The Premier League has recently updated its profitability and sustainability rules (P&S Rules) in two key areas in an effort to clamp down on commercial deals that exceed what it deems to be the fair market value for the arrangement between club and sponsor. This follows concerns that an increasing number of deals in recent years have brought clubs higher revenues (thereby giving the relevant club an unfair advantage when it comes to compliance with the P&S Rules).
The first type of transaction to be caught by the new rules are all transactions entered into by clubs with parties associated with that club, which are known as "Associated Party Transactions". Secondly, all transactions that exceed £1million a year or 5% of the club's annual revenue (excluding certain revenue streams, such as the domestic and international broadcasting revenue) – known as "Threshold Transactions" – will, along with Associated Party Transactions, be the subject of greater scrutiny by the Premier League. Both Associated Party Transaction and Threshold Transactions will be permitted if they meet certain conditions set out in the new rules.
Either way, clubs must submit details of both of these types of transactions to the Premier League, who will then undertake an assessment of the fair market value of the transaction to determine if the value of the transaction needs to be re-stated for the purposes of the P&S Rules. There are three key strands of information that the Premier League will take into account: the assessment carried out by an independent expert, the information provided by the club and comparable evidence of similar transactions.
Additionally, the Premier League will create an anonymised databank of what it considers to be comparable commercial transactions to help assess the value of new deals completed by clubs and third parties. All deals over £100,000 per year entered into since 1 January 2016 must be submitted to the league, as well as all new commercial transactions above that amount.
If the transaction is deemed to breach the rules, the club either (i) has seven working days to take all necessary steps to end the transaction (and return received fees to the third party) or (ii) can vary the transaction or return fees to the third party to ensure the transaction does not exceed the fair market value determined by the Premier League (or pay fees where the transaction is below the fair market value).
Simon Leaf (Partner and Head of the Sports Group at Mishcon) has stated that, "these rule changes will inevitably be fertile ground for disputes between the Premier League and its clubs – particularly given the difficulties in determining the fair market value. There is no 'silver bullet' to solve this puzzle – particularly as no two sponsorship deals are ever the same – there will be different rights and obligations that are specific to that particular deal making it extremely tricky to directly compare the value of deals. As a result, clubs will need to take care to ensure that commercial deals over £1million or entered into with an associated party do not excessively inflate the amounts due under the agreement. This will be important in the context of the club's compliance with the Premier League's financial fair play rules, especially if action is required following the Premier League's determination".
Given the issues in determining fair market value, Oliver Millichap believes that, "clubs should obtain expert marketing advice when entering into transactions that are caught by the new rules, which should include an assessment of the value of the transaction. As clubs must submit any relevant information to the Premier League (which can also request further information), clubs should ensure it appropriately records and documents how the transaction was valued with accompanying evidence. To assist with a club's justification of the value there are a range of factors that clubs should take into account, such as fees for previous transactions that are for the same or similar products or category of products, the assets and rights granted along with the obligations on the parties as well as factors that are specific to the club such as its fanbase, brand value, commercial strategy and historical track record in commercial deals. Whilst the weighting attached the factors will vary between transactions, these type of factors will serve as a useful guide for clubs when determining the value of transactions."