Make every shot a winner when acquiring professional sports teams

By Li Dongming and Yang Lu, East & Concord Partners
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With the development of professionalism in sport, the level of involvement of private capital in professional sports teams has been continuously increasing, and the sports industry has gradually realised the importance of stimulating domestic demand. Professional sports teams are corporatised legal person forms, and as such are not only subject to the Company Law, but as entities that have the right (or the qualification) to participate in professional sports league games they are also subject to the standards of the industry, namely the administration of the pertinent industry administration authority. The authors will briefly describe the special procedure for acquiring professional sports teams and the key issues requiring attention, by taking basketball teams as an example.

李东明 Li Dongming 天达共和律师事务所 合伙人 Partner East & Concord Partners
Li Dongming
Partner
East & Concord Partners

Subject to Company Law

Being enterprises with independent legal personality, the procedure for the transfer of equity of professional sports teams is identical to that for ordinary companies. Usually, the acquirer will, depending on the circumstances, carry out legal due diligence, a dedicated audit, asset appraisal, etc., of the target company, execute the transaction documents and then complete the procedures for amending business registration/recordal particulars.

As to the issue of whether foreign-invested enterprises can invest in professional sports teams, on the one hand, it is necessary to refer to the Catalogue for the Guidance of Foreign Investment Industries, which currently does not restrict or prohibit such investment. On the other hand, it is necessary to look at the requirements in respect of investors in professional sports teams of the industry administration authority for the specific sport, for example, the Chinese Basketball Association prohibits foreign-invested enterprises from independently establishing CBA, NBL or WCBA league teams, or becoming the controlling shareholders of such league teams.

杨露 Yang Lu 天达共和律师事务所 实习律师 Trainee Lawyer East & Concord Partners
Yang Lu
Trainee Lawyer
East & Concord Partners

Industry administration

The Sports Law grants the individual national sports associations the right to administer individual national sporting tournaments, register and administer athletes and represent China by participating in individual international sporting organisations, thereby establishing the individual national sports associations at the highest position in the individual sports industries, i.e. they are the highest industry administration authority for their respective sports.

Given the importance of the right (or the qualification) to participate in professional league games to professional sports teams, the parties to a transaction must comply with the regulations of the highest industry administration authority on the transfer of equity of professional sports teams, including, but not limited to, the equity transfer procedure, the qualifications of acquirers, etc.

Team equity transfer procedure. Looking at the relatively sound administrative regulations for the football and basketball industries, a transfer of equity in a team must be reported to the individual national sports association, regardless of whether such a transfer involves a transfer of the team’s right (or qualification) to participate in professional league games. If such a transfer is involved, the transaction must first be approved by the individual national sport association; or, if not, the transaction must first be filed with the individual national sports association.

In addition to the above-mentioned approval or filing, the transaction needs to comply with the procedural requirements of the industry administration authority. Taking basketball teams as an example, adopt the following procedure: first, asset appraisal and credit investigation of the acquirer; second, execution of transaction framework agreement; third, securing of approval document from the competent local sports authority; fourth, executing the transaction documents while setting the securing of the approval of the Chinese Basketball Association as a condition for the entry into effect and performance of the agreement; fifth, reporting to the Chinese Basketball Association, with the steps being reporting – review – approval; sixth, after securing the approval of the Chinese Basketball Association, carry out the amendment of business registration/recordal particulars in respect of the equity transfer pursuant to the transaction documents.

Qualifications of the acquirer. With respect to the qualifications of an acquirer, in addition to the restriction or prohibition on whether it is a foreign-invested enterprise, there are also requirements in respect of its scope of business, source of funds, etc.

Taking basketball teams as an example, the acquirer of a CBA, NBL or WCBA league team may not be: an investment entity prohibited by Chinese laws and regulations; an investor whose scope of business or source of funds involves the gaming industry or other activity prejudicial to the reputation of the competitions; or an investor the source of whose funds remains unclear after a review by a competent third party authority.

With a view to avoiding competition between affiliated entities and professional league cheating, the Chinese Basketball Association prohibits any shareholder of a CBA league team from becoming a shareholder of another CBA or an NBL team in any manner, and prohibits any shareholder of an NBL or WCBA league team from becoming a shareholder of another NBL or WCBA team in any manner.

Due diligence

Both the legal due diligence and the drafting of the transaction documents for the acquisition of a professional sports team need to be carried out based on the particular features of the professional sports team. Normally, professional leagues adopt an annual registration and entry system, and the industry administration authorities will also formulate a professional league entry plan or rules. The requirements in respect of teams that the entry plan or rules make are a key point on which lawyers should focus in their legal due diligence.

Transaction documents for the transfer of equity of a professional sports team should be formulated by taking into account the Company Law, the industry regulations and the actual circumstances of the team. Attention should be paid to separating the right to participate in games, on the one hand, and equity as normally contemplated in the Company Law, on the other.

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The documents should expressly specify the performance responsibilities in respect of securing the approval or recordal of the industry administration authority for changes to the right to participate in games, for the legal representative of the club, the name of the club, etc. They should expressly set out representations, warranties and undertakings in respect of factors that could have a material impact on the transaction, such as the team’s players, coaches, cheerleading squad, training and game venues, relocation of the main venue, contract documents, state of the assets, claims and debts, etc.

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yanglu@concord-lawyers.com

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