**This article was originally written with Philippa Lombardi in June 2018 and published on the Lombardi Associates website**
UEFA’s Club Financial Control Body today issued its
decision regarding AC Milan’s infringements of the Club Licensing and Financial
Fair Play Regulations (hereinafter referred to as “The Regulations”). The Club
was excluded from participating in the next UEFA club competition for which it
would otherwise qualify in the next two (2) seasons (i.e. competition in 2018/19 or 2019/20,
subject to qualification). This decision may be appealed to the Court of
Arbitration for Sport (CAS), in accordance with Article 34(2) of the Procedural
rules governing the UEFA Club Financial Control Body, as well as Articles 62
and 63 of the UEFA Statutes.
The AC
Milan Case
The Italian Club has been closely watched by UEFA
since they were acquired by Chinese investor, Li Yonghong, through his
investment company, Rossoneri Sport, in April 2017. In the summer transfer
window following this AC Milan spent more than €200m on a number of players. UEFA’s
concerns surrounded compliance with the “break-even” element of the
Regulations, and the Club’s ability to repay loans, which were taken out to
finance the purchase of the Club. An American hedge fund, Elliot Management, is
reported to have loaned the Club in excess of €300m, which must be repaid by
October 2018, together with more than €40m of interest. The Club is attempting to recover from years
of losses incurred when it was under the ownership of Fininvest, an Italian investment
company ultimately owned by the family of former Prime Minister, Silvio
Berlusconi. Following concerns raised by UEFA about the Club’s financial situation,
the Club had requested to enter into a voluntary settlement agreement but this
was refused by the European governing body due to ongoing concerns raised about
their finances. UEFA advised that they would continue to monitor the club and
assess the situation in early 2018.
Following assessment, UEFA confirmed in May 2018 that:
“After careful examination of all the
documentation and explanations provided by the club, the CFCB Investigatory
Chamber considers that the circumstances of the case do not allow the
conclusion of a settlement agreement. In particular, the investigatory chamber
is of the opinion that, among other factors, there remains uncertainties in
relation to the refinancing of the loan and the notes to be paid back in
October 2018.” As such, the Investigatory Chamber referred the Italian Club
to the Adjudicatory Chamber of the Club Financial Control Body (CFCB) for
breach of the Regulations.
UEFA’s Regulations relating to Financial Fair Play
(FFP) were introduced in Season 2012/13 and apply to clubs who wish to
participate in UEFA competitions. The Regulations aim to promote and improve
the standard of all aspects of football in Europe and improve the economic and
financial capability of clubs, increasing their transparency and credibility.
Clubs are encouraged to operate on the basis of their own revenues and to spend
responsibly for the long-term benefit of football. Of all the provisions
contained within the Regulations, none have attracted such debate as the
break-even requirement. This requirement states that clubs should have an
overall break-even surplus in the monitoring period, with the monitoring period
defined as the year of assessment (“T”) and the preceding two years (“T-1” and
“T-2”). A surplus is defined as the excess of relevant income over relevant
expenses. If instead expenses are greater than income and a break-even deficit
is generated, a deviation of €5mio will be tolerated. Furthermore, an excess of
€30mio will be tolerated if the excess is covered by a shareholder contribution
(not a shareholder loan).
The Galatasaray
Case
In 2016, Galatasaray attempted to challenge the
Regulations (in particular the break-even rule) at the Court of Arbitration for
Sport (CAS) on the basis that the rules infringed EU law and the sanction
imposed (exclusion from UEFA Club competitions for which they would otherwise
qualify for the next two seasons) was disproportionate. However, CAS dismissed
the claim in its entirety. In relation to the complaint regarding compatibility
with EU law, the CAS Panel held that the club had not demonstrated that the
provisions restricted competition. Further, the Panel confirmed that even if
the club had demonstrated that the Regulations had an anti-competitive effect,
their objectives and in particular the provisions relating to Financial Fair Play
were legitimate. Any restrictions imposed by the Regulations were inherent to
the achievement of the objectives. The Panel noted that the Regulations allowed
for mitigating factors to be taken into account by the CFCB, when reviewing a
case, and considered that this ensured that restrictions would be proportionate
to the individual case circumstances. The Panel therefore dismissed the Club’s
claim that the Regulations infringed EU law.
The Panel did not consider that the Regulations
were contrary to EU Law, the Club argued that the sanction imposed by the CFCB
was disproportionate as the Club’s “mitigating factors” failed to be taken into
account when rendering the final decision. The Club asked the Panel to pay
attention to external factors which affected the finances of the Club and its
ability to meet the objectives set forth by the Settlement Agreement: namely,
the Syrian refugee crisis, the terrorist attacks in Turkey, the Turkish major
match-fixing scandal, the introduction of the so-called Passolig electronic ticketing system in Turkey, the exchange rate
and interest rate fluctuations and the national economic downturn in Turkey.
The Club advised that the disciplinary measure imposed was disproportionate and
the financial consequences of exclusion from the Champions League alone would
result in a significant financial loss. Such a loss would prevent the Club from
future compliance with Financial Fair Play requirements. However, the Panel
considered that the sanction imposed on the Club was not disproportionate on
the basis that it was imposed as a sanction for a second offence. After its
first breach, the Club had the benefit of a second chance through the
conclusion of a settlement agreement.
The Club first avoided sanctions and benefited from
the settlement agreement, the purpose of which is to provide an opportunity to
allow compliance by clubs with UEFA’s FFP Regulations, in view of their
indication that they could and were willing to do so if provided with the extra
time, under the conditions mutually agreed. However, despite this second chance
the Panel noted that the Club failed to comply and thus had to bear the
consequences thereof. The Panel considered that the Club was the “architect of
its own failure” and that exclusions from UEFA competitions were consistent
with the principle of equal treatment and fair competition, as it protected
clubs who adhered to the Regulations. The CAS Panel therefore dismissed the
proportionality argument of the club. The full case decision can be accessed here.
It should be noted that in the case of AC Milan, the
Club was not afforded the opportunity to enter into any settlement agreement as
UEFA raised concerns following examination of all documentation and
explanations in relation to the breaches of the Regulations. Instead, UEFA’s
CFCB has issued the same exclusion as was imposed upon Galatasaray after the
Turkish club had failed to adhere to its settlement agreement. If AC Milan were
to appeal the decision of UEFA to CAS, it will be interesting to note the CAS’s
stance given their comments with regard to settlement agreements and second
chances as noted above.
Changes
to the Regulations
UEFA’s Regulations are periodically reviewed to
identify weaknesses and improve upon the existing provisions and as such in
2018, new measures and requirements were introduced for competition cycle, 2019-2022
(they were amended previously in 2015, following their initial implementation
in 2012). The 2018 regulations can be
accessed here.
The new measures introduced aim to address improved transparency, harmonisation
of accounting operations, the reduction of the assessment time gap and two new
debt indicators in relation to sustainable debt and player transfers, the infringement
of either being considered a breach of the break-even requirement.
Transparency
In terms of transparency under Article 47bis, the
club must publish on its website or the website of the licensor, the total
amount paid in the latest reporting period to or for the benefit of
agents/intermediaries and the last audited annual financial information
assessed by the licensor.
Harmonisation of accounting principles
This new principle is designed to address
differences in the accounting treatments applied by some clubs with respect to
certain transactions. The provisions are designed to protect from differing
accounting standards as well as different interpretations and applications of
those standards. The accounts must be prepared in accordance with the
accounting standards of the relevant jurisdiction, or International Financial
Reporting Standards (IFRS). In addition, UEFA have given clear prescriptive
illustrations within the guidelines contained within the Regulations at Annex
VII (B-F) to assist in the interpretation of specific transactions. This Annex
includes commentary on consolidation requirements; the permanent transfer of a
player’s registration and the temporary transfer of a player’s registration;
specific expenses items and specific revenue items.
Reduction of the assessment time gap
As of competition cycle 2018-2022, there will be a
shift towards a priori assessment whereby
clubs will be assessed to take into account current transactions. The
break-even requirements with the monitoring periods of T, T-1, T-2 will still
be paramount, but these new Regulations require that any clubs considered to be
in breach of sustainable debt and/or player transfer debt indicators must prove
compliance with projected break-even reporting periods of T+1, T and T-1 ie.
For season 2018/19: 2019, 2018 and 2017.
Player transfer balance
Under the new regulations, the Club must report
player transfer balances (deficits) that are greater than €100m in any
registration period that ends during that licence season. The player transfer
balance in respect of a registration period is calculated as the net of: (1)
the aggregate costs of acquiring each player’s registration in respect of all
new and existing player registrations, being all such costs paid and/or payable,
and (2) the aggregate proceeds of transferring-out a player’s registration,
being all such proceeds received and/or receivable (net of any direct costs of
disposal). If the aggregate of the costs incurred exceeds the aggregate of the
proceeds generated in a registration period, then the club is considered to
have a player transfer deficit.
Sustainable debt
The new regulations impose greater scrutiny on a
Club’s debt position with a shift towards the importance of creating value in
the long-term. Under the new Regulations, a club will be in breach of the
indicator if at the end of reporting period T-1, its relevant debt is
greater than €30 million and it is greater than 7 times the average of
the relevant earnings of T-1 and T-2. With regard to reporting period T (the
current season), the club will be considered to be in breach of the sustainable
debt indicator if at the end of reporting period T, the relevant debt is
greater than €30 million and it is greater than 7 times the average of
the relevant earnings of T, T1 and T-2.
Conclusion
The positive impact that the introduction of the
Regulations in 2012 has had on European clubs (over 700 in total) cannot be
denied. UEFA has reported an 80% reduction on aggregated net losses with a
significant increase in net equity whilst the number of overdue payables owed
by clubs has also reduced. The overall objective set by UEFA in its
implementation of the Regulations was to improve the economic and financial
capability of clubs whilst protecting the long-term viability and
sustainability of European club football and in turn, improving all aspects of
football across Europe. The Regulations have resulted in a significant
improvement in club profitability with some of the highest operating profits on
record, reported in recent years.[1]
The impact of the new amendments, however, will
surely be felt by clubs across Europe with their finances scrutinised more
closely than ever, not just by the governing body but by the public, as a
whole, thanks to provisions under Article 47bis. That said, at a time of
growing concern regarding intermediary fees, the further scrutiny and
publication of these fees will likely be welcomed by a large proportion of the
football industry. Turning to individual
player transfers, the introduction of the player transfer indicator is likely
to have one of the biggest impacts on football clubs as their expenditure becomes
open to scrutiny by UEFA for the first time immediately after the transfer
window closes, whilst the implementation of key accounting requirements for
specific football transactions is designed (but yet to prove effective) to
prevent creative accounting practices that circumvent the rules.
AC Milan will now be feeling the effects of UEFA’s
FFP sanctions and we wait in anticipation of any likely CAS appeal as well as
any clarification in the jurisprudence.
** Update as of July 2018**
The Court of Arbitration for Sport heard the case between AC Milan and UEFA on 19 July 2018 after the Club filed an appeal seeking the annulment of the sanction. The CAS rendered its decision, without grounds, on 20 July 2018 given the pressing nature of the matter and that UEFA club competition qualifying rounds were currently ongoing.
A full written decision has yet to be published but a press release published on 20 July confirmed that the CAS Panel in charge of the arbitration had partially upheld AC Milan’s appeal on the basis that the sanction, to exclude the Club from participating in the next UEFA Club competition for which it would otherwise qualify in the next two seasons, was disproportionate.
The Panel advised that, in its opinion, “certain important elements had not been properly assessed by UEFA’s Adjudicatory Chamber, or could not be properly assessed” at the moment when the Appealed Decision was communicated on 19 June 2018. Further, in particular, the Panel noted that the Club’s financial position was now better following the recent change in ownership. On 10 July 2018, the hedge fund company Elliott Management took control of AC Milan, after its Chinese owners defaulted on its payments, promising to inject €50m into the Club.
The Panel has thus referred the case back to the Adjudicatory Chamber on the request of the Club, but also as the Panel considers that the Chamber is in a better position than the CAS, to issue a proportionate sanction based on the Club’s current financial situation.
To summarise, the CAS Panel held as follows:
- The decision of the Adjudicatory Chamber of the UEFA CFCB rendered on 19 June 2018 establishing that AC Milan has failed to fulfil the break-even requirement is confirmed;
- 2. The decision of the Adjudicatory Chamber of the UEFA CFCB rendered on 19 June 2018 to exclude AC Milan from participating in the next UEFA Club competition for which it would otherwise qualify in the next two seasons is annulled;
- 3. The case is referred back to the Adjudicatory Chamber of the UEFA CFCB to issue a proportionate disciplinary measure.
Without the full written grounds of the decision, we can only speculate on the CAS Panel’s considerations whilst rendering their decision. However, we can be sure that they will have considered previous jurisprudence with a focus on proportionality in cases concerning breaches of the FFP regulations such as Bursaspor Kulubu Dernegi v UEFA, Gyori ETO v UEFA and Besiktas JK v UEFA. Specifically, the Panel will have referred to the tests behind the principle of proportionality in that the severity of the sanction should be consistent and commensurable with the degree of the violation of the rule.
The link to the press release can be read here.
[1]http://www.uefa.com/MultimediaFiles/Download/uefaorg/FinancialFairPlay/02/55/20/17/2552017_DOWNLOAD.pdf
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