Third Party Ownership – a Brazilian perspectivePoonam Majithia
Much has already been written about the third party ownership of footballers ("TPO"), both positive and negative. Its prevalence has been a cause for concern in Europe, highlighted in the European Commission report on 'The Economic and Legal Aspects of the Transfers of Players'.
The English, French and Polish football leagues have banned TPO and UEFA have openly asked FIFA to eradicate the practice entirely from football.
Across the Atlantic in Brazil, this insistence from UEFA has been lambasted by local clubs, so much so that, on 22 April 2013, 21 Brazilian clubs wrote an open letter to FIFA stating that a ban on TPO "could impact the finances of the Brazilian and South American clubs negatively" and that they would "once again be affected by a unilateral and sudden change of rules, implemented without their involvement, exclusively promoted by UEFA".1 In light of this, this article aims to look at the importance of TPO in Brazil, how and why clubs use it, the legislation that controls it and how the negative aspects of TPO could be better tackled.
TPO in Brazil
To understand just how important TPO is in Brazil, you only need to look at the numbers. It is estimated that 90% of players in Brazil's top division are somehow linked to third party investors,2 with Sao Paulo being the only top division club not to be known to have links with such investors.3 Ten of the starting eleven Corinthians players that beat Chelsea in the 2012 World Club Cup were subject to TPO4 and Neymar, Europe's biggest signing last year, had 40% of his rights owned by investment fund DIS Esporte.5 David Luiz and Oscar are just a couple of other big Brazilian names playing in Europe who have had a percentage of their rights owned by third party investors.
It is such an ingrained practice that the ownership structure of a particular player's rights are openly discussed in the press and several third party investment funds such as, FCP Soccer BR1 and Fundo de Investimento em Direitos Creditorios (FIDC NP) are recognised by Brazil's Securities Commission.6 It is a practice that has been going on for over a decade; for example, Gremio and Internacional, two of Brazil's biggest clubs, have been using TPO for at least 15 years and Gremio even sold 10% of Ronaldinho's rights to Canoas, a third party investor, when he was playing for them back in the late 1990s.7
In addition to this, Brazil is a country which is an exporter of players; they are the clubs' biggest assets. In 2013, Brazil supplied 1,558 players sold abroad. This constituted 13% of the total and was more than any other country.8 Add the fact that the vast majority of these "exports" will have some part of their rights owned by third party investors and you can begin to understand why a ban on TPO is seen as a threatening prospect in Brazil.
Brazilian clubs see TPO as a financial tool that allows them to "unlock the equity" in an asset without paying for it; in the same way a company would much rather lease a plane as opposed to buy it, a club would prefer to benefit from fielding a player without having to pay for him and risk his transfer value depreciating as he passes his peak years. Equally, it allows cash-strapped clubs to hedge risk if the player turns out to be a bad investment. It is also a cheaper way of investing in new players than taking out a bank loan as there are no regular interest payments to make and third party investors in Brazil typically do not include guaranteed minimum return clauses in their agreements.9
Clubs in Brazil have limited revenue streams. They do not make money from sponsorships, merchandising, broadcasting deals, ticket sales and hospitality at stadiums in the same way European clubs do.10 As mentioned in my previous post, commercialising the use of stadiums still has a long way to go. TPO therefore allows clubs to both spend less on buying players and release equity by selling a player's rights further down the line. This leaves them with a better cash flow for day to day expenses such as paying wages, improving training facilities and generating business from elsewhere.
Brazilian clubs argue that this investment has in turn regenerated the league by making teams more competitive and allowing them to field players they would otherwise not be able to afford.11 There is a concern that third party investors are taking money out of the football industry but it could also be argued that they are putting money into it; for example one of Brazil's biggest third party investors, Traffic, has invested $75 million in about 60 players since 2007.12
The Portuguese connection
Should FIFA decide to ban TPO, it would also affect the ability of Portuguese clubs to buy Brazilian players. Portugal is considered a hub for the transfer of Brazilian footballers (David Luiz, Deco and Ramires are just a handful) and the country's clubs have a very sophisticated way of using TPO. The country's top three clubs, Benfica, Sporting Lisbon and FC Porto have their own investment funds which are recognised by the Portuguese Securities Commission. Benfica's fund, the Benfica Stars Fund is also partly owned by the Banco Espirito Santo.13
The practice is so widespread that, for example, Benfica's latest annual report shows that it owns 100% of the economic transfer rights to only nine players in its 27 man team. 14 For FC Porto, the figure is seven out of 27.15 The club argues that the system enables them to compete on the transfer market with more wealthy clubs and to build a competitive enough team for European level competitions.16
Types of TPO in Brazil
As is commonly understood worldwide, TPO in Brazil is the ownership of economic rights in a player, the underlying asset of which is the player's future transfer fee and sometimes even their future earnings. The economic rights of a player are derived from the player's federative right. This is the right of a club to be able to register a player with a national football association, by virtue of an employment contract between the club and the player, so that the club can field that player in competitions.
More specifically, the economic rights are the rights to receive compensation arising out of the early termination of this employment contract; so if a player's employment contract expires before they are transferred, the economic rights no longer exist and the third party investor risks making no return on its investment.17
In Brazil, there are three common ways in which TPO occurs. The first is when a youth player is first registered with a club; the talent scout, agent or youth club that discovered him may take a small percentage of the player's economic rights to benefit if he is transferred again.18 The second possibility is when the club transfers some economic rights (usually between 20-50%) of a player that is already registered with them. This usually occurs when a club want to raise money and a player begins to show potential.19
The third is when an investor owns 100% of a player's economic rights and then loans him out to a club.20 This is exactly what happened when Carlos Tevez and Javier Mascherano joined West Ham from Corinthians in 2006 and both players had 100% of their economic rights owned by investors Media Sports Investment (MSI) and Global Soccer Agencies (GSA). This type of ownership also occurs in the form of "straw man" clubs which are small clubs set up especially to loan players out to proper clubs.21
Of course, as we are now aware, the English Premier League did not appreciate the notion that Tevez and Mascherano's owners could have such power as to "materially influence [West Ham]'s policies or the performance of its team". 22 This does raise the question of what the potential risks are of having so much TPO activity in Brazil.
As with TPO anywhere in the world, the usual concerns apply. Integrity could be compromised through match-fixing; if investors own rights in various players at different clubs they can, at least theoretically, fix the outcome of a match. There is also a risk of money laundering as investment funds can often have complicated ownership structures which make it difficult to discern who the ultimate beneficial owner is.
There is the ethical argument that the players are restricted in their freedom to decide on their futures as the third party investor would have a say in when the player will be transferred and where to. Though it must be noted that, generally in Brazil, contrary to the Tevez and Mascherano scenario, third party investors prefer to own less than 50% of a player's economic rights giving them less control over these issues. 23 It is argued that bigger percentage would usually deter a club from selling a player for as long as possible and potentially depreciate his value.24
As Brazilian players are generally very young with low levels of education, there is also the potential for them to be exploited through unscrupulous contractual clauses. Indeed, the lack of transparency and the fact that TPO agreements are usually confidential makes it difficult to ensure this does not happen.
There is also the argument that a third party investor would have an influence over clubs which would damage the reputation of football. After all, an investment of a player's economic rights is an investment like any other which the investor will want control over in order to maximise potential profit regardless of how it affects the sport. It is rumoured that third party investor Kia Joorabchian had a long term relationship with Corinthians and would influence transfer decisions made at the club.25 Another instance of this conflict is when Internacional unwillingly sold Oscar to Chelsea; 25% of the player's rights were owned by investor BMG and it is highly likely that they would have had some say on his transfer. 26
Perhaps the biggest conflict of interest issue in Brazil is the involvement of agents in the ownership of players. There are less than 20 private entities that control Brazil's TPO market and almost all of them have links to agents.27 High profile examples include Kia Joorabchian, who was not only responsible for the Tevez and Mascherano saga but whose company also had a 50% stake in Chelsea's Ramires.28 Another agent, Jorge Mendes, has an investment company called Gestifute which had a 35% stake in Deco.29 This is despite Article 29 of FIFA's Regulations of Players' Agents stating that agents are prohibited from receiving any payments from a club on the transfer of a player.30 This lack of separation between agent and owner is something that needs to be addressed in order to boost the reputation of TPO as an acceptable financial tool.
Regulation rather than prohibition
As the use of TPO is so widespread in Brazil, the concerns mentioned above need to be addressed so that it does not become such an exploitative practice so as to encourage those responsible for regulating the sport to ban it. At the moment, Brazilian legislation mirrors the same on the fence stance as Article 18bis of the FIFA Regulation on the Status of Transfer of Players. 31 Under Article 27-B of Law No. 9615 of 24 March 1998, the so called "Pelé Law", any clause where there is a third party influence on transfer related matters or in a player's performance is null and void.32 However the notion of "influence" is not defined and is a high threshold to meet.
Other than the Pelé Law, TPO in Brazil is governed predominantly by federal law. For example, Article 286 of the Civil Code supports the transfer of economic rights as it deems them to be the transfer "credit rights" which are recognised by the Brazilian courts.33 Moreover, as a TPO agreement is a private contract between a club and an investor, it is usually the general contractual principles of the relevant jurisdiction that apply.
In April 2013, the Brazilian Ministry of Sport made clear its intention to attempt to ban TPO.34 However, given how widespread the practice is, this could negatively impact football in Brazil. Rather, the practice would benefit from new legislation controlling it. Introducing requirements such as the mandatory disclosure of agreement terms and limiting the number of players a third party investor can own in one club or one league would go a long way in ensuring that TPO becomes a more transparent and legitimate practice.
Powerful sanctions also need to be put in place to prevent agents from dealing in economic rights or investors from influencing transfer decisions. As the world's largest exporter of footballers, for Brazil, the banning of this important practice is not the answer; rather better regulation is.
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- Tags: Brazil | Employment Law | FIFA | FIFPro | Football | Players Rights | Third Party Ownership | UEFA
- FIFPro: Worldwide third party ownership ban
- Top ten tips to understand third party investment in football players
- European Football Sports Law News 10 Feb 2014
- Third party ownership – to ban or not to ban?
About the Author
Poonam is a lawyer in the intellectual property team at CMS Cameron McKenna. Her areas of interest include the exploitation of media rights, brand protection, advertising law and ambush marketing.