From the moment a 175-page tribunal verdict was published last week, there was the inevitable scramble to declare a winner in an opening legal battle between Manchester City and the Premier League.
Both sides attempted to spin the verdict in their favour but in a long list of legal arguments, some more important than others, there was no denying City could claim one significant victory: in successfully arguing that shareholder loans should face the same assessments as any commercial deal, they did enough to ensure that associated party transactions (APT) rules could be declared unlawful.
The Premier League maintains the legal tribunal brought against it by City has served to endorse “the overall objectives, framework and decision-making of the APT system” but defeats suffered along the way have left it facing significant legal and political problems.
So the APT rules now need to be amended, but can the league get a two-thirds majority of clubs to back the repair job, especially when City’s lawyers scrutinise their handiwork?
The Athletic analyses the long-term implications of shareholder loans and the benefits they bring.
What are shareholder loans?
They do exactly what it says on the tin: it is money loaned to a club by their shareholders. They amount to a form of funding, a means for owners to inject cash into the football project without seeking equity in return. Typically these are long-term arrangements, often free of interest payments.
And clubs are certainly fond of them. Fourteen of the 20 Premier League teams in the 2022-23 season had shareholder loans recorded in their most recent set of accounts and City’s legal team were only too happy to highlight the extent of their use during this case. It was cited that £1.5billion ($1.96bn) out of £4bn total borrowings across the division — 37 per cent — were through shareholder loans.
“The main motivation (behind shareholder loans) is that it’s an easier mechanism for an owner getting their money back,” says Chris Weatherspoon, an accountant and financial analyst at the football website Game State. “If they put in equity, that’s them effectively giving up any right to a return, short of paying out dividends, which hardly any club does or even can do, as most are in a position of accumulated deficits, or making their money back when they sell up.
“It’s also more tax efficient. Interest costs on debt — if owners charge them — are tax-deductible for clubs, so reduce the club’s tax burden; dividend payments aren’t.
“Another point is that if there’s a need to plug a cash-flow gap quickly, lending money is easier than working through the mechanism of issuing shares.”
The Premier League, until this point, had excluded shareholder loans from APT rules, saying they would “encourage investment” in clubs. It also reminded us this week that 19 of the 20 members, City included, had been responsible for voting through the existing APT rules in 2021, with only Newcastle United abstaining.
Read more: Manchester City vs the Premier League
- Man City and PL both claim victories after APT ruling
- The APT verdict (briefly) explained
- APT verdict hasn’t changed anyone’s mind
Why did City raise them as an issue?
City came hard at the Premier League when launching their legal challenge in June, saying the APT rules in place were “discriminatory and distortive”. They also called their existence “unlawful” and set about picking holes in a set of regulations designed to prevent clubs earning increased revenue through inflated commercial deals.
Everything, in theory, had to reflect fair market value (FMV). Only, shareholder loans have never done that. No bank would lend hundreds of millions interest-free, so why should a club benefit from such an arrangement through its owners? It was, City argued, the very definition of an associated party transaction and “at odds with the whole rationale of PSR (the league’s profit and sustainability rules)”.
“The exclusion of shareholder loans from the APT rules distorts competition in permitting one form of subsidy, namely a non-commercial loan but not another, namely a non-commercial sponsorship agreement,” City were cited as saying in the verdict.
And, most importantly, City’s argument over shareholder loans was accepted by the independent panel. That will force a change to the Premier League’s rules, with shareholder loans integrated into the broader APT regulations.
Any money loaned to a club by their owners will need to reflect FMV and see interest rates charged in line with commercial loans. The changes will bring the Premier League in line with UEFA, European football’s governing body, which applies FMV to shareholder loans in its financial fair play (FFP) calculations.
Which clubs have received most money from shareholder loans?
Three clubs lead the way by some distance: Everton, Brighton & Hove Albion and Arsenal. Collectively, those three had £1.08billion of debt owed in shareholder loans recorded in their 2022-23 accounts.
Everton’s profligacy during the reign of Farhad Moshiri sees them top the list with £451million borrowed in interest-free loans from the Iran-born businessman, a sum expected to be written off when The Friedkin Group completes its looming takeover of the club.
Brighton come next with £373million owed to Tony Bloom, their long-standing owner, in another interest-free arrangement. That outstanding sum had been trimmed thanks to a £33m repayment during the 2022-23 season but had previously increased every year since 2013.
Arsenal’s shareholder borrowings are much more recent. A refinancing of existing debt in 2020 saw them draw down a loan from parent company Kroenke Sports & Entertainment and, as of the 2022-23 accounts, that sum now stands at £259million. The precise rates of interest on that shareholder loan have not been disclosed, but Arsenal’s last two sets of accounts showed interest paid on total debts (including £10.2m worth of debentures) to be £4.3m. That is less than half the interest Arsenal had previously paid when holding external debt.
Chelsea (£146million), Liverpool (£137m) Leicester City (£132m) and Bournemouth (£115m) are also north of £100m in shareholder loans but Leicester’s figure has been markedly reduced after £194m of loans to King Power International Co Limited, the club’s parent company, got capitalised into equity in February last year.
That is an approach others could adopt. Existing loans can be converted into shares, wiping out the borrowing and placing a club beyond the coming scrutiny.
It will not be a concern to half a dozen sides, including City, Tottenham Hotspur, Newcastle and Manchester United, who held no shareholder loans when filing their most recent set of accounts.
“How the Premier League address the shareholder loan issue will be very interesting, and I would advise them to be very cautious about what they do next,” says Jack Williams, a competition law barrister at Monckton Chambers.
“Their current rules have just been found to break competition law, so they must be careful not to create a new problem. The judgment has also given clubs the right to seek injunctive relief to prevent rules they might not like from coming in. But, on the other hand, the tribunal also relied on public law principles of due process and that rules out the retrospective application.
“So the league is in a difficult position. They need to create a level playing field, not one that is tilted.”
What could happen now?
Now there’s a question. The Premier League maintains this is just a bump in the road, no cause for alarm. Its belief is that the imminent change to its APT rules will not lead to retrospective assessment of PSR calculations, meaning no club will end up in hot water over their use of shareholder loans.
If only it were that simple.
“The exemption of shareholder loans was Manchester City’s big win on competition law and the potential impact is very significant indeed,” explains Stevie Loughrey, a partner at sports legal firm Onside Law. “The Premier League will need to amend its rules to expressly include shareholder loans. It remains to be seen whether this is to be from December 2021 (when APT rules were introduced) or just going forward.
“If the APT rules are invalid and we revert to the RPT (related party transaction) rules, then it would seem shareholder loans do need to be factored in from December 2021. All Premier League board decisions made since December 2021 on APTs may need to be revisited.
“Further, you can see that clubs such as Everton and Nottingham Forest may contend they have been subjected to punishments under an unlawful regime and seek compensation for that.”
Simon Leaf, a partner and sports law specialist at Mishcon de Reya, shares those misgivings.
“On the one hand, whilst the Premier League may try to carry on with the existing rules and rely on what is commonly known in the legal world as the ‘blue pencil test’, where essentially they would argue that the rules should be read so that they are automatically reinterpreted in a lawful way, it would appear that Manchester City would challenge this strongly,” says Leaf.
“City would, no doubt, try to argue that until formal changes to the rules are voted on and agreed by the other Premier League clubs, the APT rules are unlawful and therefore cannot be enforced.
“In my view, City may even try to suggest that the APT rules can only now work if the shareholder loan calculation applies retrospectively — which again, is likely to be problematic for the Premier League because several clubs are likely to oppose this, and may even try to challenge such a rule change themselves.”
Consider this a can of worms opened.
For all that the Premier League insists there is a simple fix, a mere tweak to the rules, City believe all APT rules have been declared null and void by this tribunal.
And though the league may choose to avoid assessing shareholder loans retrospectively, as the likes of Everton will be hoping, it would leave it open to compensation claims from every club who have had a sponsorship deal revised downwards in the past three years.
The rabbit hole we are looking down, however, does not end there.
What if RPTs, which is what the Premier League previously called APTs, were also handled incorrectly, when assessments were only made once a club had declared them in their audited accounts? City might well be seeking an answer to that question as they attempt to defend themselves over more than 100 different finance-related charges.
That can be an argument for another day in court, but the implications for retrospective assessments are worthy of inspection.
Much would depend on when any shareholder loans were taken out. The FMV for borrowing £200million in 2021 would be very different to striking the same arrangement this year, with Bank of England interest rates climbing from 0.1 per cent to the current rate of five per cent during that period.
Tottenham, as an example, reported in their most recent accounts that 90 per cent of their £851million of borrowing, largely for the construction of their new stadium finished in 2019, was at fixed rates that averaged 2.79 per cent.
The shareholder loans taken out by Everton and Brighton came over several years, largely predating the sharp climb in interest rates since 2021, but in enjoying interest-free borrowing they would both be liable to a significant reassessment of PSR. Everton, even if judged by historic lending rates of three per cent, would need to add £12million a year to their already-strained PSR calculations.
Brighton would require similar alterations, but their participation in the Europa League last season would suggest they have little cause to worry. UEFA, unlike the Premier League, applies FMV to shareholder loans when assessing FFP positions and would have calculated Brighton’s £373million of debt to Bloom accordingly.
That would also suggest Arsenal, who do pay a low level of interest on their borrowing from Kroenke, and Liverpool would be compliant regardless of any reassessments.
Shareholder loans, though, will never be quite the same again.
(Top photo: Getty Images)
