Suppose you are an avid fan of the English Premier League (the “EPL”) like I am. In that case, you have likely heard or read about the ensuing arbitration between Manchester City Football Club and the EPL over the EPL’s Associated Party Transaction (“APT”) rules.[1]
At a high level, the APT rules require any club, its players, manager, or senior official(s) to submit, among other things, sponsorship agreements with “associated parties”[2] to the EPL board of directors for a fair market value (“FMV”) assessment.[3] Presumably, the EPL’s board reviews each transaction to assess whether the business dealings between the associated parties were conducted at arms-length and that the ultimate consideration represents FMV. According to the EPL, the APT rules were created, “to build ‘fairness’ across the [English Premier League], by ending a ‘reliance on enhanced commercial revenues linked to the club’s ownership[.]’”[4] Without such review, the presumed fear is that a football club and its associated parties could obtain a competitive advantage by inflating sponsorship deals to generate excess revenue, thus allowing the football club to acquire higher priced (and, in theory, better quality) players.
The EPL’s position and the APT rules, whether valid or not, are not dissimilar to related party transaction concerns buy-side parties need to analyze when considering whether to acquire a target company, even if the potential acquisition is approximately 3,300 miles away in Rhode Island (or New England generally).
A related party transaction is a familiar legal concept, commonly understood to mean a transaction, arrangement, or relationship between the target company and another company controlled by, or related to, the owners of the target. A typical example of a related party transaction is a target-operating company leasing office space from a real estate holding company owned by the target’s owners. Indeed, related party transactions can be beneficial. Companies involved in related party transactions will argue the relationship is an efficient means to fulfill the economic needs of both parties by, among other things, improving decision-making, reducing financial and legal costs, and sharing information. However, many of these reasons may pose significant risks to an unknowing buyer, such as potential financial manipulation.
Accordingly, buyers should ask the target company pointed questions about related party transactions to adequately assess the target’s financial position at the earliest possible stage of the acquisition process. Namely, buyers should investigate whether the related party transaction manipulates the target’s bottom line. As the due diligence process continues, buyers should also investigate whether the related party transaction will continue post-acquisition on the same terms and conditions and, like the APT process, whether it is conducted at arms-length. Based on the target company’s answers, buyers should consider how a related party transaction could impact the business’s success after the acquisition. That assessment will likely affect the valuation of, and purchase price for, the target company.
Prior to kicking off any acquisition, it is important to conduct comprehensive due diligence, ask pointed questions about the target company’s business structure, and prepare and engage in thoughtful discussion with legal counsel, business professionals, and tax advisors.
[1] Gab Marcotti, Manchester City’s lawsuit against the Premier League explained, ESPN (June 6, 2024), https://www.espn.com/soccer/story/_/id/40284718/manchester-city-premier-league-legal-action-associated-party-transactions.
[2] According to the EPL, “associated parties” are companies or people who have a significant interest in the relevant football club, financially or otherwise.
[3] Geraint Hughes and Kieran Maguire, Manchester City legal action Q&A: What are APT rules? How will hearing work? What are the implications?, Sky Sports News (June 11, 2024), https://www.skysports.com/football/news/11679/13148178/manchester-city-legal-action-q-and-a-what-are-apt-rules-how-will-hearing-work-what-are-the-implications.
[4] Id.
