Third party ownership – to ban or not to ban?
Published 10 December 2013 By: Luís Villas-Boas Pires
One of the hot topics currently on the football agenda is the third party ownership ("TPO") of the economic rights of football players. This article will try to describe what is a TPO, why it became so popular and describe some of the reasons to ban and to allow such practice.
Finally, it is given a possible solution for the TPO that may be used for future discussions regarding this issue.
In short, a third party finances a player's development in exchange for the rights to that player's future transfer fee.1 Sometimes that third party investor will also be used as a method of financing to purchase players for clubs that do not have the money to fund the deals on their own by purchasing part or the total ownership of the economic rights of that player. In turn, the third party investor will receive all or part of the transfer value of the player.
Other model of this third party investment is the creation of football players' funds where the third party purchases units of that fund which in turn owns economic rights of players of a certain club. As a result, in this situation the third party investor will receive a percentage of any transfer fees from any of those players.
Although it is not a new issue within the football industry, the governing bodies of this popular sport have made enough statements about it2,3 in the last few years to trigger a deeper legal and economic research on TPO.4,5
Various authors have highlighted the difference between a football player's federative and economic rights. A "federative right is the right of a club to register, by virtue of an employment contract, a player with a national federation or professional league in order to allow him to participate in the official competitions organized by such sporting organizations".6 As a result, the club that owns the federative rights can "share with another club or with an investor, in whole or in part, the economic value of a football player"7, i.e. the economic rights.
As mentioned by Ariel Reck,8 this distinction is confirmed by jurisprudence of the Court of Arbitration for Sport in the CAS award 2004/A/635 RCD Espanyol de Barcelona Sad v Club Atletico Velez Sarsfield, which states that "(...) the economic rights, being ordinary contract rights, may be partially assigned and thus apportioned among different right holders (...)".
Although in this case the TPO was recognized as valid, the third party ownership in the Tévez and Mascherano case was heavily contested. What was to be a regular international player transfer between two clubs by means of exchanging contracts, ended-up as a loan between Joorabchian, an Iranian businessman who was the owner of all the economic rights of the two players, and the football club West Ham United. As a result, the transfer was subject to an investigation by an independent panel of the Premier League that found the signings of those two players to be in breach of league regulations. The English Premier League fined West Ham United in 5.5 Million pounds and demanded the amendment of the contract.
In fact, the original contract granted Joorabchian (through his company Media Sports Investment) the exclusive and unilateral right to terminate the contract during each transfer window, thereby giving him the option of selling Tévez's contract to another club. The panel required the amendment of the contract to provide that West Ham United was the sole recipient of the transfer fee, which meant the club had to buy out all the economic rights of the football player Tévez from Joorabchian.9
FIFA's reaction to this legal dispute was the introduction of article 18bis in the FIFA Regulations on the Status and Transfer of Players. This article prevents any club from entering into contracts where a third party could influence it.
Article 18bis par. 1 of the FIFA Regulations on the Status and Transfer of Players states that:
"No club shall enter into a contract which enables any other party to that contract or any third party to acquire the ability to influence in employment and transfer-related matters its independence, its policies or the performance of its teams."
At first glance, it may seem that the FIFA regulation forbids all forms of TPO, but that is not the case. Only one form of TPO is forbidden and that is the TPO that allows the investor to influence the decision making of the football club. In the absence of such influence, the TPO is valid.
Why should TPO be banned?
Different stakeholders (such as UEFA and FifPro) use different arguments to defend the banning of TPO. These arguments can be grouped into six distinct categories:
1. Integrity of competitions:
- Individuals or companies that effectively own or control various players at different clubs could thereby influence the results of sporting competitions. This risk is increased further still if third party investors have a financial interest not only in the "economic rights" of players but also in other football clubs.10
- There is no public information on who the third party investors are or the ultimate beneficial owners of the economic rights.11
2. Overall reputation of the game:
- TPO can affect public confidence in the integrity of competitions and the authenticity of results.
- Some argue that the ownership of player's rights comes dangerously close to the concept of human trafficking.
- There is no public information on the ultimate source of the financing coming into the game through TPO, which can cause concerns in terms of money laundering.
3. Financial Fair Play:
- The key objective of financial fair play is to "live within your means" and TPO clashes with this principle.
- Through TPO, a club relies on speculative investments from a third-party in order to acquire players it cannot really afford.
- European countries where TPO is banned are in disadvantage compared to those were it is allowed.
4. Funding of football:
- TPO takes significant revenues away from the game.
5. Contractual stability:
- Investors are incentivized to trade players as often as possible.12
- TPO destabilizes the relationship between clubs and players.
6. Development of players:
- Through TPO, player transfers are driven by third party owners that are purely concerned with maximizing profit. This is unlikely to enhance the development of players.
Why should TPO be allowed?
The main arguments that favor the existence of TPO can be summarized as follows:
1. It benefits small clubs that cannot afford to buy players, meaning that such investments are necessary to their survival in the football market.
2. TPO also benefits clubs that do not belong to the top European leagues. It allows them to compete with greater "equality" in the different UEFA competitions.
3. TPO may be a new form of financing, but its essence is not substantially different from a loan.
4. TPO can benefit players insofar as such investors can promote the player's football future more effectively than the player's club can.
5. The disadvantage for French and British clubs exists, but this is a result of their voluntarily banning TPO.13
6. "TPO is a legitimate business and (...) a good alternative source of income and financial tool for clubs (...)."14
7. The prohibition of TPO is a restriction of the freedom of trade and an undue barrier to entry into the football business market.15
Is there a solution?
Although there are valid reasons to believe that TPO poses a threat to the world of football, the solution is not a blanket ban of third party ownership. The better aim is to mitigate the various hazards raised by TPO by creating a series of measures and principles to regulate it at a European level. Such measures and principles could entail:
1. Creating an entity at a federative and national level (a "TPO Licensor"), where clubs must disclose who owns the economic rights of the football player
2. In that disclosure, the club must identify the ultimate beneficial owner of those economic rights. Failure to do so results in the club not being allowed to register the federative right of the football player in the name of the relevant club.
3. The TPO Licensor must disclose the owners of the economic rights of the football players in each club.
4. The TPO Licensor should provide different models of third party ownership contracts it considers to be good practice.
5. Prohibiting the transfer of economic rights outside both transfer periods.
6. The contract entered into between the club and the investor in which the economic rights are acquired/sold shall always be subject to the consent of the football player. Without that consent, such contract shall be considered null and void.
7. Copies of such contracts must be delivered to the TPO Licensor who shall supervise and monitor the investor's "ability to influence in employment and transfer-related matters its independence, its policies or the performance of its teams".
8. Limiting the percentage of the economic rights that an investor can hold (e.g. 30%) in a player at any given time.
9. Limit the number of players an investor can own the economic rights to in a single club to 4 players.
10. Limiting the number of clubs (competing in the same league) in which an investor can own economic rights of football players.
11. Any investor that wishes to own economic rights of football players shall be registered with a TPO Licensor and be subject to a Third Party Investor Test.16
12. Licensed agents and anyone that has a significant ownership stake in a club shall be forbidden from owning economic rights of football players.
13. The training compensation (when applicable) and the solidarity mechanism shall always be calculated taking into consideration the overall compensation paid to the former club.17
14. Prohibiting the owning of economic rights of football players that are minors.
15. The failure to comply with these rules should result in disciplinary sanctions against the club assessed on a case-by-case basis and taking into account the principles of proportionality. Such sanctions could include the club:
(i) not being allowed to register new players;
(ii) not being allowed to compete in national (league or cup) or European level competitions, such as the Champions League or Europa League;
(iii) not being able to receive revenues from the competitions; and
(iv) being fined with a pecuniary compensation.
These measures and principles are a good starting point that allow the negative aspects of third party ownership to be tempered, while not eliminating the benefits it undoubtedly also brings. It is clear, however, that some regulatory measures at the European level are necessary in order to safeguard the integrity of competitions – in particular, to safeguard the uncertainty of the football result.
1. Burgess Williams at "Texas Review of Entertainment & Sports Law", 2009
6. Victoriano Melero and Romain Soiron at Sports Law Bulletin number 10 (Special Report on Third Party Ownership) of EPFL, June-October 2012
7. Juan de Dios Crespo Pérez and Ricardo Frega Navía at "Comentarios al Reglamento FIFA con análisis de jurisprudencia de la DRC y del TAS", 2010
8. Ariel Reck at Sports Law Bulletin number 10 (Special Report on Third Party Ownership) of EPFL, June-October 2012
9. An excellent description of the case can be found at "Texas Review of Entertainment & Sports Law", by Burgess Williams, 2009
10. An excellent example of how the integrity of the competition can be affected can be found at "Sport & EU Review, the Review of the Association for the Study of Sport & European Union" by Ariel N. Reck and Daniel Geey, 2011
11. The Sports Law Bulletin number 10 (Special Report on Third Party Ownership) of EPFL provides examples of such investors (e.g., London-based Doyen Capital Partners, Kia Joorabchian-run investment fund Media Sports Investments, Creative Artists Agency's Jersey-based subsidiary Quality Sports Investment, São Paulo-based player agent Juan Figer, Brazilian sports marketing agency Traffic Sports, Pini Zahavi and Fernando Hidalgo's partnership HAZ Sports, DIS Esporte, Gol Football Luxembourg, Mamers BV, Pearl Design Holding Ltd).
12. In fact, the two investment funds incorporated in Portugal ("Sporting Portugal Fund" and "Benfica Stars Fund) through the Espírito Santo Group, state in its number 11 article 8 of the management regulation that "Whenever an employment contract of a given athlete in relation to whom the Fund holds economic rights signs with (Sporting SAD or Benfica SAD) during the last 18 months of said contract, (Sporting SAD or Benfica SAD) must place the athlete in the transfer market at a price to be determined by the fund and the club.". Please see link: https://web3.cmvm.pt/sdi2004/fundos/docs/A155531-FRG0003781294020130422.pdf. This article does not seem to coexist very peaceably with article 18bis of FIFA Regulation.
13. As mentioned by Ariel Reck in his article in Sports Law Bulletin number 10 (Special Report on Third Party Ownership) of EPFL, "With the same reasoning, different rules on TV rights distribution, merchandising, club legal status (company or civil association) or taxation may lead to similar disadvantages".
14. Ariel Reck in Sports Law Bulletin number 10 (Special Report on Third Party Ownership) of EPFL, June-October 2012
15. As mentioned by different authors (Victoriano Melero, Romain Soiron, Jean-Louis Dupont), the ban of TPO can be considered an obstruction to the freedom to provide services as guaranteed under article 56 of the Treaty of the Functioning of the European Union
16. Something similar to the Fit and Proper Person Test for owners and directors in the English Premier League
17. For example, if the contract of a football player is bought by a club for Euro 20 million, where 20% of the economic rights are owned by an investor, the calculation of the solidarity mechanism shall be made and paid taking into consideration the overall amount paid and not only the 80% of the compensation paid.
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Luís Villas-Boas Pires holds an Undergraduate Degree in Law from the Universidade Católica Portuguesa. Prior to his career in sports law, Luís worked for 11 years in both Lisbon and London as a M&A, Corporate and Capital Markets lawyer.