Imagine if the LA Dodgers, headed into the NLCS this afternoon, were convicted of financial schemes and fraud in federal court (yeah, they’d have jurisdiction due to all the wire fraud and money laundering charges), found guilty on a hundred charges and were sentenced as follows: the last three World Series titles revert to the Toronto Blue Jays, Rays, and Yankees; they are fined hundreds of millions; they are immediately relegated out of the National League and sent to AAA, the Rochester Red Wings are elevated to the majors (it would be the Oklahoma City Comets except they are the Dodgers’ minor league team); their stars’ contracts, tied to actually being in MLB, are voided; Ohtani and Yamamoto fulfill long time dreams of playing for the Astros.
Something exactly like this is playing out in the U.K. right now and it involves the Premier League equivalent to the Dodgers, if not more successful, Manchester City FC.
Guilty on 114 of 115 Charges
Man City has won the Premier League eight times since 2012. Last week an independent commission found the club guilty on 114 of 115 charges of breaking the league’s financial rules from 2009 to 2018 – the nine seasons in which it went from also-ran to the best team in England. By the next morning, a bookmaker had a billboard up in Manchester that read “Shamchester.” City has appealed.
How Premier League Clubs Make Money
To understand what the club did, you need to know how Premier League teams make money. The league sells its television rights as a group and splits the proceeds. That is where the sharing ends. As we wrote when Manchester United was falling apart, Premier League teams own their logos and colors and, unlike the MLB, NBA, or NFL, do not share merchandise sales with the league. The same goes for sponsorships. Which explains the new uniform every year, the alternate, the third one for Champions League nights, and the special editions for certain days. City’s current deal with Puma is reportedly worth £100 million a year.
The catch is that the Premier League and UEFA (European soccer’s governing body) both tie what a club can spend to what it brings in, so an owner, no matter how rich, can’t simply write a check to cover the payroll. Sponsorship money, however, counts as income, and the more a club earns the more it is permitted to spend. In theory, that’s how City could afford an all-star lineup with Erling Haaland at striker and an all-world coach.
Sponsors From, Amazing!, Abu Dhabi
City was bought in 2008 by Sheikh Mansour, a member of Abu Dhabi’s ruling family over, well, the entire country’s objections as cries of sportswashing were thrown about. Before long, the club had a roster of sponsors from, amazing!, Abu Dhabi. Over those nine seasons City booked roughly £950 million from them. According to the commission, the sponsors themselves paid about £119 million. The other £830 million came from the owner’s company. If you’re counting at home, that’s 87 cents on the dollar coming from the man who owns the team.
In other words, the owner wrote the checks without regard to City’s bottom-line because it was always going to be covered by the sponsors. The commission’s word for this was “sham.” As in sham sponsors, sham agreements, sham companies, even sham people.
Our favorite detail: in May 2013, the club was reportedly £9.9 million short. Within days it 'amended' sponsorship agreements covering the gap – “without real Abu Dhabi sponsors even being approached,” according to the report. That’s right, the sponsors apparently somehow sensed City’s needs and redid their contracts without anyone asking.
Self-Dealing, Plain and Simple
This is self-dealing, plain and simple: an owner on both sides of the deal, setting the price and approving it. Owners do business with their own companies all the time and there’s nothing illegal about it – provided it’s disclosed, priced the way it would be for a stranger, and approved by someone who doesn’t stand to gain. That someone is supposed to be the board.
Where Was the Board?
City has a board. It signed off on nine straight years (so far) of accounts that the commission says did not fairly reflect the club’s finances. If any director ever asked who was actually paying the sponsors’ bills, it was never written down or uttered in public. There is, however, an email (there’s always an email) leaked to Der Spiegel in which a director is asked whether the payment dates could simply be changed and responded, “Of course, we can do what we want.”
Regular readers will remember the Tesla board and its six sure votes on everything. This is what that looks like nine years in.
Disguised Dividends in Closely Held Companies
While you may not own a professional sports team and have funds available due to your hereditary titles, similar unscrupulous actions happen every day in closely held companies with majority owners “bonusing” themselves money as wages to avoid required sharing of profits as distributions to minority owners. These “disguised dividends” are often just as legally suspect as the fake sponsorships funding Manchester City’s inflated payroll.
Texas law doesn’t forbid an owner from doing business with his own company. Under Section 21.418 of the Texas Business Organizations Code, a deal between a corporation and one of its directors or officers – or another company they have an interest in – holds up when the interest is disclosed and the deal is approved by disinterested directors or shareholders, or when it was fair to the company at the time. Those are, more or less, the same questions the Premier League was asking, and the same questions City’s board apparently never did.
For a minority owner, the hard part is usually seeing it at all. The majority owner’s salary goes up, the “management fee” paid to his other company goes up, distributions dry up, and the minority owner finds out – if at all – from a K-1. That is what books and records rights are for. Texas shareholders and LLC members have a statutory right to examine the company’s books (Sections 21.218 and 101.502 of the Business Organizations Code), and a written demand is usually the first step toward finding out who is actually paying the sponsors’ bills.
Back to the Dodgers
City could face some or all of our hypothetical Dodger penalties.
Talk to Hopkins Centrich
If you’re a minority owner who suspects the majority is paying itself first, or a majority owner who wants to be sure the related-party deals will hold up when someone finally asks, talk to our business litigation and business law attorneys. As Man City found out, there’s always an email – better that you find it before the other side does.