Thought leadership
Key considerations for setting up new sporting competitions
It is important for competition organisers to carefully consider structural matters from a corporate and commercial perspective when launching any new sporting competition, in order to ensure the smooth running of the competition and avoid potential governance (and other) issues in the future.
In general, there are three recognised models for structuring sports competitions which have developed over time: the Governing Body Model; the Contractual or Franchise Model; and the Shareholder Model.
New competitions are increasingly following an established model which involves a centralised entity running and owning the competition with teams competing by way of franchise or licence rights (the Franchise Model).
This article provides an overview of structuring considerations for new sporting competitions at both a corporate and commercial level, in light of the proliferation of new competition formats across different sports in recent years.
Sports Competition Models
There are three generally recognised models for structuring sports competition models: the Governing Body Model; the Contractual / Franchise Model; and the Shareholder Model. We examine each of these in turn below.
Governing Body Model
This has historically been the established structure in Europe, whereby a governing body owns and controls the league or competition. Teams participate by way of qualification only, not as owners of the competition. In this Model, no separate commercial entity owns the league.
Contractual / Franchise Model
With a Contractual Model, a separate commercial entity owns and operates the competition, not the participating teams. The competition itself is often in a closed format, with a limited number of teams invited to participate on a more permanent basis (rather than the traditional promotion / relegation model historically used in European sport).
Individual teams operate as standalone entities with separate legal status to the commercial entity running the competition. They may be owned by the competition entity itself, by independent investors, or a combination of the two.
Teams usually receive the right to participate in the competition by virtue of a participation agreement or licence (usually set for a mid-to-long term period of time), which establishes core commercial and legal terms.
Teams are not shareholders and would not typically have any equity in the competition. However, they are often incentivised by an agreed share of central league profits or through equity in the competition entity.
Pros
The Contractual / Franchise Model benefits from flexibility and speed in establishment, in theory.
Furthermore, the financial agreement between the competition and participating teams is clearly documented and control is maintained by the competition owner and investors, with no dilution of their economic interests.
Indeed, this structure is often driven by commercially-minded owners of sports leagues who wish to retain economic ownership of central revenues and governance control over the direction of the competition and key decision-making.
Cons
However, there are also a number of disadvantages associated with this Model. Firstly, there is the potential flight risk of participating teams following the end of the relevant licence term, leading to the consistent threat of breakaway competitions. This is illustrated by the cyclical tensions present in Formula One, with the framework 'Concorde Agreement' between the key stakeholders renegotiated every five years (example below).
Clearly, potential team owners may view their lack of shareholding or central control in the competition as unattractive, while teams can be demotivated by a lack of economic participation in profit and on any potential exit. Recently, a group of clubs that regularly qualify for the UEFA Champions League have agitated for greater decision-making powers and economic autonomy by supporting the nascent European Super League proposals (example below).
Competition organisers may seek to mitigate potential flight risk through a combination of incentives and restrictions, which are discussed further in the 'Commercial Considerations' section below.
It is also important to strike the correct balance between too short a licence term (which may create renewal tension, as outlined above in relation to Formula One) and long-term or perpetual licences which can lock in underperforming teams.
Additionally, competition owners should note that the competition itself would not benefit from a share of any potential future capital growth in team values.
Shareholder Model
The Shareholder Model involves collective ownership of the competition by teams as shareholders. Hence, teams have a share in economic opportunity and decision-making powers in the league.
This Model is typically governed by a shareholders' agreement setting out the relevant rights and responsibilities of the parties. This may also need to be supplemented by a participation agreement or competition regulations, as used in the Contractual Model.
There may be an option for competition organisers to deploy a hybrid partial Shareholder / Contractual Model, with teams participating in the competition under a participation licence and receiving some minority equity in the competition entity itself.
Pros
Collective ownership ensures that teams remain fully invested in the success of the competition, with joint participation in capital requirements and profit generation.
Participating teams are also locked in for the long term, ensuring consistency of participation and reducing the threat of breakaway competitions (as outlined above with the Contractual Model).
The commercial elements of the competition can be addressed by competition regulations and the competition owner may retain the ability to amend these as necessary over time.
There is also potentially a high degree of control for participating teams in the competition on key matters, given that they have a share in decision-making, which will clearly be appealing to the teams themselves.
Cons
However, collective decision-making (both at shareholder level and through board representation) potentially removes an element of control from the competition owner and hands it to the participating teams, a clear disadvantage for competition organisers.
Furthermore, revenues and exit value are shared directly with participating teams, while the limited amount of equity available in the competition entity may deter private owners and investors.
There may also be ongoing issues with perceived or actual conflicts of interest between teams competing in the league and making the best decisions for the competition itself. This is exemplified in the Premier League (example below), where rule changes and commercial and broadcast proposals require the approval of two-thirds of member clubs.
Premier League
This entity governs the top tier of the English football pyramid and takes the form of a company owned by its 20 participating clubs, each holding a single equal share.
UEFA Champions League
UEFA runs the competition, with performance-based qualification for participating clubs, who sign up via a contractual agreement.
Formula One
Formula One is privately owned. Teams are owned independently by private bodies and participate via a contract between the key stakeholders.
Commercial Considerations
In conjunction with the choice of corporate structure, it is important to weigh up key commercial considerations, including how to incentivise teams and athletes, attract external investment and successfully leverage commercial rights opportunities.
Key Takeaways
Ultimately, each potential corporate structure brings with it a complex set of advantages and disadvantages, so it is important for competition organisers to carefully weigh these up at the outset. Doing so will help to mitigate the risk of governance and other issues in future, including potential restructuring later down the line and the associated significant time and expense involved.
It has become increasingly evident that new competitions are following the Franchise Model. For example:
The Hundred
The league is run by the England and Wales Cricket Board (ECB) and all teams are currently wholly owned by the ECB. However, the ECB has initiated a sale process to secure private investment in the league, whereby 51% of the shares in each of the eight franchises will be given to the counties and 49% sold to private investors.
SailGP
The competition is owned by F50 League LLC, with ten separate teams also traditionally owned by the competition. Teams have increasingly been bought by private investors (both individuals and funds) to become third-party owned franchises. The ultimate goal of the league is for all teams to transition to private ownership.
LIV Golf
Teams have been established as operating entities by the league and are currently owned partly by the league and partly by players and management. Teams are granted the right to compete under a perpetual participation agreement. It is anticipated that they will be sold to third-party investors in future.
If adopting a Franchise Model, we would recommend implementing a framework licence agreement establishing core commercial and legal terms, supported by more detailed regulations that can be adapted in due course. Prospective owners and teams can then be incentivised through potential participation in profits and exit value.
Regardless of the structure used, it is important to have appropriate incentivisation structures in place to deliver the opportunity for value creation within teams. In a Shareholder Model, teams are invested in the success of the competition and have a share in the economic opportunity and decision-making powers in the league. In a Contractual or Franchise Model, greater consideration will have to be given to how to incentivise teams to participate in the success of the league, for example through profit sharing arrangements or bonus schemes.
Competition organisers should also consider how they can incentivise athletes, with an emerging trend of giving athletes a voice in governance and decision-making to bring them on board.
There are further layers of additional complexity and issues to consider, including how to attract external investment into a competition, via either debt, equity or a combination of the two; and the commercial rights structure involved.
This emphasises the need to closely scrutinise structural matters and involve lawyers in the conversation with the commercial and operational teams from the beginning of the process, to ensure that it runs smoothly and any potential issues are properly identified, considered and addressed at the outset.
Find out more
Please feel free to contact Northridge partner Jon Walters if you have any questions regarding structuring new competitions in sport.
