Kok Chee Kheong explains the legal framework and the pounds and pence of the EPL.

By now the euphoria or the anguish, depending on whether you love or loathe them, of seeing the Manchester United players kissing and lifting the English Premier League Trophy for a record-breaking 19^th time last May would probably have receded into the recesses of your memory.
 
Another English Premier League ("EPL") season is over. Dreams, like those of Chelsea and Arsenal, have been shattered. Clubs that do not have owners with deep-pockets check their bank balances and credit lines to see how much they can afford to spend on signing new players.
 
For the relegated clubs, Blackpool, Birmingham City and West Ham United, it is time to prepare for a more frugal existence in the Championship by offloading players to trim wage bills. It is also time to transfer their much coveted membership in the big league to the promoted clubs, Queens Park Rangers, Norwich City and Swansea City.
 
Have you ever wondered, "Who organizes the EPL?", "What are the sources of income of the football clubs?" and "What are "parachute payments?". These and other related questions will be answered in this article.
 
THE EPL
 
The EPL is a football competition organised by The Football Association Premier League Limited ("Company"). The competition is played in a league format where 20 clubs play each other twice in each season, on a home and away basis.
 
The EPL was launched in 1992 when the 22 First Division clubs broke away from the Football League to form the Company to run their own competition. The number of clubs was reduced to 20 at the end of the 1994/1995 season when 4 clubs were relegated but only 2 promoted.
 
THE LEGAL FRAME-WORK
 
The Company is a limited liability company. It is incorporated under the Companies Act 1985 with share capital. Its main object is to organise and manage a football league, namely the EPL.
 
The Company has the power to enter into television, broadcasting, sponsorship, commercial and other transactions in connection with the EPL. It also has the power to make rules for the management of the EPL.
 
In the exercise of its rule-making power, the Company has adopted a comprehensive set of rules ("Rules") that regulate matters ranging from membership of the EPL, finance, team jerseys, the registration and transfer of players and disciplinary procedures to the minutiae like the size of the teams' changing rooms and the persons who are permitted to sit on a trainer's bench during an EPL match.
 
The Company presently has an issued share capital of £21 consisting of 20 ordinary shares of £1.00 each and 1 non-redeemable special rights preference share of £1.00 ("special share"). Each of the 20 clubs in the EPL ("Clubs") holds 1 ordinary share in the Company.
 
The Company's articles of association ("Articles") specifically provide that the special share is to be held by the Football Association Limited ("FA"), the body which governs the game and sanctions all football competitions in England.
 
Although the holder of the special share has no right to vote at the Company's general meetings, its written consent is required before certain actions can be effective. These include a change of the name of the Company, the amendment of the objects of the Company and of certain provisions of the Articles, such as any variation of the rights attached to any share in the Company, including the special share.
 
The written consent of the holder of the special share is also required before any change can be made to certain provisions of the Rules, including those which relate to name of the competition, the number of members, promotion to and relegation from the EPL and the criteria for membership of the EPL.
 
Each Club which is relegated from the EPL is required by the Articles and the Rules to transfer its share in the Company to one of the promoted clubs.
 
MONEY MATTERS
 
The main sources of income of the Company are broadcasting money, title sponsorship money, radio contract money and commercial contract money.
 
Broadcasting money, which is divided into UK broadcasting money and overseas broadcasting money, is the Company's main source of income and amounted to £1.04 billion in the 2009/2010 season. In fact, one of the main factors which led to the formation of the EPL was that the football clubs in the Football League's First Division wanted to exclude the clubs in the lower divisions of the Football League from having a share of the broadcasting money.
 
The Rules prescribe that the expenses of the Company and the EPL are to be paid out of the overseas broadcasting money, commercial contract money, radio contract money, title sponsorship money and other income excluding the UK broadcasting money. If such income is insufficient to meet these expenses, the board may, with the approval of its members in general meeting, require the members to contribute money to cover the deficit.
 
SHARING THE BOUNTY
 
The Company's surplus income is distributed in the manner set out below.
 
UK broadcasting money
 
A part of the UK broadcasting money is to be paid to the FA for players' education, insurance and benevolent purposes and for any other purpose approved by the Company in general meeting.
 
The balance is the divided into 3 parts, ½ of which comprises the Basic Award Fund, ¼ the Merit Payments Fund and the last ¼, the Facility Fees Fund.
 
The Basic Award Fund is divided into 24.5 shares. Each Club receives 1 share and the remaining 4.5 shares (less a prescribed deduction) are divided between the clubs that were relegated from the EPL in the preceding 4 seasons ("Relegated Clubs"). For the 2010/2011 season, each Club received a payment of £13,819,031 from the Basic Award Fund.
 
The Merit Payments Fund is distributed amongst the Clubs according to their position at the conclusion of each season. The Club that finishes in 20^th position receives 1 share and each Club that finishes 1 position higher receives 1 additional share so that the Club which finishes in 1^st position receives 20 shares. For the 2010/2011 season, West Ham United who finished in last place received £756,756 while Manchester United, the champions, received £15,135,120 from the Merit Payments Fund.
 
The Facility Fees are paid to the home and the away teams that participate in EPL matches which are televised live. The amount of Facility Fees to be paid is determined by the board of the Company.
 
For the 2010/2011 season, a sum of £582,089.80 was paid to each Club which participated in a match that was televised live. Each Club received a minimum of £5,820,898 million even if it was involved in less than 10 live matches. For the recently concluded season, Manchester United received the highest amount of Facility Fees amounting to £13,548,306, followed by Liverpool with £12,099,410 and Chelsea and Arsenal jointly with £11,616,454.
 
Overseas broadcasting money and title sponsorship money
 
The surplus of the overseas broadcasting money and title sponsorship money is divided into 24.5 shares. As in the case of the Basic Award Fund, each Club receives 1 share of these payments while the remaining 4.5 shares (less a prescribed deduction) are divided among the Relegated Clubs.
 
Commercial contract money and radio contract money
 
The surplus of the commercial contract money and radio contract money is shared equally among the 20 members. The Relegated Clubs are not entitled to a share of these payments.
 
Parachute payments
 
As mentioned above, the Relegated Clubs are entitled to share in the remaining 4.5 shares of the moneys which are distributed from the Basic Award Fund and the surplus overseas broadcasting money and title sponsorship money. Each Relegated Club's share is as follows –
 

 
The Rules prescribe that a sum of £2.3 million is to be deducted from each payment to a Relegated Club. 
 
In other words, a Relegated Club receives a total of 1.5 shares (less total deductions £9.2 million) over 4 seasons after being relegated. These payments are to help the Relegated Clubs cope with the adverse financial impact of relegation and are commonly described as "parachute payments".
 
For the 2010/2011 season, each Relegated Club that was relegated in the preceding season, such as Hull City, received a total payment of £15,031,094.
 
CLUB GENERATED INCOME
 
To obtain an insight into the income of the Clubs across the spectrum of the EPL, we have highlighted information on the income of Manchester United, Everton and West Ham United, the teams that finished in 2^nd, 8^th and 17^th places respectively in the 2009/2010 season.
 
Without doubt, broadcasting money comprise a substantial portion of a Club's income. In the 2009/2010 season, broadcasting money accounted for 36.6% of Manchester United's income and for 63% and 53% of the income of Everton and West Ham United respectively.
 
Broadcasting money aside, the main source of income of a Club is gate receipts (including match day related activities). Manchester United raked in £100.2 million while Everton and West Ham United took in £19.2 million and £16.9 million respectively from these activities in the 2009/2010 season.
 
Other important sources of income of the Clubs are income from sponsorship, commercial and merchandising activities. In the 2009/2010 season, these activities contributed £81.4 million, £8.76 million and £16.8 million of the respective incomes of Manchester United, Everton and West Ham United.
 
Player trading rarely earns a profit unless a player is sold for a transfer fee that substantially exceeds his acquisition cost and the Club does not reinvest the fees received in other players or for other purposes. A case in point, the transfer of Cristiano Ronaldo to Real Madrid in 2009 for £80 million netted a whopping profit of about £44 million for Manchester United after it reinvested part of the transfer fees on 3 new players.
 
STRUGGLING TO BREAK EVEN
 
Although their incomes are substantial, most Clubs struggle to break even or earn a modest profit as they are weighed down by high wage bills. For example, Manchester United's wage bill (including bonuses and pension costs) for the 2009/2010 season amounted to £131.7 million while Everton and West Ham United expended £54.3 million and £50.2 million respectively for wages.
 
Matters reached the height of absurdity when Manchester City's wage bill of £133 million amounted to 107% of its total income of £124.3 in the 2009/2010 season.
 
In the 2009/2010 season, only 7 Clubs generated operating profits while the remaining 13 Clubs incurred operating losses.
 
FINANCIAL FAIR PLAY REGULATIONS
 
The new UEFA Club Licensing and Financial Fair Play Regulations ("Regulations") which take effect from the 2013/2014 season imposes a "break-even requirement" which requires each club to ensure that its income is sufficient to cover its expenses in each monitoring period in order to be eligible for a UEFA licence to play in European competitions like the Champions League. The initial monitoring period is 2 years and every subsequent monitoring period is 3 years.
 
The Regulations define the types of income and expenditure which are to be considered in determining whether a club has satisfied the break-even requirement. The Regulations also permit an acceptable deviation of €5,000,000 and a greater amount of deviation, within the limits specified in the Regulations, if the excess is covered by contributions from equity participants or related parties.  
 
The introduction of the Regulations will compel the Clubs to maintain greater financial discipline and take measures to rein in the escalating wage bills.
 
Audere est Facere.