters: (i) that the player is transferred at the peak or near peak of his value during his stay at the club; and (ii) that any money paid in consideration of his transfer is entirely reflected in the relevant transaction.

At the same time, football regulators must ensure that clubs will not assume any obligations, which may limit their independence and freedom as regards precisely those aspects: if and when to trade the player and on what terms and conditions.

These conflicting concerns may seem irreconcilable, hence the “English solution” of an outright ban. However, this apparent conflict may be overcome by careful contract drafting, which could allow investors and clubs to come to an acceptable compromise, whereby the autonomy of the club is preserved while a good standard of protection is granted to the economic interest of the third party investor.

Going to the extreme, an absolute prohibition on the sale of a player absent the investor’s consent is obviously not acceptable; likewise the club must not come under an obligation to transfer the player at the request of the investor.

In principle, an economic interest not exceeding 50% of the sell-on fee would leave sufficient economic interest for the club to maximize its return if and when it considers it appropriate to transfer the player. But independently of the size of investors’ participation, good contract engineering can do ‘miracles’.

Importantly, an economic interest should be the expression of capital invested at risk, not a loan: there should be no remuneration as such on invested money, as return on the investment should be contingent on the increase of a player’s value. Allowing for interest to be paid on invested money should be a fall-back position that applies if the club decides not to maximize a player’s value on the transfer market, but instead continues to benefit from his valuable performances on the pitch.

Finally, an overriding requirement which increases both the investor’s risk and the club’s independence is the need for the player’s consent to be transferred. The fact that players are not mere commodities but have freewill ensures a force majeure safe harbour for the club against any investor’s claims for failure to sell: if a Chinese club makes the best offer but the player wants to play in Europe, there can be no adverse effect on the club, unless the latter, quite unreasonably, has given a warranty in this respect.

Contract Engineering

The key challenges of the contractual relationship between investor and club are as follows:

• what if the player is never transferred;

• what if the player does not renew the contract, thereby becoming a free agent on expiry thereof;

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• what if the club, instead of selling the player, keeps him until his career is declining;

• what if the club wants to sell the player too cheap;

• what if the club does not want to sell in spite of a superb offer;

• what if the club transfers the player for money+another player or just “player for player”;

• what if the club diverts part of the transfer fee on the sale of another player, which the investor has no interest in?

These and few more potential issues should be dealt with contractually. Furthermore, contracts in the world of football ought to be kept as simple as possible. And, last but not least, Art. 18bis of FIFA regulations prohibits TPI.

So, considering that:

a) the club must keep its independence in deciding about employment and transfer-related matters; and

b) a fair return on investment must be secured;

the contract should include provisions addressing critical situations without constituting any limitation on the club’s range of action. As an example of how to resolve just one of the critical issues, the parties could agree that if club intends to transfer the player, it shall notify the transfer conditions to investor; investor could, in turn, notify the club of a higher offer (subject to player’s acceptance of alternative destination) and if club refuses such higher offer, the investor’s return will nevertheless be calculated thereon. One could object by saying that the refusal of the higher offer by the selling club is unreasonable. However, such ‘unreasonable’ conduct could either conceal a ploy aimed at putting part of the transfer fee on another transaction between the selling club and the lower offeror, or possibly a genuine -even if costly- wish not to strengthen a rival club. In the first case, the pre-emption mechanism based on the alternative (higher) offer should work either as a deterrent or as a remedy. In the second case, should the club whish to maintain the freedom not to benefit a direct competitor, the funder’s protection mechanism could be limited by identifying in advance the category or identity of clubs which would not be acceptable as potential transferees, regardless of the price offered. In order to guarantee maximum freedom of decision, should the club receive an offer (and player’s consent to transfer) but decide not to transfer the player, the contract could simply grant the investor a “put option” for the immediate or progressive reimbursement of his investment plus a given rate of interest, which in fact would transform the investment into a simple loan.

Any provisions addressing material issues concerning the relationship between the club and the third party must be balanced and reasonable to meet the strict standard of art. 18bis of the FIFA regulations. Most importantly, until regulations are changed, football agents should not own, directly or indirectly, any economic interest in football players, although this prohibition appears to be regularly circumvented, especially in South America.

Conclusion

While protection of a club’s independence is vital to the integrity of football competitions such that FIFA should ensure the strictest compliance with the TPI prohibition, funding players’ acquisition should be accepted as a viable solution for clubs to cope with financial difficulties and UEFA FFP restrictions. One should be wary and avoid the risk of investors in football talent being demonized much in the way in which, in the past, the Catholic Church saw the devil’s claw in capitalism.