When Arsenal executive Tim Lewis slipped out of the directors’ box and avoided handshakes at the Etihad Stadium after John Stones’s injury-time equaliser robbed his side of a vital three points, he may well have been cursing Manchester City under his breath.
If he was not then, he will be now.
Today, the results of City’s legal challenge to the Premier League’s Associated Party Transaction (APT) rules landed in 20 inboxes across the top flight. There was no score draw here. One word, delivered by the three experienced and former high-ranking retired judges on the panel, screamed out. The rules are ‘unlawful’. This was a victory for City.
Over 175 pages something else will quickly have become clear. What City had viewed as a cynical attack aimed at disrupting their era of dominance appears to have ended up spectacularly backfiring on the Gunners and other heavyweight clubs, who they suspected of leading the charge against them.
The panel’s key reasoning will no doubt hit hard at the Emirates and beyond. Arsenal were one of eight top-flight clubs who gave evidence on behalf of the Premier League and the system. The rules, the ex-judges said, were not lawful because they did not include shareholder loans.
Manchester City have won their legal case against the Premier League about sponsor deals
City’s rivals Arsenal were among the clubs who gave evidence in favour of the Premier League against them
Cutting through the legal jargon, and there is a lot of it, the trio basically found that because money pumped into clubs from owners in the form of borrowings, often at low or no interest, is not subject to the same fair market value (FMV) tests as commercial deals with third parties, the top-flight’s new and robust APT system is unjust. While hindsight is always 20/20, that nobody at the Premier League apparently saw this coming is breathtaking.
Why is this important? Why will the after-shocks of this earthquake continue to be felt for some time? The hearing was told that out that of the £4bn in borrowings across the league, no less than £1.5bn comes in the form of shareholder loans. Almost half. In Arsenal’s case that’s an estimated £250m owed to Kroenke Sports and Entertainment. They are not alone.
As the panel heard, almost all of Brighton’s £350m plus borrowing is in a similar format. At the last count Liverpool still owed Fenway Sports Group £71.4m from an interest-free £100m loan seven years ago to rebuild the main stand at Anfield. Across Merseyside and pre-takeover, Everton are currently subject to more than £400m in shareholder loans. Sums that, if the rules survive, may end up putting those who wanted this element of the Premier League’s profit and sustainability (PSR) rules to stand on the wrong side of permitted losses and thus in danger of points deductions themselves.
It was not meant to be like this. Following the Saudi-led takeover of Newcastle United, and in the midst of City’s four-in-a-row run on the Premier League, Arsenal and others at places such as Liverpool and Manchester United decided to lobby.
They identified what they believed were inflated sponsorship deals that City had signed with parties linked to their owners and cried foul.
The view among those advocating was that state-owned clubs like City and now Newcastle could circumnavigate PSR and use bumper partnerships deals with Abiu Dhabi and Saudi-based firms to inject vast levels of cash into the coffers that their rivals could not match and thus give them an unfair advantage when it came to buying and paying the world’s best players.
As a result, the system on what are known as Associated Party Transactions (APTs) were toughened up considerably. It was no coincidence that the move came on the back of the arrival of the new ownership at St James’ Park. Within months, City felt the new reality bite when new agreements – including a bumper deal with stadium and kit sponsor Etihad – started to get pulled up and eventually blocked.
They had seen enough. Battle lines were drawn. A legal challenge followed.
As well as Arsenal, Liverpool and Manchester United decided to lobby against City too
Everton are currently subject to more than £400m in shareholder loans – as this table shows
Sceptics will say this now opens the door for City and Newcastle to spend what they wish. That press releases will immediately go out announcing that each club is delighted to have penned billion-pound shirt sleeve sponsorship deals with Abu Dhabi and Saudi companies. That is highly unlikely.
But what happens next will be fascinating. The prospect of the rules being dropped entirely seems far-fetched. Indeed, the retired judges did make a number of findings in support of the amendments and toughening of the system. The panel pointed out that there ‘was a sufficient evidential basis for the Premier League to conclude…that the (old) rules were ineffective in controlling APTs’.
They also dismissed many of City’s claims, stating that Fair Market Value (FMV) while ‘not an exact science’ was an ‘inherent’ part of profit and sustainability rules and that there was no element of price fixing nor an unclear criteria.
But any amendments will need to be voted through and Arsenal and others may find themselves in a seemingly impossible position.
The panel was clear that the exemption of shareholder loans made the rules unlawful. While clubs may remain in favour of APTs, logic would dictate that those with shareholder loans cannot continue to have them without the spotlight being shone on their own affairs. Should such interest rates on loans (deemed an agreement between a club and anyone with more than a five per cent shareholding) be hiked to commercial rates it could put many in breach. Here, City’s lawyers had a strong point. They argued that such loans were ‘obviously APTs’ and ‘plainly not at FMV’ as they were often non or low interest or even non-repayable. They branded such an exclusion as discriminatory and distortive.
Sceptics will say this now opens the door for City and Newcastle to spend what they wish
The case provides a major blow to the Premier League and its rules (pictured CEO Richard Masters)
The Premier League’s case was that the shareholder exclusion permitted transparent investment by owners in clubs, was not discriminatory as it applied equally to all clubs and treated shareholder loans and equity investment in the same way. That it was right to be distinguished from sponsorship agreements with APTs that may contain a concealed subsidy.
The panel emphatically agreed with City. They found the exclusion to be ‘at odds with the whole rationale of PSR’. They added that it was not legitimate to draw a distinction between owner investment and the artificial inflation of commercial revenues and found the exclusion ‘discriminatory’. ‘It distorts competition’, they added, for good measure.
Any amendments will need to be voted in. While some attempted to portray this as City and Newcastle versus the competition, the reality is that others will need convincing. At the first attempt in November last year 13 voted in favour but seven voted against. Following an amendment to the amendment 12 voted in favour with six against and two abstentions. The resolution was carried by the barest of margins. That was what City referred to as ‘the tyranny of the majority’ but that majority may no longer exist. It is worth noting that along with Arsenal, United, Liverpool, and West Ham gave evidence in favour of the Premier League, along with Brentford, Bournemouth, Fulham, and Wolves.
The tentacles of this decision reach far and wide. It is, put simply, a mess. To make matters worse for the competition, there are other issues on which the panel sided with City. In another damaging swipe, the club argued that the Premier League was in a ‘dominant’ position and therefore had abused its power. In a key finding, the panel agreed stating that this made the rules ‘procedurally unfair’. In finding the rules in breach of competition law ‘by object’, the panel highlighted a serious and damning infringement.
City also said the fact they were unable to access the databank of commercial deals across the league on which FMV would be calculated was unfair. That was the finding which led to amendments to the databank system being removed from the agenda of last week’s Premier League meeting, with the impact already beginning to cause issues. So what happens there, then? Do the clubs now get to see the details everyone else has done? Is commercially sensitive information now fair game? Can one club see how much a rival is getting and try to offer a better deal in future? Good luck with that.
Pep Guardiola’s side took legal action against these sanctions that they deemed as a form of ‘discrimination’ in February – and after winning they are at least set to attempt to recover costs
Despite claim and counter claim, at the heart of the issue lies a simple argument. That the horse bolted when Abu Dhabi and Saudi Arabia were able to take over two football clubs. That this was an attempt to close the stable door with the horse over the hills and far away.
As the Premier League and its members sift through the repercussions, the separate case involving City’s alleged 115 breaches of financial rules continues, in its fourth week of 10. There will be no obvious knock-on effect but that is not to say there will be no impact.
City’s alleged rule breaking sits outside the amended APT timeframe and so can be dealt with separately, hence why the hearing started before the APT verdict was delivered. However, the feeling of unease among those who want the club punished will only, you would imagine, grow.
Arsenal and other clubs identified what they believed were inflated sponsorship deals that City had signed with parties linked to their owners and cried foul
City will now attempt to recover costs and potentially damages. This is an expensive business and it is the clubs who will end up paying should they be successful. That said, the legal fees triggered in this case will be a drop in the ocean compared with those currently racking up on the back of the 115.
Lord Pannick KC, who oversaw City’s fight against APT amendments, is back in action for the club. He does not come cheap and is not alone.
Mail Sport understands that some of City’s rivals were keen on an out-of-court settlement being reached, but that time clearly appears to have passed.
There is already collateral damage. More will follow. The battle may be over but the war rages on.