Third Party Ownership in Football – Indentured Slavery or a Free Market Economy?

Third Party Ownership (TPO) has again come under the spotlight in recent weeks following the resignation of Barcelona President Sandro Rosell over the transfer of Neymar Jr and the recent allegations by The Guardian of links between Chelsea and the acquisition of third party economic rights over players via an offshore company.

Is the reality of third-party ownership different from the form of “indentured slavery” inferred by Premier League Chief Executive Richard Scudamore?

It was in 2006 that the matter of TPO first came to the attention of the football watching public in the UK when West Ham United surprised everyone with the double signing of Carlos Tevez and Javier Mascherano following Argentina’s World Cup campaign in Germany. It later transpired that Tevez and Mascherano’s economic rights were retained by third-party investors and that West Ham had only obtained the right to the players registrations. West Ham were later fined £5.5m by the FA for failure to disclose all of the relevant documents relating to the transfers.

The Premier League rules were subsequently amended to prohibit third party ownership, with France and Poland following the UK in a blanket ban. FIFA, the governing body, have been strongly lobbied by UEFA to institute a worldwide ban and have yet to act either way – but is TPO really that unethical?

What is TPO?

An agreement between a Club and a third party, normally an investment fund, whereby the investor acquires, for a fee, a percentage of the future fee related to the transfer of a player between two clubs.

TPO is principally arranged via one of the following vehicles:-

1) Financing TPO – The club, holding the registration of Player A, sells part of the economic rights (normally no more than 50% per player) for which the club receives an agreed amount.

2) Investment TPO – The club acquires the registration of Player A and at the same time part of the economic rights of the player are acquired by a third party .

An Investment TPO therefore allows a club to purchase a player with the aid of funds from an investor, in exchange for a percentage of any future transfer fee.

The model has proved to be particularly popular in South America, Portugal and Spain. A report into TPO by KPMG found that between 26-37% of players in Portugal’s Primera Liga are linked to TPO schemes against an overall European average of around 5-7%.

F.C Porto have certainly used the scheme to their advantage, remaining competitive and winning the League Championship on 7 out of the 8 previous seasons. Players such as Lisandro Lopez (who moved to Lyon in 2009 for 24m Euros), Falcao (to Atletico Madrid for 40m Euros) or Hulk (to Zenit St Petersburg for 40m Euros) in whom Porto had divested a share of future transfer fees, have generated huge returns for both Club and TPO Investor.

Who owns what?

Essentially, a misconception of third party ownership is that is results in players being under the control of private parties. From a legal perspective, this is not the case. The ‘federative rights'(that is the relationship between player and club)are enshrined in the contract of employment between player and club, which is registered at the relevant national association upon completion of a transfer. Federative rights cannot be divided between third parties.

Admittedly, in the case of West Ham United, whilst it was the case that both Tevez and Mascherano were registered with the FA, the terms of the arrangement dictated that the third party( in this case linked with agent Kia Joorabchian)retained influence over the players futures.

It is this which is the principal case against TPO – the idea that a third party would have control over the player and where they play. Michel Platini of UEFA has been vociferous in his opposition to third party influence.

On the face of it however, this need not be the case. A TPO agreement simply needs to contain the appropriate protective clauses.

Forward Funding

Forward funding is a popular means for clubs to generate working capital over the close season, when regular revenue streams are at their lowest. This capital is also often used to fund player purchases.

There exist investment schemes by which a club can secure an investment against Television revenue, or, famously in the case of Rangers F.C, against future season ticket sales.

Is there any real difference between forward funding, which is within the rules, and TPO via an investment? Both are effectively gambling on the future success of the club as a means of generating revenue.

It is recognised that it may well be that the most appropriate means of protecting clubs from undue influence of investors is by absolute prohibition of third party schemes. However it could be argued that a better understanding of how TPO works may give rise to appropriate systems being put in place to regulate and therefore police TPO schemes.

In the case of Neymar( transferred from Santos in Brazil where, like Portugal, TPO is common place) the controversy relates to the fact that by Barcelona’s own admission that only 17.1m Euro of the was paid to Santos, and 40m went to N&N, which held the bulk of the players economic rights. It just so happened that N&N is owned by Neymar’s father, with a deal allegedly done with N&N before one was done with Santos.

In the case of allegations that Chelsea is involved in a TPO scheme, it would appear on the facts that the club have no case to answer. Having a registered company linked to the club which invests in players economic rights in countries where the scheme is allowed is not against Premier League Rules. None of the players linked to the scheme play or have played for Chelsea.

TPO is a topic which will continue to dominate the economics of Football worldwide. It is the contract of employment between club and player which is the binding relationship and should govern behaviour. This cannot be superceded by an invisible economic interest purchased in consideration of a future transfer fee. It is therefore not accurate to suggest that under a TPO scheme, the player is controlled by an investor – this is misleading.

Provided TPO is regulated, in the event that FIFA is minded not to ban it, it could well be an important means of generating revenue for clubs at the smaller end of the spectrum in Europe’s top leagues, and might even encourage the development of young players. The key is to ensure that any TPO agreement and the employment contracts are properly drafted.

For more information please contact Neil Paterson at [email protected]