By Daniel Geey, Kieran Mercer, Dewi Hall Evans and Alex Harvey
In November last year, the Glazer family rather unexpectedly announced their plans to sell Manchester United, a club which they bought back in 2005 for just £790m. The twists and turns of the bidding war have since been widely reported in the press. With the Glazers holding out for their lofty £6bn asking price, and the two frontrunners (Sheikh Jassim Bin Hamad Al Thani and Sir Jim Ratcliffe) reportedly falling well short of that figure so far, it will be fascinating to see how it all plays out in the coming weeks and months.
In the background, the parties’ lawyers, accountants and financial advisors will no doubt be working overtime to ensure everything is in place for a smooth takeover if and when a bid is accepted. But what exactly will they be doing? In this piece, we give an insider’s guide to the process of buying a football club and take a closer look at the various practical, financial and regulatory considerations for prospective buyers.
1. THE PROCESS
The process of purchasing a football club is, at its core, no different to any other M&A transaction. A traditional bilateral sale between a buyer and seller will involve initial commercial discussions followed by a period of exclusivity for the buyer to conduct due diligence and negotiate acquisition documents with the seller. The process can typically take between three to nine months from start to finish, depending on the complexity of the transaction.
In contrast, an auction process (as recently seen with the sale of Chelsea and ongoing in respect of Manchester United) will see the seller controlling the sale process and preparing sale documents for negotiation with a number of bidders simultaneously. At each stage of the auction process, interested parties will submit their bids (including valuation, proposed changes to the transaction documents and any other key commercial terms) and uncompetitive bidders will be eliminated until a final, successful bidder is chosen. The competitive nature of an auction process means that a transaction can be completed with an expedited timetable, usually within three months once a preferred bidder is identified.
2. KEY CONSIDERATIONS FOR POTENTIAL BIDDERS
Owners’ and Directors’ Test
In England, any would be club buyer must satisfy the requirements of the Owners’ and Directors’ Test (OADT). It is the club which makes the application for approval on behalf of the prospective owner or director. The acquisition documents may be finalised before the application is made, with the transaction’s completion being conditional on the applicable league’s authorisation.
The intention of the OADT is to ensure that those dictating the direction of professional football protect the integrity, image and reputation of the game. Depending on whether the club plays in the Premier League (PL) or English Football League (EFL), the tests differ marginally. For EFL clubs, a declaration of compliance is required where an individual is to control more than 30% of the club’s voting rights. The threshold is now 25% for PL clubs following reforms which were announced on 30th March this year. The reforms also widened the scope of PL club officials subject to the OADT, with club chief executives now needing to pass the test too. If a potential buyer has a ‘Disqualifying Event’ on their CV, they will not be approved.
The Disqualifying Events for both PL and EFL clubs are:
- having the ability to determine or influence the management or administration of another league club or holding more than a 10% stake in such a club (which we come back to further, below);
- being disqualified from serving as a company director;
- having an unspent criminal conviction which carried a 12 month+ prison sentence, or any conviction for dishonesty;
- being a bankruptee or having been involved with a club at the time of an insolvency event;
- being named on the sex offenders’ register;
- being disqualified or suspended by a sports governing body or other professional body; and
- having breached the rules on betting in football.
Earlier this year, the PL expanded the Disqualifying Events by disqualifying those who are subject to government sanctions; have committed human rights abuses; or any offences involving violence, corruption, fraud, tax evasion or hate crimes. The PL has also updated its due diligence requirements for takeovers with an agreed published list of ‘Acquisition Materials’ being required from prospective buyers with the aim of improving transparency.
Further reforms are expected from the PL in June and wider regulation of owners and directors is likely if the government’s planned Independent Regulator for Football is constituted. However, the Manchester United takeover is not thought to have been affected by the recent PL announcement and it is likely that any sale will be concluded before the next round of reform is brought in.
With the two favourites for the Manchester United takeover – Qatar’s Sheikh Jassim Bin Hamad Al Thani and INEOS’ Sir Jim Ratcliffe – both having close ties to other European football clubs (PSG and OGC Nice respectively), another potentially thorny issue is in the spotlight once again; that of multi-club ownership.
This issue only arises where the prospective buyer has an interest in another football club, but with multi-club ownership groups on the rise in recent years (11 out of 20 EPL clubs operate as part of a multi-club ownership model), it is certainly a matter which requires early consideration from potential buyers.
Under domestic rules in England, the situation is clear-cut; you cannot own more than one football club competing in either the EPL or EFL (see the first ‘Disqualifying Event’ under the OADT). However, the situation becomes a little more nuanced when it comes to multi-club ownership across different jurisdictions. Under UEFA’s rules, two clubs with the same ownership are prevented from playing in the same UEFA competition, and this includes where one individual or entity has a “decisive influence” in the decision-making of another club. This became problematic for the ownership groups of Red Bull Salzburg and RB Leipzig when both teams qualified for the 2017/18 Champions League campaign.
Under growing pressure from influential stakeholders, it’ll be fascinating to see how UEFA’s rules are interpreted and applied in respect of Manchester United’s potential new owners.
3. DUE DILIGENCE FOCUS
Before any takeover, prospective buyers will want to carefully investigate the legal, financial and commercial position of the target business; a process known as ‘due diligence’. Below are some key areas of focus in a buyer’s legal due diligence exercise in the context of buying a football club.
Broadcasting, Commercial Rights & Transfer Fees
The majority of a PL club’s revenue is from competition prize money, broadcast income, commercial deals and matchday gate receipts.
The rules on distribution of prize money and broadcast income are generally well established. Nevertheless, a buyer will still need to assess in detail the revenue permutations of on-field performance, relative to the club’s prospective spending, in assessing the potential value of the transaction.
A buyer of a club with significant commercial and sponsorship income will also need to conduct due diligence into the underlying contracts to understand the term of the relevant agreements and any conditions attached to them. For example, short term arrangements or contingent payments linked to performance (which are inherently less certain) may impact a buyer’s valuation.
Similarly, prospective buyers will also want to understand the club’s position with regards to incoming and outgoing transfer fees. For example, does the club still owe significant instalment payments on a historic transfer?
The stadium and training facilities are key parts of a football club’s infrastructure. Verifying ownership of the land on which that infrastructure is built is, therefore, a critical aspect of a buyer’s due diligence. A buyer will need to consider:
- if a third party owns the land: the terms of the club’s use of that land (for example, the level of any rent payable by the club and any restrictions on the club’s ability to occupy or develop the land in the future) and, if desirable, the cost of bringing that land under the club’s ownership;
- any obstacles for redevelopment (whether for ground improvements to unlock further matchday revenue or naming rights or other plans to diversify income streams, such as building a hotel or other commercial buildings); and
- the ability to use the club’s ownership interest in the land and/or buildings as security to obtain debt financing (if required).
As part of the due diligence process, prospective buyers will also want to see detailed financial information evidencing the club’s compliance with applicable financial regulations. They will also usually insist on appropriate warranties (i.e. contractual promises) from the selling entity in the share purchase agreement to protect against any historic regulatory compliance issues.
An owner wanting to invest heavily in the transfer market will also be interested in the club’s future liabilities and the extent to which there is any leeway for further transfer spend. For example, a club which has recently invested heavily in player acquisitions might have little room for manoeuvre in the upcoming transfer windows, which may put-off a prospective owner hoping to spend lavishly in the near future.
4. DISPUTES AND LITIGATION
Disputes often arise when a club is subject to takeover negotiations. The upshot is that many prospective deals collapse. However, where a deal is concluded, litigation can follow where information exchanged between the buyer and seller in the run up to the sale has been incomplete, misleading or fraudulent.
Prior to purchase, the buyer will have relied on the guarantees and disclosures made by the seller and will have agreed the purchase price and other relevant terms of the deal on the basis of the information provided. Once in control of the club, the buyer may find that relevant information was obscured or misrepresented by the seller pre-sale. Where this is the case, the prudent buyer will have ensured that the sale documentation has sufficient protections in the form of indemnities, warranties and guarantees so that they may seek redress from the seller.
In certain instances, a buyer may insist on a proportion of the sale price being held in an escrow account so that if the club’s true nature has been distorted by the seller, the buyer may more easily recoup a proportion of the agreed purchase price.
Buying a football club is not a straightforward process and requires careful consideration of the various financial and regulatory constraints and requirements at every stage. The buyer’s due diligence process, looking at the club’s finances, commercial rights and property in particular, will be key, and it is then for the lawyers to paper the deal in the relevant documentation and ensure the parties have suitable legal protections in place should an issue arise later down the line. As the Manchester United bidding process nears its conclusion, it’ll be fascinating to see whether the transaction can complete without any major stumbling blocks.
Daniel, Kieran, Dewi and Alex are solicitors at Sheridans, a leading sports law firm based in London. They have advised on several high-profile club takeovers and provide expert advice on the relevant corporate, commercial, regulatory and litigious considerations for both buyers and sellers.
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