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Ian Lynam, Partner, Joint Head of Sport

Financial Regulation in Sport: Salary Caps and Financial Fair Play

Financial Regulation in Sport

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1984 - NBA

1987 - Australian Football League

1994 - NFL

1997 - Super League

1998 - National Rugby League (Aus)

1999 - Premiership Rugby

2004 - Football League (League 2), A League

2005 - NHL

2006 - ITM (NZ)

2008 - IPL

2010 - ECB

2011 - UEFA FFP, Super Rugby (for Australian teams only)

2012 - NZ Netball, Championship

2013 - Premier League, Serie B, La Liga, Euroleague

2014 – Women’s Super League

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Chronology

• “Hard” Salary Cap – NFL, NHL,ECB, Serie B

• “Soft” Salary Cap – NBA, Premiership Rugby, Super League, MLS, NRL, AFL

• % of Turnover Salary Cap – La Liga, League One and League Two, Euroleague, Women’s Super League

• Luxury Tax – MLB, NBA, Premiership Rugby

• FFP/Allowable Loss – UEFA, Championship, Premier League, La Liga

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Forms of Financial Regulation

Legal Challenges?

• Competition Law (both domestic and European per Articles 101 and 102 TFEU)

• Common law doctrine of restraint of trade; and

• European law on the free movement of workers (Article 45 TFEU)

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Nordenfelt v Maxim Nordenfelt, Lord MacNaughton in 1894:

“…all interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void.”

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Legal Analysis of Financial Regulation in Sport

Legal Analysis of Financial Regulation in Sport

1. Is the restriction inherent to achieve a legitimate objective?

• preserving the financial viability of clubs

• maintaining competitive balance

2. Is the restriction proportionate?

• Is there a less restrictive alternative?

• Is it applied in a transparent, objective and non-discriminatory manner?

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Legal Analysis of Financial Regulation in Sport

• No one size fits all solution.

• Proportionality always determined with reference to specific circumstances.

Hard Cap

Soft Cap % of

Revenue

Salary Cap

Luxury Tax FFP

Financial

Viability?

Yes

Yes Yes Yes Yes

Competitive

Balance?

Yes

Yes No Yes (to a lesser

degree)

No

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Legal Analysis of Financial Regulation in Sport

• Legal position in US?

• “Labor exemption” to antitrust law for collectively bargained salary caps

• Baseball’s Antitrust Exemption

• Role for Collective Agreements in European Sport?

• Albany

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• The basic concept is a break-even requirement, expenditure must not exceed revenues beyond a set “acceptable deviation”

• Revenues: gate receipts, broadcasting rights, commercial sponsorship deals and profit on player transfers (nb but can also include revenue from non football operations “based at, or in close proximity to, a club’s stadium and training facilities”)

• Expenditure: player transfers, wages and associated costs and other operating expenses. Youth development and infrastructure spending is excluded.

• Acceptable Deviation: starts at €45m over two years, reduces to €30m over three years.

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Summary

UEFA Financial Fair Play

• The basic concept is a break-even requirement, expenditure must not exceed revenues beyond a set “acceptable deviation”

• Revenues: gate receipts, broadcasting rights, commercial sponsorship deals and profit on player transfers (nb but can also include revenue from non football operations “based at, or in close proximity to, a club’s stadium and training facilities”)

• Expenditure: player transfers, wages and associated costs and other operating expenses. Youth development and infrastructure spending is excluded.

• Acceptable Deviation: starts at €45m over two years, reduces to €30m over three years.

24 November 2016 11

Summary

UEFA Financial Fair Play

• Related Party Transactions: UEFA has the power to amend the value of related party transactions undertaken otherwise than at “fair value”

• “Exemption”: Provided clubs report a positive trend in their break-even results, they can remove all wage costs from their 2011-12 accounts for players whose contracts who signed for them prior to 1 June 2010

• Sanctions: warning, fine, ban from UEFA competitions

24 November 2016 12

Summary (II)

UEFA FFP

Voluntary Agreements

• Introduction of “voluntary agreements” whereby clubs subject to a “significant change in ownership or control” within the past 12 months can apply for a relaxed application of FFP, tailored to that club’s circumstances. Owners will need to legally commit to cover all losses during the period

Other changes

• Operating in a ‘structurally inefficient’ market is now taken into account when UEFA assess a club’s finances

• Spending on women’s football is now excluded from the expenses

• Clarification that spending on “substantial modification” of a facility is excluded

• Loan fees are now excluded from revenues

• The concept of ‘significant influence’ is now quantified. Any party providing more than 30% of a club’s revenue will be treated as having significant influence and be treated as a ‘related party’

24 November 2016 13

Summer 2015 Changes

UEFA Financial Fair Play

• The short term cost control measures applies to clubs with a player wage bill in excess of £52m in 2013/14, £56m in 2014/15 and £60m in 2015/16. Next year?

• Clubs above those thresholds are restricted from increasing player wages by more than £4m per season unless increase is covered by:

(a) increased club revenues (excluding PL Central Revenues);

(b) profit from player trading; or

(c) contractual commitments entered into before 31 Jan 2013.

24 November 2016 14

Short Term Cost Control

Premier League Financial Regulation

Club finances assessed in three year cycles (first assessment in 2015/16 which takes into account 2013 to 2016)

• Do the club’s earning before tax for the three year period show a loss in the aggregate?

- If no, no further action.

- If yes, how much is the loss?

• If the aggregate loss does not exceed £15m, sustainability tests applied.

• If the aggregate loss exceeds £15m:

- club provides future financial information for the following two seasons.

- club provides evidence of “secure funding” (i.e equity not loans)

24 November 2016 15

Profitability and Sustainability Regulation

Premier League Financial Regulation

• If the three year aggregated loss exceeds £105m: the club is liable to disciplinary action.

• Other considerations:

(a) Does any revenue arise from a Related Party Transaction? If so, is it recorded at Fair Market Value?

(b) Exclusions: Youth development and community expenditure, infrastructure (costs of training grounds/ stadium).

(c) Not a live check (compare with PRL Salary Cap).

(d) Not a break even rule (clubs can make a loss of £105m over three years).

24 November 2016 16

Profitability and Sustainability Regulation

Premier League Financial Regulation

• Modelled on UEFA FFP with variations:

• Financial reporting is measured over 1 year

• Based on audited accounts only

• Sanctions - Fine or embargo with effect from 2013/14 reporting period

• Annual Accounts, FFP Calculation and Auditor and Board Statements to be submitted on 1 December each season.

24 November 2016 17

Financial Fair Play

Football League Financial Regulation

• Calculating Fair Play Result:

• £0 or above: Championship Club satisfies FFP requirements.

• If there is a loss, does if fall within Acceptable Deviation or is covered by Equity Contributions?

24 November 2016 18

Financial Fair Play

Football League Financial Regulation

Reporting

Period

2011/12 2012/13 2013/14 2014/15 2015/16 onwards

Acceptable

Deviation

£4m £4m £3m £3m £2m

Equity

Contributions

£8m £6m £5m £3m £3m

Maximum

Permitted

Allowances

£12m £10m £8m £6m £5m

Football League Financial Regulation

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• November 2014 changes: Accepted Loss for 2015/16 season increased to £13m

• Profitability and Sustainability Regulations introduced for 2016/17 season onwards. Ties in with Premier League equivalent

• Allows £39m loss over three year period. Flexes for teams who move between Championship and Premier League (allows loss of £35m per year in Premier League, £13m per year in Championship)

ECB – Team Salary Payments Regulations

• Introduced in 2010

• Three stated principal purposes: (i) to improve the competitiveness of ECB competitions;

(ii) to keep player costs under control to help ensure the long-term financial survival of FCCs and the long-term employment prospects of Players; and

(iii) to provide Players with an objectively defined interest in the financial well-being of the game and to incentivise them to contribute to its success.

• Hard Cap

• Sanctions include fines and docking points

• Minimum level of cap is set by formula of 2% of ECB professional game revenues

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Legal Analysis of UEFA FFP (I)

• Is FFP necessary to achieve a legitimate objective?

UEFA have stated the following principal objectives for FFP:

• to introduce more discipline and rationality in club football finances;

• to decrease pressure on salaries and transfer fees and limit inflationary effect;

• to encourage clubs to compete with(in) their revenues;

• to encourage long-term investments in the youth sector and infrastructure;

• to protect the long-term viability of European club football;

• to ensure clubs settle their liabilities on a timely basis.

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Legal Analysis of UEFA FFP (II)

• Is FFP proportionate?

• Is there a less restrictive alternative?

• Will it be applied in a transparent, objective and non-discriminatory manner?

• European View?

• Legality of financial regulation left as an open question in Commission’s 2007 White Paper

• Commission “fully supports the objectives of the FFP” and endorsed its principles as providing “an effective model for other sports facing similar financial challenges”. Noted consistency with State Aid principles.

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Challenges to FFP – Striani & Dupont (I)

“[FFP] likely constitutes collusion and hence a violation of EU competition law.”

“Even if FFP were sufficiently legitimate and necessary to justify its distortions of EU principles, however, it would still have to clear a final hurdle: proportionality. Uefa would need to convince the EU's judges in Luxembourg that FFP is the least restrictive means of achieving its aims. This seems unlikely.”

Jean-Louis Dupont, March 2013

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Challenges to FFP – Striani & Dupont (II)

• Striani lodged a complaint to the European Commission in May 2013 and the Belgian courts in June 2013. Argued FFP restricts competition as:

• Restriction of investments;

• Fossilization of the existing market structure;

• Reduction of the number of transfers, of the transfer amounts and of the number of players under contracts per club;

• Deflatory effect on the level of players’ salaries; and

• Consequently, a deflatory effect on the revenues of players’ agents (depending on the level of transfer amounts and/or of players salaries).

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Challenges to FFP – Striani & Dupont (III)

• Key Striani argument: FFP fails the proportionality test as there is a less restrictive alternative means of achieving aims - owners personally guaranteeing losses.

• European Commission rejected the complaint on the grounds that (i) Striani, as an agent, lacked legitimate interest in the case and (ii) the matter could be dealt with adequately by the Belgian court.

• Belgian court heard case in February 2015. Refused jurisdiction and referred matter to ECJ for a preliminary ruling

• ECJ ruled in July 2015 declaring the request for a preliminary ruling as "manifestly inadmissible“

• Back to Belgian courts? Coming towards an end?

• FFP endorsed by CAS as consistent with European Law - as Galatasaray v. UEFA, CAS 2016/A/4492.

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Challenges to FFP – Championship

• Letter sent to Football League in January 2014 from law firm acting on behalf of “several Championship clubs (and one League One club)”

• Identifies likely basis of challenge to Regulations as being:

- restricting investment thereby creating a barrier to entry into Premier League and economic expansion;

- prevention/reduction in competition restricting Championship clubs from competing with wealthier clubs;

- entrenchment of status quo, unfair advantage for clubs with larger followings;

- proposed fines are discriminatory as they restrict the use of TV income;

- restricting wages and also restricting competition at the expense of the players.

• Football League and QPR confirmed in May 2015 that:

“Legal proceedings are ongoing between Queens Park Rangers and the Football League. QPR challenges the legality of the Football League’s

Championship Financial Fair Play Rules”

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Ian Lynam

Partner, Joint Head of Sport

Charles Russell Speechlys LLP

Tel: + 44 (0)20 7203 5030

Email: ian.lynam@crsblaw.com