Football Club Ownership in England and Germany

TABLE of CONTENTS

1  INTRODUCTION  6

  Terms and definitions  6

  Scope of this dissertation  6

  Drivers of club ownership  7

  Limited comparability of English and German football  9

  Limitations to free trade with football club shares  10

  Overview of the chapters of this dissertation  11

2  RESEARCH QUESTIONS  13

3  RESEARCH PROCESS AND METHODOLOGY  14

4  LITERATURE REVIEW  16

  Literature related to football club ownership  17

  football club ownership  18

  5  COMPARISON OF THE STRUCTURES FOR PROFESSIONAL FOOTBALL IN

  ENGLAND AND GERMANY  19

  General remarks  19

  The structure of English football clubs  21

  The predominant legal forms for football clubs in England  21

  History of legal forms for football clubs in England  21

  English rules related to football club ownership  23

  Financial performance of English football  25

  Threat from external investors  25

  The structure of German football clubs  29

  Significance of tradition  29

  Financial aspects of German football  30

  The human factor  30

  6  POTENTIAL CONFLICTS OF INTEREST IN CONNECTION WITH CLUB

  OWNERSHIP  32

  The rat race  32

  ownership  34

  Conflicts of interest in relation between English and German football  34

  Conflicts of interest among the stakeholders of a football club  35

Protection of competition or competitors   36

7  RULE  37

Definition  rule  37

  Membership associations  37

  The governance vacuum within membership associations  37

Spin-off of football branches................................................................ 38

A “Fit and Proper Person Test” for Germany?..................................... 62

LIST of FIGURES

Figure 1, p. 20 Drivers of institutional change in sport Figure 2, p. 23 Ownership structures of Football League clubs Figure 3, p. 28 The importance of external investments according to professional English football clubs Figure 4, p. 28 Motives behind the involvement of external investors in English football

LIST of ABBREVIATIONS

I am grateful for all the support I have received whilst researching and writing up this dissertation. Thanks especially go to my mother, Elisabeth Kindler, who has continuously encouraged me to pursue my dreams. I would also like to thank my ex- girlfriend, Sandra Golser, who has endured me through most of the MBA programme and has imposed great privations upon herself. Thanks also to Dr Geoff Pearson who has been a patient supervisor and, last but not least, to Walter Böhm (Sportfive, London), Till Johannsen, Helge Kratochvil, Jörg von Appen and all the other supportive people at Sportfive, Hamburg.

This dissertation analyses the legal and statutory environment for investments in football clubs in Germany, as opposed to the situation in England. Whereas German regulations limit the acquisition of shares of football clubs, the legal framework is much more liberal in England. The paper looks at the potential conflicts of interest involved with club ownership issues as well as at the arguments for and against the German “50 plus 1” rule and how this rule may cause a shortfall in competitiveness as compared to English football. Finally, the dissertation looks at doubts over the lawfulness of the rule in relation to European antitrust legislation and doubts over its effectiveness concerning legal loopholes provided by German corporation law.

The paper relied predominantly on the analysis of literature concerning the regulation of club ownership in England and Germany, whereas a significant amount of German literature was used.

Essentially, the research found that there is reason for severe scepticism about both the lawfulness and the effectiveness of the “50 plus 1” rule. It would probably not bear up against a test before the European Court of Justice. There are several opportunities in German corporate law to circumvent the rule.

Finally, the paper urges the German Football Association (DFB) to consider a softening of the regulations currently in place, and effective modifications of the underlying licensing system, respectively, as well as the introduction of supporters’ trusts and fit and proper person tests. Finally, the paper claims that competitive balance on a European club level can only be restored if club ownership issues are resolved on a European level.

1. INTRODUCTION

1.1 Terms and definitions

The commercialisation 1 of football is closely linked to terms like (multi-)club ownership, (multiple) team control or cross-ownership, all of which refer to the issue of controlling shareholding in one or more incorporated football companies. Unlike in other industries, such (multiple) control of commercial entities (football clubs) is possibly suggestive of manipulation of competition within leagues. It is often claimed that multi-club ownership or the absence of regulations limiting such ownerships is able to provoke conflicts of interest. These potential conflicts and their practical relevance are outlined and described in Chapter 6. The European Court of Arbitration for Sport (CAS 98/200 - Arbitral Award, AEK Athens, and Slavia Prague v. UEFA) defined the issue of multi-club ownership as “the ethical and non-ethical questions raised by the circumstance that two or more clubs controlled by the same owner take part in the same competition”. Simple ownership can, for purposes of this dissertation, be defined as follows: ownership of a football club means the entirety of rights that are necessary to influence the management, the administration and the sporting presentation of the club.

1.2 Scope of this dissertation

This dissertation, however, will assess the effectiveness and lawfulness of restrictions prohibiting the acquisition of shares of a professional football club in

1 Whereas UNESCO (1978) naively postulated in 1978 that competitive sport may under no circumstances be influenced by profit oriented or commercial motives, the situation looks quite different today: in 2002, the sports sector contributed 27m € or 1.4% to the total GDP of Germany (Weiler, 2006: 68). As new sources of income, such as television rights, commercial partnerships and the exploitation of stadium infrastructure, have become increasingly important and have attracted higher public attention, football has become more attractive for potential investors (Morrow, 2003: 4).

Germany, following the pretension to safeguard the integrity of competition and regardless of the fact whether or not such shares provide for a controlling influence over the club. The dissertation will also compare the German situation to the respective legal framework and its economical impact in England.

Ethical questions of possible dominance of institutional investors over members and supporters are only covered marginally by this dissertation. To quote Szymanski (2007: 199), this dissertation is about the “tension, between the desire to allow clubs greater market freedom in order to find their own economic solutions, and the desire to regulate the operation of markets in order preserve existing competitors and

1.3 Drivers of club ownership

(Multi-) Football club ownership can be driven by various objectives. Ownership of football clubs can relate to maximisation of financial gains. 2 Investment in a football club may be seen as similar to many other business investments and be justified using financial criteria such as discounted cash flow, internal rate of return, asset appreciation, or payback (Foster et al, 2006: 97).

Investments may as well be driven by strategic considerations, seeking to put the owning company in a good position to acquire certain rights, such as TV rights or merchandising rights. Another motive might be the fear of competing media

2 Cairns et al (1986) argued that “it is not clear that we are capable in principle of empirically distinguishing utility and profit maximizing behaviour”, and therefore differences in objectives would not necessarily result in differences in behaviour. However, according to Gratton (2000: 24), the objectives have effectively been made clearer for many Premier League, and some Football League clubs in course of the flotation of the clubs on either the London Stock Exchange or the Alternative Investment Market (AIM).

corporations from the clubs themselves, which have recently shown increasing tendencies towards broadcasting their own pictures on TV or the Internet or even towards creating their own leagues (Weiler, 2005: 179).

There is no dominant opinion about what club owners are trying to maximise. Nikolychuk and Sturgess (2007: 844) refer to other authors who argue that clubs are less profit oriented than other commercial organisations because they are attempting to maximise utility with sporting performance. Morrow (2003: 75) sums up the numerous different interests and motivations among and within football’s stakeholders as “more diverse than ever before”. After all, “corporate governance, which involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders, provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined” (OECD, 1999: 2). The differences in corporate governance in English and German football clubs will be outlined in more detail in Chapter 5.

In practice, apart from individuals like Roman Abramovich, a certain group of investors has shown interest in holding a controlling share in one or more football clubs. Firstly, clubs themselves might be interested to, directly or indirectly, invest in other football clubs in order to secure talent education or to pursue other purposes. 3 Secondly, marketing companies show an increasing involvement in football club shareholding. Thirdly, media corporations, such as Rupert Murdoch’s BSkyB, have shown enhanced interest in capital investments in football clubs (Glover et al, 2004).

3 The acquisition of shares of one club through another club is commonly described as cross- ownership, e.g. the case of Ajax Amsterdam merging two South African clubs into Ajax Capetown and holding the majority of this newly formed club (BBC News Online, 2000).

Finally, the sporting goods manufacturing industry seeks to get involved in football clubs in order to enhance its core business. 4 According to Scaglione (2007: 110), referring to the Deloitte Sports Business Group, the European professional football market generated total revenues of 12.6 billion € in 2005/2006 and hence represents a very attractive playground for investors.

1.4 Limited comparability of English and German football

While in England, there is literally a race of investors for top tier football clubs 5 , the acquisition of controlling influence over German football clubs is still limited to registered membership associations (‘eingetragener Verein’). Critics of the underlying regulations argue that such regulations are maintained at the expense of competitiveness as compared to other European leagues such as the English Premier League. However, the comparability of the English Premier League (EPL) with the German Bundesliga is limited as long as the range in which the EPL markets itself goes far beyond the outreach of the Bundesliga. Naturally, owners see huge potential in markets such as the Middle East or Asia, but while the EPL already enjoys a lot of awareness in these areas of the world, the German Bundesliga leads a rather humble existence in these regions (Goff, 2007). Bearing that in mind, we may doubt that German professional football clubs would attract as many potential investors as do English clubs in case restrictions to investments should fall. The sole

4 The probably most prominent example is the involvement of adidas-Salomon AG with FC Bayern

5 Goff (2007) quotes opponents of the buying spree in English football: “The status of football clubs as publicly traded companies has led to people buying into them who have no interest whatsoever in the game.” He also reports concerns about the means by which the takeovers are financed: football clubs would eventually suffer from the overwhelming amounts of debt capital. However, as long as television contracts remain as lucrative as they currently are, there is no indication that potential investors will cease to look for takeover opportunities. According to Stokes (2006), a lack of strict legislation regarding investment in football clubs could mean problems for the clubs involved, for example if the investors lose interest and withdraw from the clubs.

absence of restrictions will not bring in investors, and a whole set of other circumstances, such as global (TV) outreach 6 or corresponding branding efforts, need to be realised as well. Another issue that should be considered in depth is the perception brand owners (sponsors) have of changing ownership of football clubs. According to Stokes (2006), sponsors are particularly cautious about who they are associated with and could demur if questions arise over the suitability of an investor.

1.5 Limitations to free trade with football club shares

Governing bodies seek to secure the integrity of football by introducing rules that set limitations to the acquisition of the majority of shares in different football clubs or even in one football club. These rules may be divided into legal provisions 7 and regulations by governing bodies and league organisations that establish the limitations within articles of association or licensing manuals. These regulations range from total liberty of investment (e.g. in Greece and the Netherlands), to the prohibition of acquisition of direct or indirect controlling interest in two or more clubs of the same league (Italy), the prohibition of the acquisition of a minority stake in another competing club (England), or the prohibition of any kind of involvement in

6 Just recently, in July 2008, the German Antitrust Agency (Bundeskartellamt) forbade the plans of the German Football League (DFL) to centrally market the German Bundesliga. It ruled that the pooling of the football clubs into the DFL represented an unlawful restraint to competition that could only be justified if society would benefit from such a pooling. Such an ‘added value’ could be seen in free access to football on TV before 8 pm (Gaebler, 2008). In August 2008, the DFL and its marketing partner Leo Kirch offered a compromise to the German Antitrust Regulation aimed to preserve the centralised marketing model: 30 minutes of football highlights on public television starting at 7.30 pm (Soccer Investor II, 2008).

7 Weiler (2005: 180-181) lists the prominent examples Poland and Spain, where specific laws prohibit the acquisition of shares of multiple corporations and restrict shareholders and executives to grant competing sporting corporations bonds or securities (Poland) or, next to other restrictions, make share acquisitions in excess of 25% of the voting rights subject to the confirmation by the controlling institution Consejo Superior des Deportes (Spain).

more than one club 8 . Whereas the respective UEFA regulations, as outlined in more

detail in Footnote 8, upheld by the CAS 9 and confirmed in 2002 by the European

Commission 10 , do not prohibit multi-club ownership as such, meaning that it is still

possible to own and control more than one club as long as these clubs do not enter

the same UEFA club competition, the German “50 plus 1” rule does not even allow

ownership of one club, as will be outlined in more detail in Chapter 7.

1.6 Overview of the chapters of this dissertation

Chapter 2 of this dissertation formulates the research questions, Chapter 3 illustrates

the applied research process and methodology, and Chapter 4 reviews the literature

covered by this dissertation.

8 Initiated by attempts of the English National Investment Company (ENIC) to create synergies

between several European football clubs by building a portfolio of shareholdings, UEFA blocked ENIC’s initiatives by prohibiting multi-club ownership according to the following criteria (European Commission, 1999):

N No club participating in a UEFA club competition may, either directly or indirectly:

(a) hold or deal in the securities or shares of any other club, or (b) be a member of any other club, or (c) be involved in any capacity whatsoever in the management, administration and/or sporting performance of any other club, or (d) have any power whatsoever in the management, administration and/or sporting performance of any other club participating in the same UEFA club competition.

N No person may at the same time, either directly or indirectly, be involved in any capacity whatsoever in

the management, administration and/or sporting performance of more than one club participating in the same UEFA club competition.

N In the case of two or more clubs that are under common control, only one may participate in the same

competition. In this connection, an individual or legal entity has control of a club where he/she/it: (a) holds a majority of the shareholders' voting rights, or (b) has the right to appoint or remove a majority of the members of the administrative, management or supervisory body, or (c) is a shareholder and alone controls a majority of the shareholders' voting rights pursuant to an agreement entered into with other shareholders of the club in question.

9 CAS 98/200 - Arbitral Award, AEK Athens and Slavia Prague v. UEFA; what is remarkable about the

CAS decision is the definition of “integrity” in sporting competitions; integrity, according to the CAS, means authenticity of results paired with public perception of these results – it is not sufficient that competitors are in fact honest, but the public must, at the same time, get the impression that all the involved actors, including the club owners, make their best efforts to win.

10 European Commission, Press Release (2002): “[…] Without the UEFA rule, the proper functioning of

the market where the clubs develop their economic activities would be under threat, since the public’s perception that the underlying sporting competition is fair and honest is an essential precondition to keep its interest and marketability […]”.

Chapter 5 is concerned with the structural prerequisites of English and German football and how the present regulatory frameworks have evolved throughout history. The chapter also draws a picture of the financial state of football in both countries and what implications the relatively better financial position of English football might have on competitiveness on a European level.

Chapter 6 illustrates what types of conflicts of interest might be triggered by different constellations of football club ownership. In other words: is there a need for rules limiting club ownership? Do different regulatory systems affect the competitiveness of the football clubs of one country in relation to the clubs of another country?

Chapter 7, the core chapter of this dissertation, gives detailed insights into the German “50 plus 1” rule, a statutory regulation established by DFB and DFL. It is DFB’s and DFL’s intention that the rule provide for the integrity and authenticity of football in Germany. The existence of the rule is closely linked to the persistence of the membership association (Verein) as a legal form for German football clubs. A Verein, however, has limited opportunities to set commercial activities. Hence, we may doubt that the legal form of the Verein still meets the requirements of a modern and commercialised football world. The chapter gives a comprehensive overview of all existing arguments for and against the “50 plus 1” rule and how it might be challenged or circumvented on legal grounds.

The final Chapter 8 is concerned with the questions what measures DFB and DFL could take to safeguard the 50 plus 1 rule’s intentions and to provide for a more investor-friendly environment at the same time.

2. RESEARCH QUESTIONS

This dissertation seeks to elaborate the structural differences in relation to professional football clubs in England and Germany, further the resulting business environment and regulatory framework from such differences for potential investors in football clubs, and in how far these differences are accountable for competitive disadvantages of German football clubs as opposed to English football clubs.

Apart from the elaboration of these prerequisites, the German “50 plus 1” rule will be examined in depth and the following questions will be discussed: N How effective is the German “50 plus 1” rule? Does it offer sufficient protection to prevent potential conflicts within and outside leagues (nationally and

N Can the rule be circumvented and can such circumventions create conflicts of

N Considering the autonomy with which governing bodies introduce rules to limit club ownership in football on the one hand and taking into account the constraints to the economic activities of companies seeking to obtain such ownership of football clubs on the other hand, is the “50 plus 1” rule compatible with European antitrust legislation?

N What other options are there to provide for the integrity of competition in a system that allows the acquisition of the majority of shares?

In the attempt to answer these questions, the following research process and methodology was applied.

3. RESEARCH PROCESS AND METHODOLOGY

This chapter aims to inform the reader about the methods of research conducted in preparation and completion of this paper and for what reasons such methods were limited, as well as the ways in which the research materials were interpreted and

The methodology applied in this dissertation is qualitative, relying on comprehensible legal materials, even if they may be challengeable or subject to interpretation. It is moreover deductive and tests existing hypotheses. All other types of methodologies had to be excluded because they do not provide for the necessary amount of reliability and validity in the present context (Flick, 2006: 14). The qualitative approach is applied to assess the main motives behind and for the implementation of regulations restricting football club ownership, as well as the assessment of the lawfulness and effectiveness of such regulations. In this context and as the topic of this dissertation requires a legal assessment of the self-governing law of football’s governing bodies as opposed to European and German Law, the methodology applied relies on the legal analysis of the available resources about the issues involved, as outlined below. The sole discipline affected by the scope of this dissertation is law and hence the present standard of knowledge is structured, presented and compared according to the research questions. The aim of this procedure is to provide a legal assessment of the German approach to club ownership as well as an objective presentation of all available arguments for and against the system.

The legal assessment is based on the currently existing legal frameworks of governing bodies (FA, DFB/DFL, UEFA), Germany and the European Union. These frameworks, being fluid, complex and diverse, are subject to change and such a change might give way to challenges of the findings in this dissertation.

The findings in this dissertation rely on a significant range of interpretation of legal materials. Interpretation is always closely linked to interrogation of legal values. As this paper seeks to express what effects law can have on society, politics or economics, it follows an interpretive socio-legal research approach as opposed to a simply positivist or critical legal approach (Harrington and Yngvesson, 1990: 136). However, this approach is prone to limitations because interpretation always has to exclude neutrality and objectivity. In order to avoid major shortcomings in relation to the findings of this dissertation, the author has attempted not to present just a unilateral interpretation of the regulations under review, but also to account for opposing interests and positions. In this sense, the law research in this dissertation is closely linked to social science research that is somewhat more behavioural and is able to enrich the understanding of law (Tomasic, 1996: 31). The multitude of interests involved with football club ownership issues, the potential conflicts of these interests, and football’s significance as part of society in general require such an approach. All other research methods would deny the effects football’s law have on

The topic under review only requires data collection or statistics for general indications about investor-related issues; it is generally based on substantiation and interpretation rather than exploration. Key points of this dissertation, however, were