By Mark Geday and Samson Brill, of Morgan Lewis
Following the successful takeover of Premier League club Everton by a US acquiror in December last year, eleven of the twenty clubs in the Premier League, the highest level of English football’s league system, are now controlled or part-owned by US investors. With over a third of all clubs from the English Football League, consisting of three lower leagues and seventy-two clubs in total, also minority-owned by US stakeholders, there is no question that English football clubs have become an attractive target for US investors over the last twenty years, drawn in by the relatively low valuations compared to US sports’ franchises and growing interest in the US for English football among other factors.
However, the increase in foreign interest and ownership in English football and the resulting boom in broadcasting revenues and player salaries has placed other aspects of the game’s structure, or “pyramid”, under strain. Threats to clubs’ financial sustainability, proper fan representation and the heritage of English football for example have led to the UK Government, following a consultation period, to introduce a draft Football Governance Bill (the Bill). The core objectives of the Bill are to protect and promote the financial soundness of regulated clubs, protect and promote the financial resilience of English football, and safeguard the heritage of English football. These objectives are to be delivered through legislation and the establishment of an independent football regulator (the IFR).
The recently elected UK Labour government made several changes to the previous version of the Bill, which was introduced in March but was not passed before the general election. Whilst the Bill remains substantially the same, there are several key changes partly aimed at addressing concerns around independence from government and the treatment of parachute payments. Additionally, it aims to further formalize the role and scrutiny of fans in club decision-making. The Bill is currently well advanced through the UK Parliamentary process.
OWNERS AND DIRECTORS TEST
The previous Bill established conditions that a prospective owner or director must meet before the IFR can ascertain that they meet the necessary honesty, integrity, and financial soundness standards. However, the requirement for the IFR to have regard for the UK government’s foreign and trade policy in connection with any proposed new ownership has now been removed, furthering the IFR’s operational independence from the UK government.
Following warnings from the Union of European Football Associations (UEFA) to the UK government stating that there should be no government interference in the running of football, this change acts to remove any express connection between the IFR’s decisions and UK government policy. UEFA has praised the fan engagement elements of the Bill but continues to voice concerns of potential “scope creep,” whereby the IFR’s powers allow it to potentially regulate English football beyond initial expectations.
PARACHUTE PAYMENTS AND FINANCIAL DISTRIBUTIONS
Under the previous Bill, the IFR was given powers to intervene for dispute resolution purposes if there were disagreements regarding the distribution of revenue, from broadcasting or other sources, from a specified competition between two leagues—or competition organizers. The IFR would ultimately make a distribution order following a mediation process. Parachute payments, being payments made to clubs out of the Premier League broadcasting revenue after they are relegated from the Premier League as a financial buffer against the reduced revenue of a lower league, were specifically carved out of the IFR’s scope of review or distribution orders.
The previous Bill simply required the IFR to ensure a distribution order would advance the IFR’s objectives and not place an undue burden on the commercial interests of either organizer. The new Bill, whilst bringing parachute payments into scope for the review, further requires a distribution order not to lower parachute payment revenue within the year following any team’s relegation below the revenue such team would receive without the distribution order.
In the context of a longstanding disagreement between the Premier League and the English Football League (EFL) regarding parachute payments, the inclusion within the IFR’s scope of review could potentially bring an end to this deadlock by allowing the IFR to reduce parachute payments, as long as such reduction is consistent with the IFR’s objective of financial stability. UK Culture Secretary Lisa Nandy has confirmed that parachute payments will not be abolished altogether, despite the IFR’s ability to reduce them. Significantly, one of the amendments put forward in Parliament’s most recent reading of the Bill was to close financial gaps between leagues.
Such powers of intervention regarding the distribution of top-flight revenue have provoked concern from the Premier League, which suggests its competitiveness and the capacity of its clubs to invest in the best talent may be negatively impacted by this change, as could the wider financial sustainability down the full pyramid given the importance of the Premier League’s profitability for the lower leagues and its role as the driving force for English football’s financial success. The Premier League has also expressed concern for the IFR’s binary-style mediator role in the event of a revenue-related dispute, and a perceived lack of certainty or guardrails as to circumstances when the IFR’s powers will enable it to step in and intervene with clubs’ financial operations. The potential harms of overregulation were one of the topics addressed in the Bill’s most recent reading in Parliament, as were the IFR’s ability to restrict clubs’ spending.
Notably, the EFL’s stance on parachute payments has recently shifted towards reform, rather than abolition. Given such commentary and reception, it seems likely that the IFR will, at least initially, approach any reduction or removal of parachute payments with caution and moderation. However, the potential impact of this change to the Bill on the flow of revenue across the Premier League and the EFL could be significant.
FAN ENGAGEMENT
The previous Bill proposed to formalize fan engagement and powers by only granting clubs with an operating license if it met a fan engagement threshold, and attaching a mandatory fan consultation condition to any license granted, as well as requiring the support of fans before allowing any club to materially change its crest or home shirt colors.
The new Bill takes these engagement standards further by requiring clubs to regularly meet and consult a representative group of fans on key club matters, as well as consult supporters on ticket prices and any proposals to move home ground, such changes only becoming permitted under the legislation once a club has taken reasonable steps to secure fan support. This representative group may also now be required by the IFR to be elected by other fans to prevent any situation where the club strategically selects the representative group.
Fans’ reception for the Bill has generally been positive. However certain fan groups have noted that while engagement between owners and fans in the lower leagues can be exemplary in some cases, such as Wrexham A.F.C. since Rob McElhenney and Ryan Reynolds’s entry in 2021, more mandatory engagement and consultation is required particularly in the Premier League and have called for the Bill to go further in this regard.
LICENSING CONDITIONS
Under the previous Bill, club operating licenses, required by a club before it can operate a team in a specified competition, would only be granted by the IFR if multiple license threshold conditions were met. Mandatory operating conditions would then attach to any license granted to ensure clubs operated in line with the Bill’s core aims. The new Bill grants the IFR increased powers and flexibility to impose non-financial discretionary license conditions, allowing the IFR to implement tailored additional conditions to struggling clubs to protect against these clubs’ perceived historical shortcomings.
The IFR’s powers in limiting a club’s spending through discretionary licenses has, on the other hand, been reduced, meaning that a club will always retain discretion on which areas to reduce expenditure on in order to meet the financial resources threshold or condition, and the IFR will not have power to limit any particular item of expenditure.
EXPERT PANEL AND INTERNAL REVIEW
As set out in the previous Bill, the IFR is to consist of a board and an expert panel. The new Bill contains several minor revisions to the way in which the expert panel, and the IFR’s internal review mechanism, will operate with the aim of mitigating any risk of overburdening the expert panel.
The IFR may now decline a request for internal review in certain cases where an internal review is clearly not necessary, and approval of certain “reviewable decisions”, i.e., decisions relating to certain specific matters listed in the Bill that may be appealed, including the sale or relocation of a stadium or the decision to appoint an administrator (all of which require the IFR’s approval).
OVERALL
Ongoing political developments across the domestic and European stage and the mixed reactions of domestic and international stakeholders such as the English leagues and UEFA will continue as the Bill passes through the legislative process, and potential further amendments to the Bill in response to such developments should not be discounted. As an investor, it will remain key to include a target club’s compliance history with the legislation as part of due diligence, given the potential impact of the new regulatory measures on a club’s operations, as well as the potential severity of financial penalties and sanctions under the Bill.
