This article, first published on October 14, has been updated to reflect the passing of the changes to the associated party transaction rules on November 22
The vote came swiftly and for the embattled Premier League, there was relief.
Changes to the associated party transaction (APT) rules gained the necessary support to be signed off on Friday morning, with clubs voting 16-4 in favour of amendments deemed necessary by Manchester City’s legal challenge this summer. Friday’s meeting began at 9.05am, and by 9.23am a statement had been released.
Only Aston Villa, Newcastle United and Nottingham Forest joined City in opposing the Premier League’s proposals at a shareholders meeting in central London. But there was a lack of further resistance, with previous sceptics Wolverhampton Wanders and Everton choosing not to join the rebellion, which has given the green light to a revised set of APT rules.
Most notably, it will see shareholder loans, previously exempt under the old system, integrated into the APT rules and, by extension, be included in future profit and sustainability rules (PSR) calculations.
City, who had pushed for this vote to be delayed, will retain their belief that the Premier League’s APT rules are flawed, but the short-term will now bring modification rather than overhaul.
The Athletic analyses where the changes to shareholder loans will leave the Premier League’s 20 clubs.
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. 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.
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 from earning increased revenue through inflated commercial deals.
In 2021, 19 of the 20 members, City included, had been responsible for voting through the existing APT rules in 2021, with only Newcastle United abstaining.
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.
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 the most money from shareholder loans?
Three clubs lead 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 if 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. Still, 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.
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.
What could happen now?
The Premier League were obliged to address the legal shortcomings of their APT rules and say the revised framework will ensure “appropriate parity between the treatment of shareholder loans and other APTs going forward”.
The 14 clubs currently benefitting from shareholder loans now have a decision to make. The simplest solution is to replace those soft loans through a conversion to equity and the Premier League has provided a 50-day grace period for that to happen. Take this approach before January 11 and the matter will end there.
Any shareholder loans still in place after that cut-off point, though, “must be submitted as an APT” and be subject to an FMV assessment. That will mean money borrowed from owners can be retained on its existing terms but adjustments will need to be made to this season’s accounts.
An interest-free loan, for example, must now see FMV interest payments added to PSR calculations. Going on the Bank of England’s current rate of 4.75 per cent, that would mean £4.75million would need to be included for every £100m borrowed in shareholder loans.
The Premier League made two distinctions in how shareholder loans will be judged: pre- and post-December 14, 2021. That was the point that the APT rules challenged by Manchester City were introduced but the Premier League board will need to determine in both instances whether the borrowing was at FMV.
Most importantly, though, there will be no retrospective assessment of shareholder loans. That ensures clubs such as Everton, who benefitted from enormous interest-free funding from outgoing owner Farhad Moshiri, while sailing close to the PSR wind, are set to escape further scrutiny.
None of that is to say this thorny issue has met a neat resolution.
“In no way will this be the end of the matter,” says Yasin Patel, leading sports barrister at Church Court Chambers. “Instead, it highlights a number of factors: not all of the Premier League clubs are unified in one way or another in relation to the rules. Nor will this be the end of the storm.
“City have threatened further legal action prior to today’s judgment. This is now almost inevitable. City have argued that the APT Rules discriminate against clubs like themselves. They have always argued that not subjecting previous shareholder loans to a fair market value assessment would be unfair, particularly as this is applied to previous sponsorship deals.
“The case between the Premier League, where 115 charges are being fought, continues in the background. But this saga has several other plots and expect City to add a further one with new litigation.“
Speaking at the time of the tribunal verdict being published, Simon Leaf, a partner and sports law specialist at Mishcon de Reya, also had his misgivings that the issue could be easily resolved.
“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.”
It is worth remembering that City believe all APT rules were declared null and void by the original tribunal. The amendments voted through by the 16 clubs will not alter that outlook.
(Top photo: Ashley Allen/Getty Images)
