Nutmegging the Game? Third Party Player Ownership in Football
By Seshank Shekar
The practice of third party player ownership (“TPPO”) in football has been the subject of huge debate and controversy over the past few months following a spate of high profile transfers of players all across the top leagues in Europe. Some notable examples of players’ rights being owned by the third parties include the Colombian footballer Radamel Falcao, (who was recently transferred from Atletico Madrid in Spain) and the latest Brazilian sensation Neymar (who recently made a transfer from Santos in Brazil to Barcelona).
TPPO is particularly common in South American countries such as Brazil and Argentina, which have been traditional hotbeds for producing world class footballers over several decades. Clubs and third party entities in South America have together developed and refined the TPPO system over a period of time, whereby they develop young players and then sell them to European clubs for large transfer fees in order to generate cash flow for not only the club but more importantly, to third party entities. As explained below, there is massive potential for making profit under the TPPO system and as a result an investment market has emerged wherein third parties began financing the clubs in exchange for a share of the transfer fees gained by selling players to clubs in Europe.
In order to fully understand the TPPO model, it may be convenient to understand the rights vested in a professional footballer. In this respect, a distinction may be draw between the ‘sporting rights’ and the ‘economic rights’ of a footballer.
Sporting rights or federative rights as they are occasionally known, refer to the right transferred to a club to register a player in a national football federation or association. This registration is mandatory in order for a player to represent a club in a specific territory and to play in matches played by the club in any tournament or league organized by the football federation of the territory. Economic rights, on the other hand, refer to the pecuniary or commercial value generated from the transfer of the player’s sporting rights.
For most of the history of professional football, players’ sporting as well as economic rights have always been held by the clubs they belong to. Indeed, to this day, the practical reality is that the sporting rights of a player can only be held by the club as he represents only one entity (being the club) on the field. In contrast, the economic rights are being gradually shifted away from the clubs, and are now being owned by third parties who may have no affiliation to the club whatsoever. These third parties may be businesses, companies, agencies, individuals or any other entity.
It is against this backdrop that we can define TPPO as a phenomenon wherein a football club does not own, or is not entitled to the complete future pecuniary transfer value or the economic rights of a player. There are numerous sub-models followed for TPPO arrangements but the basic premise is that companies, businesses and/or individuals invest in football clubs and players in return for owning a percentage of a player’s future transfer value or fees. In this respect, the third parties involved essentially behave as speculators, by purchasing a percentage in a player from a club in the hope that their value will go up in the future. A company/individual may also provide financial support and underwrite the expenses for an amateur player’s development in return for an agreement that when the player signs a professional contract, the third party will be entitled to a percentage of any future transfer fee.
There are several reasons for the popularity of the TPPO model. The foremost reason being that most clubs in non-elite leagues around the world would face financial difficulties in acquiring top class players if not for the income or subsidies received from such arrangements. The clubs usually buy only a share of a player’s economic rights, leaving the rest to former clubs or (more often) to third party owners which enable the lowering of acquisition costs and the minimisation of the risks associated with an expensive transfer. Contracts between the clubs and such third parties are generally very complex and may include clauses that allow clubs to gradually increase their share in the player’s rights over the term of the player’s agreement for pre-agreed amounts after he has established his worth or proved himself in a top European football league. The players benefit from the TPPO model as the investment made by third party entities, provides them with otherwise unavailable resources and gives them an opportunity to gain lucrative contracts in the cash rich European professional football leagues.. For third party investors, the benefit almost always arises from them hedging their bets on the fact that the player’s economic rights may increase in value after gaining exposure.
However, the TPPO model has received severe criticism over the last few years as concerns are being raised over the level of influence such third party entities have over the players themselves and also the football clubs they are transferred to. It is believed that several players owned by third parties often have no say in their future destinations and are often transferred to clubs which offer more money rather than the ideal football opportunity for the player. Third party owners often hawk their players to the highest bidder, and have no regard with respect to the football ambitions of the player.
Perhaps the biggest entity engaged in this sort of model in the European stage is the Doyen Group which is a private fund focusing on investments in the football sector and provides an alternative source of financing for several clubs across Europe, but most notably in Spain and Portugal. Clubs such as Atletico Madrid, Sevilla, Porto FC, Benfica, Sporting de Lisbon are just some of the clubs that have benefitted by having Doyen Group players being transferred to their club for relatively small amounts of money with the transfers being funded by the Doyen group under the TPPO model.
The issue of TPPO in football first came into mainstream focus in the courts in the case of Sunderland Association Football Club Ltd v Uruguay Montevideo FC and Ors( All ER (D) 194 (Apr))wherein Sunderland Football Club (“Sunderland FC”) signed the Honduran striker Milton Nunez from the Uruguayan club Nacional.
On the completion of the transfer, Sunderland FC immediately approached the courts in the United Kingdom and sought an interim injunction against the enforcement of a bank guarantee that they had given to the selling club, due to a fact that was discovered after the player signed the agreement. It was discovered, that Nunez’s economic rights had been owned at various times before the transfer by Nacional, a second Uruguayan club called Montevideo FC and the Greek football club, PAOK, even though he was primarily contracted to Nacional. Immediately prior to Nunez’s transfer to Sunderland FC, a 70% stake in the economic rights of Nunez, which was owned by PAOK was transferred to Montevideo, meaning that the club owned a 100% of the player’s rights despite him never appearing or playing for the club.
Sunderland alleged that they has been deliberately misled by Nunez’s agent to believe that Nunez was owned by Nacional, and that if they had known that the selling club was playing in the Uruguayan third division , they would have never gone ahead with the transfer. This argument was rejected by the Judge in the injunction proceedings filed by Sunderland FC, who preferred the explanation offered by Montevideo FC that there was a genuine misunderstanding between the agents working for Montevideo and Sunderland FC respectively. The matter was eventually settled out of court. However, this case perfectly illustrated the complex and often confusing structure of the TPPO model and served as a precursor to future high profile events.
Tevez & Mascherano
TPPO was therefore not a completely alien concept when in August 2006, West Ham United FC (“West Ham”) signed two highly sought after Argentinian footballers, Carlos Tevez and Javier Mascherano, from the Brazilian first division club Corinthians Football Club. The transfers to West Ham came as a surprise to the football world as some of Europe’s top clubs were rumoured to be after the duo’s services.
It transpired that the players’ economic rights, were owned by two third party investment entities, namely Media Sports Investments (“MSI”) and Just Sport Inc. (“JSI”) and the players’ transfer to West Ham had been bankrolled by these two entities in order to provide them greater exposure in Europe. It further transpired that Tevez and Mascherano were in fact signed by West Ham on loan with both MSI and JSI maintaining their respective economic interests in the players. For the investors, the arrangement served as an opportunity to put their assets in the shop window. For West Ham, it was a once in a lifetime opportunity to have two world class footballers available for selection at an almost non-existent transfer fee. However, West Ham had almost no say or influence in the future transfer or destination of the players.
Despite widespread suspicion, details did not emerge about the controversial arrangement until Javier Mascherano was eventually sold to Liverpool Football Club on a permanent basis in January 2008. Additionally, it further emerged that when finalising the loan signing of the players, West Ham failed to disclose to the Football Association (“FA”) the true nature of the third party interest and, specifically, the influence that the entities had on West Ham’s ability to transfer the players to another club which was in contravention of the Premier League Regulations. At the time, the relevant Premier League Rules under Rule U18 stated that:
“No club shall enter into a contract which enables any other party to that contract to acquire the ability materially to influence its policies or the performance of its teams in league matches or in any (other) competitions.”
A tribunal appointed by the Premier League concluded that the arrangement with Tevez and Mascherano was a breach of the third party influence rules set out under Rule U18 of the regulations and imposed a £5.5 million fine on the club.
In the meantime, Mascherano was sold to Liverpool for little, if any, economic benefit to West Ham and Tevez remained at West Ham and almost single-handedly saved the club from relegation towards the end of the 2006-07 season.
Prior to 2006, football’s governing bodies did not have any rules in place to ban or prohibit TPPO. While the Premier League reacted strongly to the Tevez and Mascherano affair by inserting rules into the Premier League Regulations to explicitly ban TPPO, football’s two major governing bodies, the Fédération Internationale de Football Association (“FIFA”) and the Union of European Football Associations (“UEFA”), are yet to follow suit.
The Premier League added Rules L34 and L35 in the Premier League Rules for the 2008/09 season, in order to prevent a repeat of the Tevez and Mascherano affair in the top tier of English football. These rules are now incorporated under Rules U36 and U37 of the latest Premier League Rules for the season 2012/2013 (“PL Rules 2012/2013”). Rule U36 of PL Rules 2012/2013 states that unless otherwise agreed by the Premier League board, a club may only make or receive a payment in relation to a transfer to/from, another club; a financial institution or guarantor; the Premier League or the Football League; an authorised agent or exempt solicitor; or Her Majesty’s Revenue and Customs (HMRC). It is pertinent to note that the exhaustive list provided under Rule U36 does not mention third party owners explicitly.
Rule U37 on the other hand, addresses third party owners specifically and permits clubs to make a payment to buy out the interest of a person or entity who, not being a club, nevertheless has a third party ownership agreement either with the club with which the player is registered or with the player. Rule U37 states:
“In respect of a player whom it applies to register as a Contract Player, a Club is permitted to make a payment to buy out the interest of a person or entity who, not being a Club or club, nevertheless has an agreement either with the club with which the player is registered, or with the player, granting it the right to receive money from a new Club or club for which that player becomes registered.”
The operative term used in Rule U37 is “buy out” meaning the club has to buy out all of the player’s economic rights, leaving the third party owner with no economic rights whatsoever. This is now the only permitted method by which a club in England can buy a player owned by a third party.
Crucially, these rules do not apply retrospectively. However, they have ensured that such third party arrangements are not witnessed in England again. Following the change of TPPO rules in the English Premier League, other top European leagues such as the German Bundesliga and the French Ligue I have also banned the TPPO in their respective leagues. The rules in these leagues now require clubs to completely own the sporting as well as the economic rights of any player contracted to them.
While there is no specific rule or regulation enacted by UEFA directly addressing the issue of TPPO, reference may be made to the UEFA Club Licensing and Financial Fair Play Regulations 2012 (“FFP Regulations”). While the FFP Regulations themselves do not explicitly ban the TPPO model, the provisions related to TPPO are framed in such a manner, so as to discourage clubs from entering into such arrangements. Article E.1.m.ii of Annexure VII of the FFP Regulations states:
“any profit arising from the disposal of economic rights or similar of a player to any other party must be deferred, and a profit can only be recognised in the profit and loss account following the permanent transfer of a player’s registration to another club”
The language of Article E.1.m.ii implies that if a club sells a player to a third party, it will not be allowed to recognise any revenues from that transfer as profit for the purposes of the meeting the revenue requirements under the FFP Regulations until the player is registered with another club. This discourages, but does not prohibit, clubs from disposing of interests in players to third parties to increase income to achieve compliance with the FFP Regulations. Further, article E.1.m.ii also requires that clubs must disclose to UEFA any player that is owned or part-owned by a third party and the percentage of his economic rights held by the club even though there is a conspicuous absence of any obligation on the club to disclose the identity of the third party.
UEFA, through the course of press statements and media releases, has expressed a willingness to employ a permanent regulatory framework to ban players owned by third parties from playing in UEFA organised club competitions, which include the UEFA Champions League and the UEFA Europa League. The proposed regime would not prohibit players from playing for their respective clubs in their domestic leagues (subject to the domestic leagues allowing such arrangements), but would have a significant impact on the ability of clubs to compete in UEFA competitions to their financial detriment. In the event that such a framework or mechanism does come into place, UEFA has stated that a transitional period of three to four seasons would apply in order for the clubs to get in line with the new regulations.
As is the case with UEFA, FIFA at present does not have any rule which prohibits or addresses TPPO specifically. However Article 18bis of the FIFA Regulations on the Status and Transfer of Players makes an effort to prohibit third party ‘influence’ in football transfers. Article 18bis states:
“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.”
The language used in Article 18bis is thus very similar to the regulatory structure put in place by the FA and the English Premier League under the now repealed Rule U18 of the Premier League Rules.
With several top leagues implementing regulations prohibiting the TPPO model in their respective leagues, there appears to be a growing tide of opinion against TPPO. Further, recent developments emanating from FIFA and UEFA suggest that football’s governing bodies have woken up to the problem and are willing to develop an effective approach to regulate and maybe prohibit TPPO completely. UEFA is gradually making moves towards a European-wide ban, putting pressure on FIFA, who have made no such move thanks to the pressure put on them by their South American members. Further, the degree to which certain federations, such as Portugal and Spain, have an appetite to deal with TPPO and how quickly such anti TPPO-regulations could be put in place still remains to be seen. In some cases, the decision may be taken out of the hands of football’s governing bodies. For example, the Argentinean government has recently implemented a tax law that was enacted to seemingly discourage and effectively prohibit the TPPO model for all players playing in Argentina’s professional football leagues.
It should be noted that a comprehensive and complete ban on TPPO could be seen as disproportionate under anti-trust and competition regulations in several jurisdictions as restricting the free market for investment in footballing talent. Further, any attempts to ban or curb the practice of TPPO could prevent young players from unprivileged backgrounds from gaining the opportunity to make it in the cash rich professional football leagues in Europe. It could thus be argued that a blanket ban may not best serve the interests of all parties involved and that a tighter, stricter regulatory mechanism of ownership could be sufficient to protect the sanctity of professional football.
© The Sports Law & Policy Centre