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Alternative Club Financing Models Versus Third Party Ownership

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Alternative Club Financing Models Versus Third Party Ownership 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, 12 WORLD SPORTS ADVOCATE image:Alicia Chelini Shutterstock, / Inc. 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 A Cecile Park Media Publication | January 2017 13 FINANCE image: LevanteMedia / Shutterstock, Inc.Shutterstock,
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