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
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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.