By Christopher R. Deubert, Senior Writer
Sports leagues are notoriously secretive and protective of their internal affairs. League meetings where club owners meet and discuss their league’s most important financial, legal, player, public relations and other matters are events of great intrigue, where reporters try to sniff out any leaks or confidential sources they can. For example, at the December 2022 NFL owners’ meeting, club owners discussed the various legal and public relations headaches caused by Washington Commanders owner Dan Snyder and whether he should be voted out of the league. The secrecy of the leagues’ internal affairs has historically been possible because there was a very limited number of persons with an ownership interest in clubs. This has changed, as has a federal rule governing corporate disclosures in litigation. As a result, we are likely to begin to learn more about the ownership of sports teams.
The NFL historically had required that its clubs be family-owned, i.e., that a particular family owned at least 51% of more of the club’s equity. These rules were derived from, and helped sustain, the family dynasties that created and ran the league, including the Chicago Bears’ Halas family, the New York Giants’ Mara family, the Pittsburgh Steelers’ Rooney family, and the Kansas City Chiefs’ Hunt family. These rules precluded ownership by public shareholders, public corporations, nonprofit organizations, and private equity firms. The Green Bay Packers are a famous exception to the rules, as the club is publicly owned by more than 500,000 stockholders, mostly fans.
The NFL has been forced to bow to reality and change these rules several times since the 1980s. First, in that decade, the required ownership percentage for the controlling owner was reduced from 51% to 30%. Then, to enable succession planning, the NFL lowered the threshold to 10% for teams that had been owned for at least ten years by the same family, provided that other family members owned at least 20% of the club. In recent years, that figure was reduced to 5% and then finally just 1% in 2022.
The exponential rise in franchise values has driven changes to these rules. According to analysis by Sportico, the average NFL franchise is worth $4.14 billion. The Denver Broncos were recently sold to Rob Walton of Walmart fortune for a record $4.65 billion. These high prices make it extremely challenging for even the wealthiest people to buy controlling stakes in NFL clubs. As a result, the league now permits buyers to obtain up to $1 billion in debt financing. Moreover, clubs can have up to 25 people in an ownership group.
For other sports leagues with similar problems, the answer has come in the form of private equity. In the past two years, the NBA, MLB, NHL, and MLS have all changed their ownership rules to permit private equity funds to buy passive, minority stakes in clubs. Existing private equity firms and new sports-focused firms have since began buying stakes in clubs, including Dyal HomeCourt and Arctos Sports Partners. The valuations and sale prices of sports teams have seem both unstoppable and uncorrelated with other markets, making them attractive investments. Indeed, when the Phoenix Suns were recently sold for $4 billion, Dyal achieved a 158% return on investment in just 18 months.
While private equity is providing important new capital to clubs, public ownership is a possibility in all leagues but the NFL. While Madison Square Garden Sports Corp. is a publicly-traded entity that owns the New York Rangers and New York Knicks, such structures are rare. Nevertheless, in November 2022, Ted Leonsis, CEO of Monumental Sports & Entertainment which owns the Washington Wizards, Capitals, and Mystics among other properties, said that he thought the rapid rise in franchise valuations would result in more teams becoming publicly traded entities.
The diversification and extension of ownership interests will likely lead to greater knowledge about sports teams. There will be more parties with a right to or interest in sensitive club information and documents, including but not limited to operating agreements, financial statements, loans, leases, and player and coach contracts. It is inevitable that putting these documents into the hands of more people will result in more public disclosures.
The introduction of private equity firms will also likely lead to greater information. Such firms understandably will be meticulous in evaluating and monitoring investments, closely scrutinizing and requesting various documents and reports. Indeed, scrutinous private equity firms may improve the accounting and operating standards of clubs, some of which have historically been a bit sloppy or opaque as a result of their closed and private nature. The private equity firms in turn have investors of their own who may want information about the firms’ investments in sports assets.
Finally, a recent change to the Federal Rules of Civil Procedure, which govern litigation in federal courts, adds to these potential disclosures. Rule 7.1 historically required corporations to identify whether any parent corporation or publicly held corporation owned more than 10% of their stocks. This rule was intended to help judges evaluate potential conflicts of interest based on their personal stock holdings.
The rule was amended in December to require limited liability companies (LLC) to “name – and identify the citizenship of – every individual or entity whose citizenship is attributed to that party” in cases where diversity jurisdiction is alleged. The purpose of the rule change is to help courts evaluate whether they have jurisdiction over the dispute since the citizenship of LLCs is determined by the citizenship of its individual members. To fully assess the citizenship of an LLC requires knowing the state of residence for each individual or corporation with an ownership stake in the LLC or any entity with an ownership stake in the LLC, all the way through the organizational structure.
As a result of this amended rule, clubs engaged in litigation in federal court based on diversity jurisdiction will now have to reveal the names of all individuals and corporations with an ownership interest. While such information will only be revealed sporadically, it is likely that from time to time, interesting and even controversial information will come to light.
Sports teams have evolved into large and lucrative business enterprises. That evolution also comes with the increased financial disclosures and transparency typical of big business.
Deubert is Senior Counsel at Constangy, Brooks, Smith & Prophete LLP.
Eben Novy-Williams, Suns $4B Sale Sees Dyal Cash Out in First NBA Private Equity Exit, Sportico (Feb. 8, 2023)
Alex Silverman, Ted Leonsis predicts more sports teams going public, Sports Bus. J. (Nov. 10, 2022)
Eric Jackson, The 32: What Does it Take to Become an NFL Owner?, Sportico (Sept. 13, 2022)
Kurt Badenhausen, NFL Team Valuations 2022: Cowboys Rule at $7.6B as Average Tops $4B, Sportico (Aug. 1, 2022)
Daniel Kaplan, NFL pares ownership rule, Sports Bus. J. (Oct. 26, 2009)