Competition Law Financial Fair Play Football

Deconstructing the controversy around the Saudi takeover of Newcastle United

Image Source: Skynews

[Author: Gautam Garg , third year student of Law at ILS Law College]


The English Premier League is at a crucial juncture in football history right now. The takeover  of the historic Newcastle United Football Club, a process that commenced in April 2020, was completed on 7th October 2021. Marred by controversies for 19 months, a consortium led by the Public Investment Fund of Saudi Arabia (PIF) has finally got ownership of the club for a price of $413 million. However, the legal challenges are far from over, as other clubs in the Premier League have raised objections over the takeover.

The 19 other teams in the league held an emergency meeting on 18th October where they voted to temporarily block teams from striking commercial deals with businesses that have links to their owners. These deals are called Related Party Transactions and have always been a contentious issue in European football. They allege that the EPL failed to apply its Owners’ and Directors Test properly on the Saudis, while Newcastle is liable to breach regulations of the Financial Fair Play rules

These issues stem from the fact that the PIF is the sovereign wealth fund of the Kingdom of Saudi Arabia (KSA), whose Chairman is Crown Prince Mohammad bin Salman, a head of state with various allegations of human rights abuses against him. The wider international audience views KSA as having a political agenda behind the takeover, while the teams have a more immediate financial concern: the $500 billion assets of PIF that would indirectly make Newcastle the richest club in the world. The events pose 4 main legal issues which are crucial to determine Newcastle’s new owners’ fate. 

  1. The Ban on Related Party Transactions

The Football Association Premier League Ltd (FAPL) is the governing body of the EPL which is owned by the 20 member clubs. Each club as a shareholder votes on issues such as rule changes. 

FAPL held an emergency meeting on October 18 where they voted 18-1-1 in favour of blocking teams from “striking lucrative deals with businesses that have links to their club’s owners” for a period of one month. The possibility of a permanent ban is being debated. 18 clubs voted in favour of the ban, with Newcastle voting against, and Manchester City abstaining. The 19 other teams were united in demanding to know why they received such short notice of the takeover; but Manchester City and Newcastle raised the main concern here: Is such a ban and the procedure even lawful?

Managing director of Newcastle, Lee Charnley, maintained that the amendment was unlawful. He strongly asserted at the meeting that the rule change banning contracts on the basis that they involve ‘pre-existing business relationships’, is anti-competitive in nature, and the actions of the clubs resemble those of a cartel.

Manchester City’s abstinence is also believed to be a result of similar legal advice that the process was unlawful. Manchester City has had its fair share of legal issues surrounding such related party transactions. European football’s governing body UEFA determined in 2018 that City inflated the value of related party transactions with its owners. City managed to overturn a two-year ban from competitions by appealing to the Court of Arbitration for Sport in 2020. 

Newcastle’s concern is certainly valid. The clubs seemed to have unfairly colluded to prevent Newcastle from getting financial benefits from their owners. But why would the teams collude to pass such a ban which affects all of them negatively? The answer is the close relation between financial assets and club success in the Premier League. Since its inception in 1992, 50 teams have played in the league, but only 7 of them have ever won it. Before 2012, all but one of the champions belonged to the ‘Big Four’ of Arsenal, Chelsea, Manchester United, and Liverpool. These 4 consistently qualified for the Champions League and attained financial dominance from additional revenues, using them to buy world class players from across the globe.

In 2008, Sheikh Mansour, a billionaire member of the UAE royal family, took ownership of Manchester City, which came to be sponsored heavily by Etihad Airways, the flag carrier of the emirate of Abu Dhabi. City then took transfer spending to an unprecedented level, and soon, they broke the dominance of the Big Four, winning their first league title in 2012, and then winning 4 more. After exhaustive litigation with City, the other teams want to send a clear message to Newcastle: They cannot buy their way to success. 

Newcastle’s statements suggest that they will likely approach the league’s arbitration mechanism to challenge whether the members of FAPL colluded against them, but the other teams have a strong precedent in the case of City’s breach of Financial Fair Play rules (FFP).

  1. UEFA Financial Fair Play Rules (FFP)

The issues with related party transactions have gone hand in hand with UEFA’s equally controversial Financial Fair Play rules. These regulations are essentially financial restrictions imposed by UEFA and the Premier League on the member clubs, aimed to avoid teams from spending money beyond their means. As a result, the clubs are required to balance football-related expenditure such transfers, player loans and wages – with revenues in the form of ticket sales, broadcast deals and sponsorships.

The problem is when a government controls a football club, they can create sponsorships through a separate controlled company, while valuing it above the fair market price. This way clubs can artificially increase or ‘inject’ revenues and in turn splurge money during the transfer season. This practice has been aptly dubbed financial doping. This legal loophole was the hotly debated question in Manchester City’s case, and subsequently, the clubs have persistently demanded pre-emptive measures that would prevent Newcastle from signing inflated deals in Saudi Arabia. 

The League said it approved the takeover after receiving “legally binding assurances” that the Saudi state would not control the club. PIF, which provided 80% of funds and gained proportionate ownership of the club, will be viewed as an entity separate to the state, despite having the Crown Prince as its chairman. But the clubs lack confidence in this claim especially after witnessing the controversies that surrounded City. That brings us to the complaint that stalled the takeover since it was contemplated.

  1. PL Owners’ and Directors’ Test

The first reaction of the clubs after the takeover was to complain to the FAPL about how the deal passed their stringent Owners’ test. The Owners’ and Directors’ Test are regulations all owners of Premier League clubs must adhere to. Covered under Section F of the Premier League Handbook, they set out disqualifying conditions which prevent persons with allegations of wrongdoings from becoming the owner of a team. 

When PIF filed a request to undertake the Premier League’s Owners’ and Directors’ Test on 14th April 2020, member clubs demanded the blocking of the takeover based on legal adviser Stephan Nathan’s opinion that the KSA government would become a shadow director of Newcastle.

PIF vehemently asserted that it was a separate entity from the government of KSA, while the league remained conspicuously silent on these two conflicting opinions. On 14 August 2020, CEO of FAPL, Richard Masters issued the first public statement on the matter which said:

  • There was “insufficient legal separation between the PIF and the Saudi Arabian government, and the government would become a shadow director.” 
  • That the consortium “had declined the Premier League’s offer of independent arbitration” 
  • That the test was “conducted objectively and independently by the Premier League board, and no team has influence over the process.”

After the statement, Newcastle filed an arbitration against this determination of PIF’s status in July 2021, before the Premier League’s internal mechanism. Another case was filed before the UK Competition Appeal Tribunal (CAT) in April 2021 by a holding company of Newcastle, who asserted that the Premier League had acted anti-competitively while blocking PIF’s takeover. At the CAT hearing, the league said that since the issues were similar, they would be resolved through the former arbitration procedure, scheduled for January 3, 2022. They stated that the deal could go ahead in the meanwhile – although they did not give such a short timeline. Representative Adam Lewis said “If the arbitration decides KSA is not a director then the transaction can and will go ahead.”

After this reversal the teams forced a special meeting with FAPL on October 12, complaining that they had no idea that the takeover was about to be approved, saying that such an important topic was not even on the agenda at the most recent shareholders’ meeting. 

The league argued that the principles of confidentiality related to arbitration forced them to not share the takeover details. This compounds the problem of lack of transparency about the League’s position surrounding Saudi Arabia. There is no reasoning about the reversal of the League’s legal opinion from a year ago, and no information about how the PIF convinced the league that it would not be involved in the day-to-day running of Newcastle. The other clubs are certainly likely to demand more clarity over the arbitration and management of Newcastle.

  1. ‘Sportswashing

The EPL and Newcastle United are much more than just a football league and a club respectively. They are financial assets, and in this case, massive political assets too. The Premier League is by far the most-watched sports league in the world, broadcasting in 212 territories to 643 million homes and a potential TV audience of 4.7 billion people. Saudi Arabia definitely recognises this massive global reach as a PR tool.

Amnesty International was the first to criticize Saudi Arabia’s involvement as an effort to ‘sportswash’ their poor human rights record. ‘Sportswashing’ is the practice of using a club for the purposes of improving a regime’s reputation internationally. This claim is well reasoned since one does not invest in football clubs for the financial returns- clubs rarely make a significant profit.

Facing allegations like ordering the assassination of Jamal Khashoggi in 2018, Saudi Arabia has been actively trying to change its image. This does not bother Newcastle fans, as one survey found that 94% of them welcomed the new owners. In their first match after the sale, supporters wore traditional Arab headgear in a show of support for the new regime.

The Newcastle takeover has drawn reaction from the political arena. Mohammed bin Salman personally urged UK Prime Minister Boris Johnson to tell the League to ‘correct’ its decision to block the deal, or risk damaging Anglo-Saudi relations. Despite this harsh stance, sportswashing does not have a high degree of success. 

After the UAE takeover of Manchester City, debates and legal action revolved around the finances and not sports diplomacy, even though the owners faced allegations of their own. The fact is, the UK and Saudi Arabia engage in trade worth $11.7 billion every year. $413 million is not the largest concern for either government in this context.

The UK government has maintained a hands-off approach, insisting that it is an internal matter for the League, and that since the UK trades with Saudi Arabia, it would be irregular to ban the takeover of a football club. In other words, if tainted money is acceptable for the government, it is fine for the league too.

CONCLUSION

The League’s arbitration scheduled for January 2022 will be key to determining what exactly the status of PIF is. Till then, any litigation about privacy is likely to be inconclusive and evaded by the league. The other claim which is more pressing is about the conduct of the other teams while passing the temporary ban, whose legality is already being questioned by Newcastle. For now, the clubs have accepted that the takeover is a done deal and they are focused on passing legislation designed to prevent a repeat of the City situation. How it all plays out will be determined at the arbitration courts.

*For any query, feedback or discussion, the author can be contacted at [gautam.garg.09@gmail.com]

PREFERRED CITATION: Gautam Garg, Deconstructing the controversial Saudi takeover of Newcastle United, SLPRR, <https://sportslawandpolicyreviewreporter.com/?p=1676> October 26, 2021.

*NOTE- The opinions and views expressed in this article are that of the Author(s) and not of SLPRR- the expressed opinions do not, in any way whatsoever, reflect the views of any third party, including any institution/organization that the Author(s) is/are currently associated to or was/were associated to in the past. Furthermore, the expressions are solely for informational and educational purposes, and must not be deemed to constitute any kind of advice. The hyperlinks in this blog might take you to webpages operated by third parties- SLPRR does not guarantee or endorse the accuracy or reliability of any information, data, opinions, advice, statements, etc. on these webpages.

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