FINANCE

Alternative club financing models versus third party ownership regulations How can you engage investors for the benefit of capital seeking clubs in a profitable way? Which legal boundaries exist in particular in acquiring and possessing economic third party rights of single players? Marc Patrick Schneider and Simon Karlin of Lentze Stopper Rechtsanwaelte, discuss the alternative club financial models available, such as crowdfunding, and instances in which such models of financing may conflict with FIFA’s ban on third party ownership.

Introduction - Club financing and Forms of external financing view, crowdinvesting is attributed to investment in professional football - mezzanine capital the capital market as a mid- to long- The funding of capital by using corporate The diferent ways for a club to term capital acquisition and is classified finance is currently all over the place. In procure capital are the subject of as venture capital7. When subscribing times of advanced internationalisation frequent discussions4. Acquisition to subordinated (performance-based and commercialisation of sports, general of mezzanine capital via profit share or fixed-interest bearing) loans the classic bank financing is no longer the certificates, bonds or subordinated investor’s entitlement to interest and favourite choice. Rights distribution and loans are undoubtedly no longer exotic repayment is in the event of insolvency conventional sponsoring which used exceptions, as the recent crowdfunding of the capital acquirer not to be satisfied to be the day-to-day business of clubs campaign of the German Bundesliga until all the creditors’ claims are met. are no longer sufcient. Consequently, club Hertha BSC Berlin (‘Hertha’) in Beyond the subordination condition club ofcials are forced to discover March 2016 (€1 million in 9 minutes 23 which is integral for a loan agreement, a new paths of financing. The upcoming seconds) has demonstrated5. All in all, so-called qualified subordination clause instruments are in particular the issuance surely a positive and much needed may be agreed. Such an arrangement of bonds, but also asset backed securities development considering the club’s means that the investor’s claims are and private equity deals. The focus occasional three-digit million turnover. not satisfied, as long as repayment has also shifted to the player as an would lead to insolvency itself. investment - in Germany and abroad. From the Jägermeister sponsorship deal of Eintracht Braunschweig in 1973 to the Looking at Hertha’s financing The Greek under-19 national Panagiotis €61.2 million investment in Hertha by campaign ‘Digitalization,’ organised Kynigopoulos (‘Kyn’)1 can call himself Kohlberg Kravis Roberts & Co (‘KKR’), through the CF platform Kapilendo ofcially the first crowd financed the commercialisation of the ‘product of in March 2016, the benefits of CF player. Overall the 518 investors football’ has advanced and the catalogue for football become apparent: raised €236,606 via Kickrs.net to of realisable structures is extensive. enable Kyn’s transfer to the Belgian • The capital acquirer can rely Pro League club Koninklijke Sint- Subordinated loans via crowdfunding on the platform’s suitable and Truidense Voetbalvereniging (‘STVV’). Accompanied by a strong media standardised infrastructure (e.g. Any further transfers of Kyn will see presence it seems that crowdfunding pitch books or business case all these investors make a decent (‘CF’) is omnipresent. But what is behind tutorials) and financial expertise. return through indirect participation2. this form of financing that began in the • The barriers to entry are low, as classic startup arena before spreading anybody can participate with small However, legal echoes did not take long increasingly into the world of sport? amounts of money and just a ‘click.’ to show up. Already in early 2016 FIFA What makes it attractive for football? • CF allows a flexible and transparent TMS and FIFA’s Disciplinary Committee contract design and a pay- took disciplinary action3 against CF is a form of swarm finance organised of that is compatible with the STVV, claiming that its crowdfunding through intermediaries, such as internet club’s financial planning. campaign demonstrates a violation platforms. A great number of small • Clubs have the best possible ‘crowd’ of Article 18bis and 18ter of FIFA’s amounts of money, e.g. via subordinated already at hand - their supporters. Regulations on the Status and Transfer loans with profit participation in equity of Players (‘RSTP’) - the statutory based CF or crowdinvesting deals, is Issuance of option or convertible bonds regulations broadly banning the ‘third invested until a predefined funding Option or convertible bonds are by party ownership’ (‘TPO’) of players. target is met6. From a financial point of all means football proven. In 2000,

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Marc Patrick Schneider Counsel [email protected] Simon Karlin Associate Counsel [email protected] Lentze Stopper Rechtsanwaelte, Munich

Newcastle United issued €45 million potential uncertainties concerning national policies or the performance of its teams.’ worth of bonds, containing the right statutory regulations restricting or banning Derived from the exact wording of the to conversion within five years and a investors, e.g. the German League clause, its aim is to guarantee broad maximum of 10% of shares. Convertible Association’s so-called ‘50+1’-rule8. protection of the club’s decision making bonds are hybrid finance instruments and autonomy in transfer related matters. with fixed interest or floating rates Federal and supervisory legal Article 18ter RSTP came into force on 1 which are linked to a call option. By boundaries to club financing May 2015 stipulating a total ban on TPO: exercising the call option, the invested Pertaining to their professional lead and loan capital becomes equity capital and strategic approach in the capital market ‘No club or player shall enter into an for example a supporter as an investing as well as their corporate structure (e.g. agreement with a third party whereby a creditor becomes a shareholder. A an installed advisory board), top range third party is being entitled to participate, positive aspect of a convertible bond is football clubs are nothing less than either in full or in part, in compensation the combination of bond typical capital business enterprises. Nevertheless, payable in relation to the future transfer repayment with interest (downside regulation in football is not comparable of a player from one club to another, or is protection) and stock typical participation to the free economy when you look at being assigned any rights in relation to a and property rights (upside), elements provisions like the ‘50+1’-rule and the future transferor transfer compensation.’ that also determine the characteristics of club licence limitations on corporations option bonds. The significant diference in Germany. As a result, these limiting Article 18ter was already subject to as regards the latter is that the option regulations do not merely lead to legal numerous legal attacks, but FIFA has been is detached and exercisable without challenges, but they also constrain the able to successfully defend against them10. loss of the rights securitised by the clubs to change their financing strategy bond itself. In other words: the investor in order to make club capital fluent. Protective purpose may remain a bondholder at the same As the terms ‘third party’ and ‘any time as becoming a shareholder by Third party ownership rights’ are not defined within the exercising the call. Loan and equity Regulation Regulations the scope of the Regulation capital are thus not mutually exclusive. TPO is an economic third party concerning TPO is subject to legal participation right on the future transfer interpretation. Given the protective However, although in specialised literature value of a player neither owned by purpose its aim and underlying rationale these forms of bonds are commonly the player9 nor a club. Nowadays, are in particular the following: classified as not suitable for professional these constructions are, due to the football (presumed reasons: the club protection of the players and the • The protection of the transfer requires access to the capital market, the clubs, completely banned according autonomy of clubs; inevitable conditional capital increase to FIFA’s Article 18bis and 18ter RSTP. • The independence of clubs and may lead to financial planning and/or In particular contractual constructions players and contractual stability; the issuance of shares with voting rights that may influence the club’s decisions • The financial stability of the may restrict the freedom of choice of the and its autonomy are banned: league and integrity and management) such participation in a club transparency of sports; and is a far more attractive reason to invest ‘No club shall enter into a contract which • The protection of players’ rights, than a granting of simple legal benefits. enables any other party to that contract especially minor players11. Therefore, the option and conversion or any third party to acquire the ability element should in our view stay in focus, to influence in employment and transfer- Association sanctions regardless - or better because - of related matters its independence, its Concerning the topic of TPO versus

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14 WORLD SPORTS ADVOCATE The TPO regulations limit the possibility of participating as an instrument of club financing.

continued club financing in regards to direct Case study: Admira Wacker Conclusion - The road ahead contribution only - as far as can be Day-to-day business finance models In the process of planning the club’s seen - the FC Seraing-Doyen Sports often come with a fix and additionally a finances all the given options of gaining Investments case12 has been sanctioned flexible interest component. In the Admira capital should be considered and with a fine of CHF 150,000 and a Wacker case - regarding an Austrian experience has shown that in particular temporary transfer ban for four complete first division club - the amount of interest well-structured combinations using and consecutive registration periods within the CF campaign was combined private equity and other financing, for along with a reprimand and warning. with the achievement of several example CF, can lead to success. ‘milestones’ - the closing of an exact In terms of the relevant cases regarding amount of contracts with professional Before launch the finance structure diferent finance models - as far as can be football players of their own youth should be reviewed and modified seen - the only publicly known decision team as well as the success in the cup in particular with respect to by the FIFA Disciplinary Commission was tournament. Clearly recognisable in the related statutory regulations. the STVV case13 related to Kyn. STVV was model’s structure was the development sanctioned with a fine of CHF 60,000, a of not focusing on a single player but on The TPO regulations limit the possibility warning and a reprimand for breaching the whole squad and other economic of participating as an instrument of club Article 18bis and Article 18ter RSTP. parameters. The focus on other topics of financing. Nevertheless, as long as its The club was found liable for entering the club seems to conflict less with the purpose and rationales are not obviously into contracts that enabled a third party TPO Regulations, as there is no direct afected, legitimate constructions are to influence the club’s independence link to the club’s independence and conceivable. Yet these constructions must in employment and transfer related transfer autonomy and no third parties be evaluated and - if needed - adjusted matters and entering into an agreement seem to be involved in transfer activities. from time to time in terms of jurisdiction. that assigned rights to a third party in Crucial points to be considered maybe relation to the future transfer of a player. Case study: Rot-Weiß Essen not only focusing on single players but Similarities show up in the Rot-Weiss for example on the whole squad or Compliance of alternative Essen case, regarding the German referring to other economic parameters club financing models fourth-tier club. The amount of variable and including further contractual terms to Alternative club financing models may interest was linked to payments of the ensure that third parties are not involved. collide with TPO in a variety of ways, FIFA solidarity mechanism (Article 21 such as the purpose and use of the and annexe 5 RSTP) and FIFA training 1. For more details see http://bit.ly/1S2hIdz gathered capital for specific transfers, compensation (Article 20 and annexe 2. In the scenario of a doubling of the market value the combination of interest to transfer 4 RSTP). Without further statements of pay-of is €144 instead of the €100 nominal. revenues and other economic parameters FIFA these payments are not considered 3. http://fifa.to/1ojelr3 15 of a player and the establishment to be transactions of a third party . 4. As an example see Schneider/Winter’s article of an actual co-determination. about regulatory limits to financing concepts Case study: Factual co-determination in football (in SpuRt 2015, page 197). Case study: STVV If financing elements such as obligations 5. http://bit.ly/2fBPxt In the Belgian STVV case14, the relevant are equipped with a conversion or 6. Howe, ‘Crowdsourcing: Why the Power of the Crowd Is Driving the Future of Business,’ 2009. aspect was the use of the generated option right giving the shareholder the 7. See Baumann, ‘Crowdinvesting in the capital for the potential renewal of Kyn’s opportunity to convert their loan capital Field of Financial Market Law,’ p. 41. existing player contract. STVV was into equity capital and therefore become 8. Informal term used to refer to para. 8 Nr. 3 of accused of putting third parties in the joint partner of the club, TPO can still be the statutes of the German League Association position of taking influence in employment relevant. At least in the case of handing stipulating clubs shall hold at least a majority and transfer issues of the club and club shares to a few or a single person of 50% plus 1 share of its own voting rights. 9. Q&A Session FIFA/EPFL on transfer thus restricting its autonomy by giving it indicates that these people have a matters 5 February 2015. Accordingly FIFA away rights of further transfers of Kyn. so-called factual co-determination. players are treated as a third party within Nevertheless, the CF was construed in Consequently, this would be considered the meaning of Article 18ter RSTP. a way that should strengthen the club’s a threat to the club’s transfer autonomy. 10. http://fifa.to/1R0DYZs, Brussels Appeal position in transfer related matters, instead Most likely these kinds of constructions Court upholding first instance verdict stating TPO ban does not contravene EU law. of weaken it. In the future it will be crucial have not been subject to legal trials yet. 11. Abatan EPFL Sports Law Bulletin, pages 22, 32; to construct these participation structures In practice it would be hard to prove Andrews, EPFL Sports Law Bulletin, pages 33, 36. in a way that they refer to more than one that there has been any attempt to 12. http://fifa.to/1XIpvCr single player at best the whole squad. influence the transfer policy. In this case 13. http://fifa.to/1ojelr3 It should be stressed that the capital normally there would not be any transfer 14 http://fifa.to/1ojelr3. raising aims reinforce the club’s position rights to single players at stake but a 15. Q&A Session FIFA/EPFL on transfer rather than share the rights of transfers. capital participation in the club itself. matters 5 February 2015.

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