Sport stars, image rights, fiduciary duties

sports-law

A MIXTURE THAT ALMOST ALWAYS ENDS UP IN CONFUSION –  WHAT CAN PROFESSIONALS DO TO HELP?

Prelude

As the spotlight recently turned to the Spanish Courts and Javier Mascherano as he appeared in court in an attempt to avoid going to prison over a 1.5m EURO tax fraud. (He joins a long list of personalities, including Neymar & Messi who have been in court in the last 2 years to answer tax claims)

Luckily enough the individual in question has the capabilities to pay his fine, and the Spanish prosecutor allows for a fine to be paid instead of imprisonment for sentences imposed that are less than two years in length. But others in the future may not be so lucky. What intrigued me in this case was the lack of liability which has been imposed on his advisors. As is often the case with premium stars, the media spotlight has been on the result rather than an analysis of the events that have led to the result.

Parallel to the main theme of the article which centres on the history of tax cases, I would like to provide some thoughts and comments as to the role their chosen professionals have played, through either negligence or poor advice.

In this particular case, a statement made by the defendant after the hearing has stuck with me

“I’, a sporting professional, I don’t have a great understanding of taxes and law. To deal with what are for me technical and complicated matters, I have to rely on other people.[1]”

Regardless of the fact that all individuals ultimately are responsible for their tax obligations his statement hit the nail on the head. In a world where millions, if not billions of Euros pass from sports starts to the industries perceived experts, surely a duty of extra care is required when advising such clients who are often considered Ultra High Net Worth, and are in the continued public spotlight. I feel at times our industry tax an ad hoc approach to advising sports stars, through the jungle of what are, State, EU and Regulatory rules as to how they are to conduct their financial affairs

[1] https://twitter.com/Mascherano/status/690163601987014656

History

Tax issues in sport and in particular tax evasion date back to 1940’s where baseball teams in particular the Cleveland Indians in famous owner Bill Veeck, moved ownership to a “tax-shelter” in order to gain an advantage over all teams in the league. His famous quote “I had always been trust by a basic inconsistency in the way we carried our players on the books[1]” epitomises using tax avoidance practices to gain an edge in sport. The road from the 1940’s to the 1970’s is a consistent one to general tax avoidance it was ripe in all industries.

[1] Pay Dirt: The Business of Professional Team Sports By James P. Quirk, Rodney D. Fort 1997 Princeton University Press

Growth of player income

The movement was much slower for individual agreements for players. Today a large majority of professional football players rely solely on wages. The big star players have become businesses unto themselves, with their image rights adding to and sometimes surpassing wage revenue. The 90s saw the first million-dollar sponsorship agreements for players in football as corporations sought out additional promotional avenues. The difference with player sponsorship is unlike a club, players are defined by a single personality and the actions of an individual so the good comes with the bad. Some of the early big sponsorship deals were cancelled or suspended as players such as Cantona, who kicked a spectator, and Zidane, who head butted Materazzi in a World Cup final were both suspended by sponsors. More recently there are the examples of Umbro dropping John Terry and players like Mario Balotelli, who is often in the news for off-field drama, not being able to match the commercial revenue of fellow players.

“It’s not the salary that’s a problem, it’s just the image rights that needed a little perking.” — David Beckham, 2002, on his ongoing contract negotiations with club Manchester United.

As player sponsorship amounts continued to increase the value of image rights also increased, and the agents for the top players started to negotiate the club having to pay the player for the right to use their image. The agents argued, successfully, that the club and league are no different to other sponsors who pay for a players image rights when they use the player in promotional material, in selling kits, in advertising, etc. Previously playing contracts would contain clauses where players would waive all image rights, but now the agents wanted to separate these concerns for foreign players so that they could take advantage of tax concessions.

There were similar deals on the continent already in place, but in the UK the first group of foreign players to structure their image rights separately from playing deals were Dennis Bergkamp, David Platt and Patrick Viera. The players would negotiate a wage, which would be paid in England with full taxes, but they would separately negotiate a flat fee that the club would pay for image rights, and that would be paid into a separate company that the player would setup and assign his image rights to. For foreign players, the image rights company could be based offshore in a jurisdiction with little to no income tax. Club wages provided enough money for the player to live off, so the image rights company could be used as a fund for the future – to be accessed when the player has left the country and is living elsewhere, or to be used when they are away on holidays. If the money was bought back into the UK they would have to pay additional income tax on the sum as well as the corporate tax.

The image rights payments are open to negotiation because they are an estimate for the upcoming year rather than a payment for trailing services. A player agent would sit down with the club and based on club commercial revenue and the amount that player features in promotional material would negotiate a percentage of that revenue that is due back to the player. The agent would take known revenue for last year, increase it based on some growth factor and then calculate a percentage due to his player for image rights based on how famous they are. The lump sum paid would be a guarantee payment on future image rights deals. Kit deals between clubs and sponsors are done in a similar way, the kit sponsor would estimate the number of shirts they expect to sell, then make a payment to the club as a guarantee based on that figure.

Fast forward to the new millennium and the age of transparency. Sports stars are under the scrutiny to declare their income we have seen a continually amount of cases raised from tax departments with fines running up in the millions. A lawyers role becomes all that more important.

The role of a lawyer and their fiduciary duty to sports players

 

In what kind of relationships will there be a fiduciary duty present?
Under the laws of the EU a fiduciary relationship will exist in the following situations:

  • A relationship between a trustee and a beneficiary of that trust
  • A relationship between a director and a company
  • A relationship between partners involved in a partnership
  • A relationship between a solicitor and his client
  • A relationship between a principal and his agent

The responsibility of a lawyer

A lawyer takes on a relationship as an individual who is appointed to act on behalf of a professional footballer in negotiating commercial contracts for that player. The commercial contracts can include the players playing contract with their respective clubs and their various sponsorship and promotional contracts with other bodies.

A lawyer unlike an agent who operates in football has an exception in relation to English football and does not need to be an official FIFA licensed agent through the a Football Association.

Typically a footballer will pay an agent either by an agreed fixed fee or by a percentage, usually between 10 and 20% of any money earned by that player. These fees are often significantly reduced when operating with a lawyer.

Do lawyers owe a fiduciary duty to their clients?

Looking at the above relationships which involve a fiduciary duty it would be reasonable to assume that a football agent would have a fiduciary duty to a footballer which he represents as the footballer would have to place all his trust and confidence in an agent when a contract is being negotiated. The agent will have the expertise and experience to negotiate the best terms and it is his job to arrange the best deal for his client.

Accordingly it has been held under the common law for England and Wales and EU law for the rest of Europe that a football agent and thus a lawyer representing footballers have the following fiduciary duties to the client which he represents:

  • The duty not to put himself in a position where his duties to his principal could conflict with his own interests
  • The duty not to gain undisclosed economic benefit from his position as the principal’s agent
  • This second duty is aimed specifically at dishonest practices often associated with football agents such as secret deals, bribes and bungs.

With the above in mind we hope to have shed light on an increasingly lucrative market as well as provoked thoughts that can assist athletes and not just football to examine their options when choosing their representatives.