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What to Focus on in the Due Diligence of a Sports Club

What to Focus on in the Due Diligence of a Sports Club

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The acquisition of a sports club is definitely a specific process in many respects and requires preparation on several fronts. This article takes a closer look at one of the first steps to undertake before acquiring a sports club, namely legal due diligence. Along with the areas usually checked, one must pay attention to several specific areas stemming from the specific characteristics of the sport (and each type of sport has not only its own considerable further specifics, but also its own unique risks).

First, it is important to understand that a professional sports club can often be a trading company.1 The reasons for this are mainly economic and are related to the legal person’s area of work which in most case is “entrepreneurship”. There are many parallels and legal risks in acquiring a sports club that can also be seen in the acquisition of any other trading company. In that respect, the methods commonly applied in a standard due diligence can be followed.

Along with legal, tax and financial advisors, it is recommended that further advisors also participate in a sports club acquisition, particularly sports advisors. Without them, it can be quite hard to detect all the risks and cover them in transactional documentation.
On what areas then should the prospective bidders for a sports club or the lawyers performing due diligence for them focus?

Sports venues

The most valuable property of a sports club will typically be its sports venue. One might imagine that the owner of the venue is the sports club itself. But in fact, professional sports clubs are not the owners of their venues in most cases. One of the reasons for this may be the regime for providing subsidies according to Section 6b of Act no. 115/2001 Coll. on sports promotion (“Act on Sports Promotion”), which states that the government primarily supports societies whose area of activity is sport.2 It is common for a sports club to conclude a lease contract with another legal person corresponding to the parameters of Section 6b of the Act on Sports Promotion. In that case it is appropriate to check the conditions of lease, including all appendices, and to know the conditions regarding possible easements and other burdens connected to the property. Beside contractual stipulations, it can be noted at the same time that Section 7a of the Act on Sports Promotion provides definite duties regarding not only the owner of the sports venue, but also the operator, or the organizer of sport events, which in some cases is the sports club itself.

In terms of due diligence, it would be advised to check whether a particular sports venue fulfils the specific criteria for participating in certain sports competitions (e.g. the minimum capacity of the sports venue)3 and, if needed, other norms stipulated by general legal regulations. Not all of those criteria can be verified by a lawyer, therefore at some points cooperation with other advisors might be required. Other property which is also owned or used by a sports club should not be neglected (sports arenas for training, restaurants, sporting goods shops, parking, etc.) and could be subject to similar audits to the main sports venue itself (i.e. a stadium or other sporting arena).

Athletes and others

The other valuable assets of a sports club are the athletes themselves, therefore their contracts should also be subject to due diligence, particularly the relevant provisions on the length of the contractual relationship, sanctions, termination of contract and of course remuneration, the level of which can be established in advance for the whole duration of the contract or can be contingent upon results. In practice, clauses regarding remuneration cuts in case of injury or temporary indisposition or disqualification are also common.4 The state of health of an athlete who is unable to perform should not ultimately be seen as the worst scenario, considering there is also the possibility of temporary suspension due to breaking anti-doping rules (where an athlete may be disqualified from performing sports for four years).5 In case of the main star of the team this can be the key parameter that might influence the total acquisition price.
Professional contracts with athletes can set out fines linked to so-called best effort clauses. For instance, they may contain a stipulation that the player is obliged to participate in games that he is selected for, and to play “according to the best of his ability”.6 Considering the requirement of a fairly exact and fixed specification of the duty, which, if not fulfilled, gives rise to the right to a conventional fine, as inferred from consistent case law7, it is probable that a contractual stipulation regarding the athlete’s performance formulated as “according to the best of his ability” or “with maximum effort” could be classified as too vague.

Apart from the athletes themselves, it is important to keep in mind the other persons connected to the sports club and helping to achieve the results, be it individual members of the team (coaches, team physicians) or sports club employees. Contracts with these individuals should also be subject to due diligence.

State aid

In practice, state aid for the sports sector is quite common, so it is important to note that during the acquisition of a sports club it is worth making sure the sports club has not received illegal state aid under Article 107(1) of the Treaty on the Functioning of the European Union. Support constitutes state aid if (i) it was granted by the State or through State resources, (ii) the support distorts or has the potential to distort competition by (iii) favoring certain enterprises or (iv) affecting trade between EU countries. The European Commission through decision-making practice has come to the conclusion that sports clubs can be considered enterprises in the sense of the TFEU and can affect trade between EU countries (e.g. participation in multinational sports competitions, providing wider access to more effective propagation of the sports club, sponsorship or media law).8 One example is a case that was heard by the Office for the Protection of Competition, in which the provision of illegitimate state aid (rent cuts, advertisement ordering and credit granting by a company controlled by the city) by the statutory city of Pardubice to HC ČSOB Pardubice a.s. sports club. The Office expressed the opinion that procurements regarding financing of top level sport from the public budget can lead to trade disruption and can affect competition.9

Sports regulations

Sport governing bodies issue their own regulations, which all members (sports clubs) are obliged to follow. These sports regulations have certain specifics which potential bidders have to know in case they intend to participate in competitions organized by such sports union. In the future, sports regulations could influence bidders’ decisions concerning, for instance, the issue of the transfer or acquisition of an athlete. Typically, these are transfer regulations, according to which a so-called registration period (transfer window) is established, when it is possible to complete the transfer of an athlete to another sports club in terms of competition [under competitive terms?/which is a competitor?]. Therefore, the analysis of further sports regulations that may determine the functioning of the sports club is necessary.

Sponsorship contracts

Sports clubs often enter into several sponsorship contracts, thus creating a further significant source of income, e.g. Naming rights agreements, the aim of which is the building up of sponsors and their brand awareness, oftentimes by means of naming the sports venue at which a sports club performs after them.10 While undertaking due diligence, one should pay attention to sponsors’ rights and duties clauses, the duration and termination conditions of contracts, conventional fines, options and exclusiveness that would disable cooperation with other sponsors, and any other advertisement restrictions in case of holding other non-sports competitions in the venue.

Broadcasting rights contracts

Broadcasting rights contracts can also be counted among one of the further sources of a sports club’s income. These are standard license contracts, the key provisions of which concern the extent of the rights of a particular media type (television, the Internet, radio, etc.), as well as the language and territory of broadcasting. Next, it is possible to come across provisions concerning broadcasting by means of as yet poorly developed technologies, which might effectively limit future interested parties, especially if other better advanced technologies are suggested to them by rival companies. By way of illustration, sports broadcasting by means of virtual reality technologies, which offer fans the feeling of being present in the stadium, could be cited as a good example. Some experts even speculate that in the future, the connection of sport with virtual reality will allow the sale of virtual tickets that will help overcome the obstacle of the limited capacity of sports stadiums, which in effect may increase viewer ratings and the popularity of a chosen sport.11 The renowned NBA, for instance, is already experienced in broadcasting sports by means of virtual reality; they have been using the technology since 2016.12 In the Czech First League, the standard practice is for sports clubs to grant broadcasting rights on the basis of an exclusive license to one subject who then offers them as a single block of broadcasting rights.

Conclusion

In conclusion it can only be added that proper preparation pays off not only in sport, but also in the acquisition of a sports club. If an investor does not want his opponent to win (not only on the sports field, but also in transaction negotiation), it always comes in handy to have the “Mannschaft” that will guarantee your success

1 In practice, it is no more an exception that sports clubs function like joint-stock companies or limited liability companies. For instance, during the 2019/2020 season of the highest-level ice hockey competition (Tipsport Extraliga), there were 14 hockey teams in total, 8 of which had the legal structure of stock company, and 6 teams had the legal structure of LLC.
2 In this regard, the subsidy program managed by the Ministry of Education, Youth and Sport called “Podpora materiálně technické základy sportu – ÚSC, SK a TJ“, can be mentioned. One if its aims was to support the reconstruction of sports venues.
3 E.g. License Rules for participation in Extra League Ice Hockey. Available >>> here [online]. ceskyhokej.cz [as at 11.11.2019].
4 JURKA, H. Právní úprava profesionálního sportu v České republice a zahraničí. Praha: Wolters Kluwer ČR, 2018, pg. 28.
5 Section. 10.2.1 Guidelines for control and sanctions in sport in the Czech Republic. Available >>> here [online]. antidoping.cz [as at 11.11.2019].
6 E.g. Section III., B paragraph 1 in conjunction with Section IX. of sample Players Contract. Available >>> here [online]. ceskyhokej.cz [as at 11.11.2019].
7 Decision of the High Court as at 27 April 2006, file no. NS 33 Odo 469/2006.
8 Hamerník, P. Regulace veřejné podpory profesionálnímu sportu jako příklad vyvažování zájmů na periferii práva EU, Právník no. 8/2017, pg. 686-706.
9 Statement of the Director of the State Aid Department of the Office for the Protection of Competition. Available >>> here [online]. uohs.cz [as at 11.11.2019].
10 For instance, Werk Arena in Třinec, DRFG Arena in Brno or O2 Arena in Prague.
11 GREENBERG, J. Laura. MARTINEZ, M. Diana. The role of "extended reality" in sport & an overview of key global licensing considerations. lawinsport.com [online]. LawinSport, publikováno 22.2.2018 [as at 11.11.2019].
12 NBA extends virtual reality deal with NextVR. Available >>> here [online]. SportBusiness, publikováno 26.9.2019 [as at 11.11.2019]. 

By Irena Kolarova, Senior Associate, and Jiri Ganger, Junior LawyerRowan Legal

Czech Republic Knowledge Partner

JŠK, advokátní kancelář, s.r.o. (JŠK) is a medium-sized law firm based in Prague providing a comprehensive range of commercial legal advisory services in the Czech Republic. Our team consists of almost 30 lawyers, five of whom are partners with many years of experience from leading international law firms. We advise local and international clients from banking, insurance and various industry sectors, boast a respected projects practice, and work for the public sector at the federal and municipal level.

Ever since it was founded in 2004, JŠK has striven for the epitome of professionalism, expertise and ethical integrity. We continuously seek to surpass what large global law firms can offer and to give our clients a personal approach. All mandates are equally important to us regardless of size as we guide clients through both complex and seemingly routine matters.

Our clients turn to us for advice when implementing their business plans across all areas of commercial law. We are proud members of PONTES: the CEE lawyers, a unique network of law firms through which we provide services not only in the Czech Republic but also in Austria, Bulgaria, Hungary, Poland, Romania and Slovakia.

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