A guide to the legal due diligence process when buying a football club
Published 21 September 2015 By: Richard Barham
On 27 April 2015 Jeremy Peace, the West Brom Chairman, announced that he had agreed a deal with a potential purchaser of the club, and they were now entering a 60 day period of due diligence. Subsequently that deal did not happen.1 The exact reasons are not clear. But one possibility is that something arose in the due diligence which was not to the liking of the potential buyer.
So what is due diligence? How long should it take? And how could it prevent a sale happening?
Due diligence – the basics2
Due diligence is an investigation made by a potential buyer of the shares of a company that owns a club into the affairs and activities of the club.3 Essentially, it is a check on the business of the club to ensure that it accords with the buyer's understanding as to the club's financial and legal status.
The usual process on the acquisition of a company owning a club may run as follows:
- The club owner and the potential buyer negotiate and agree the basic terms for the acquisition of the club. These are usually set out in a heads of agreement (which are generally non-binding4). Often the acquisition is stated to be conditional on completion of satisfactory due diligence by the buyer; and the seller agrees to supply relevant documentation and information to the buyer in order that it can complete its due diligence investigation.
- As soon as the heads of agreement are signed, the seller supplies (normally by means of a virtual data room) that documentation and information to the buyer. This covers financial, operational and legal information about the club and its business. Before or during the negotiation of the heads the prudent seller will instruct the club's management and its legal and financial advisers to collate all information that a buyer is likely to require, usually in a virtual data room, so that this can be made available to the buyer and its advisers on signature of the heads.
- The buyer and its advisers (which will include financial and legal advisers) review that information in detail to ascertain whether there are any concerns in relation to it. Usually each of the buyer's advisers will prepare a separate report to the buyer in relation to the documentation information provided, and any other documentation/information which is publicly available. This will set out the adviser's findings and concerns arising from the due diligence exercise.
- Ideally following the due diligence, but normally whilst the due diligence process is still proceeding, the seller's lawyers and buyer's lawyers will prepare and negotiate the sale documentation. The principal document is the sale and purchase agreement, which will set out mechanisms for the share transfer. It will also contain a number of warranties and indemnities in relation to the club's business, which are designed to protect the buyer.
- If the due diligence has gone well and the sale documentation is agreed, the execution of the documentation, and completion, occurs.
- As part of the process it will also be necessary to liaise with the Premier League or Football League (as appropriate) for the new owner and directors of the club to satisfy the owners' and directors' test.
There is no fixed timescale, and normally this whole process takes 2-3 months. However more expedited sales processes are not unusual.5
If there are any negative findings in the due diligence, the buyer has a number of options:
- It may simply decide that the issue is too difficult and walk away from the deal;
- It may continue the deal, but try to renegotiate the purchase price;
- It may require that remedial action is taken before the transaction occurs; or
- It will invariably seek protection in the form of warranties and indemnities in the sale and purchase agreement.6 Usually the warranties will be given subject to agreed disclosures which are set out in a disclosure letter, and the buyer will not be able to bring a claim for a loss suffered as a result of breach of warranty if an appropriate disclosure has been made. The warranty and disclosures effectively allocate risk between seller and buyer.
Legal due diligence – the details
Fortunately a football club is a relatively straightforward business. Its key assets are:
- Its people (players and management);
- Its property (stadium and training faculties); and
- Its commercial contracts.
Information on football clubs is also very much in the public domain. There is a lot of information available by each club. A prospective overseas buyer of a club recently said to me that he could not believe how much information was available about a potential target, particularly from the club's own website.
Usually the due diligence at a football club focuses on the following:
- Stadium and training facilities – on what basis does the club hold these property interests? Are they owned outright, or are they subject to a lease? If so, what are the terms of the lease? Are there any third party rights in relation to the property? Does the property have all the licences and authorisations it needs to operate as a football ground (e.g. spectators' licence, fire certificate etc.)? Are there permitted alternative uses for generating revenue (e.g. music concerts) and if so what commitments have been made? Are there plans to develop the property? If so has planning permission been obtained?
- What bank and other debt does the club have? When do these loans mature? Is the debt to be repaid on the acquisition? What guarantees have been given by or on behalf of the club? What are the terms of each of those loans and guarantees? What is the impact of relegation on on-going teams?
- What are the principal terms of the player and management contracts? What are the termination dates for each of those contracts? What bonuses are in place? What outstanding obligations are there in relation to transfer fees?
- What commercial contracts does the club have? In particular, what sponsorship contracts does it have? What is the duration of those contracts? Are they exclusive? What other rights has the club granted under these agreements?
- What is the extent of the registration of the club's intellectual property rights (principally its logo)? Has this been protected as a trademark in all relevant jurisdictions?
On a football club acquisition usually 100 – 200 legal agreements are made available in a data room. The buyer's lawyers will undertake a thorough investigation of all the key legal agreements and information provided. It will also make any relevant public searches, including searches of Companies House and relevant property searches. This will enable the legal team to form a good overview of the club's status from a legal point of view.
Whilst the lawyers will normally report back on a regular basis on any key findings, ultimately the key work product is a legal due diligence report. Historically this used to be a full report, summarising all the target's contracts. However more recently, and especially in the context of football clubs, it is more likely that a shorter "red flag" due diligence report will be produced, concentrating on material issues only.
Ideally the legal team will have 3 or 4 weeks to undertake due diligence on the club, although we have completed a legal due diligence review within five days. However, a shorter period is reliant on having all required information available at the beginning of the due diligence period. Hence the need (as mentioned above) for this information to be gathered at an early stage.
Often the buyer will find that the virtual data room does not contain all the information that is required. It is normal for the buyer to request missing information to be supplied, or further information to be obtained in order to fully to understand an issue. Sometimes it is necessary also to have a dialogue with relevant members of the club's management to understand a particular issue. And such dialogue should be subject to the confidentiality provisions set out in the heads of agreement.
Most due diligence processes do reveal issues, but usually these can be managed and the deal proceeds. However we have seen prospective buyers walk away from a deal because, for example, the debt obligations of the target club are so great that the club relies on shareholder funding on a monthly basis to continue, and so the club's sustainability in the long term was called into question.
Ultimately due diligence is a "sense-check" on the business to ensure it has the expected property, rights and liabilities. A sensible seller will want to avoid spending time and effort on a legal process which may not result in a ultimate sale. From the seller's perspective it is advisable to ensure that any issues are brought into the open at an early stage, and ideally are explained to the buyer in the initial negotiation of the heads of terms, and certainly before the due diligence begins. If issues are only revealed during the due diligence, it is significantly more likely that the buyer will walk away or demand a significant reduction in the purchase price which the seller will be reluctant to accept. The seller needs to be tactically astute in handling any issues at an early stage.
The due diligence process is there to ensure that the buyer is aware of what it is buying before it signs the sale and purchase agreement. There are, as far as I am aware, no reported cases on claims been brought by buyers of football clubs on the basis of any pre-contractual representations made by the seller. I hope that this means the football club buyers are receiving proper financial and legal advice, and taking care to undertake sufficient due diligence before they commit to buy.
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- Tags: Commercial Law | Corporate Law | Due Diligence | Football | Premier League | Takeover Code | The FA | United Kingdom (UK)
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Richard heads both the London Corporate practice, and Sports practice, of Dentons.
Richard's focus is on M&A and corporate work. He is particularly interested in corporate governance issues, and regularly advises companies and other organisations on how they best operate to achieve good and effective governance standards.