19/09/2016
NEWS STORY
Little more than a week ago the sale of Formula One to American media conglomerate Liberty Media was announced. It came two years after the New York Post revealed Liberty's interest in F1 and three days after Pitpass' business editor Christian Sylt revealed that terms had been agreed with them.
We are just days into Liberty's tenure and talk has already started revving up about a conflict of interest at the heart of the deal and that commitments agreed with European lawmakers have been broken. Sceptics and F1 often go hand in hand but when one of the voices of dissent is none other than the sport's former governor Max Mosley, people should take note.
Praise has been heaped on Liberty from almost all quarters in F1. Drivers and team bosses alike have all come out to say how they think the deal is in F1's best interests and will boost the number of races in the United States. But when one looks into the detail it is hard to see how the status quo would change much.
Despite its name, Liberty is not a media company. It has investments in media and sports businesses just like F1's previous owner, CVC Capital, owned stakes in a portfolio of companies. Liberty is majority owned by billionaire John Malone but the company itself has just £78 million of cash in the bank so anyone who thinks that the sale will lead to billions being poured into F1 could be sorely mistaken. And as for the idea of Liberty fuelling the growth of more races in the US, that seems to be little more than a pipe dream.Although the popularity of F1 lags behind NASCAR and IndyCar in the US it has still attracted the interest of potential race promoters all over the country. In the past five years alone projects have been put in motion to launch races in California, Nevada, New York, Florida and Pennsylvania. Not one has got off the grid so far for one reason - they haven't attracted government funding.
The only F1 race in the US is the US Grand Prix in Austin and it just so happens that it has funding from the state of Texas. Even that has steadily declined from an annual £20 million to £15 million since the race launched in 2012 despite it being one of the most popular on the calendar.
Government funding is at the heart of F1's business model as revenue from broadcasting fees and trackside advertising during races is retained by the sport's rightsholder. This leaves tracks with ticket sales to cover their running costs whilst governments foot the race hosting fee which comes to an average of around £23 million every year. If Liberty could convince governments in the US to part with this kind of cash then maybe it could drive the growth of more races in the country but there is no evidence that it has this kind of clout.
These are the kind of questions that much of the sports media is failing to ask and instead it is not just talking about Liberty as F1's "new owners" but postulating who it could insert to replace F1's boss Bernie Ecclestone. In reality Liberty isn't even in a position to get its feet under the table and the real question the media should be asking is whether it ever will.
To be clear, Liberty hasn't bought F1 yet. What was largely lost in the media frenzy is that Liberty has only bought an 18.7% stake in F1's parent company Delta Topco. CVC has not sold a single share to Liberty so it is still in control of the company. Liberty's investment presentation made it clear that it hopes to take over F1 next year but, crucially, it added that "closing will require (i) anti-trust approval, (ii) Liberty Media Corporation shareholder vote and (iii) certain third party consents, including approval of FIA (F1 governing body)." It is far from a formality.
The Origin of the problem
As is often the case with the business of F1, the origin of the current problem lies way back in the past. Remember when Ecclestone ended up in court in 2013 defeating charges that he undervalued F1 by paying a bribe? That was based on events which took place in 2005. More recently, the sale of Silverstone to Jaguar reportedly hit the buffers due to a veto held by Porsche which was granted in 2008 when it opened a driving centre at the track.
Now we have Liberty's proposed buyout and the problem this time stretches back to 2001 when F1's previous parent company paid £218 million ($313 million) to buy the rights to the sport for 100 years from 2011. It bought the rights from the FIA which will get them back in 2111. In the meantime it has a say in who owns F1 to ensure that the sport doesn't fall into the wrong hands.
Specifically, Clause 8 of the contract for the rights, known as the Umbrella Agreement, states that the FIA's consent is required in order to sell F1's parent company as "any such change of control shall be subject to the prior written approval of FIA Switzerland."
It reflects comments in 2011 from Jean Todt, the FIA's president, who said that "if one day CVC decide that they want to sell the rights... I need to speak with my people in the FIA to give the agreement whether we are happy with the people who will take over or we are not happy."
The conflict
In 2013 the FIA bought a 1% stake in Delta Topco as part of plans to float the company on the Singapore stock exchange. Ecclestone said at the time that "the FIA gets 1% if F1 floats" and although the float got the red light in the end, due to the poor health of the economy, the FIA had taken up the share option by then. It got it for a bargain basement price.
Contrary to reports, the shares did not come from Ecclestone and this could prove to be a crucial point. In fact, the shares were newly issued by Delta Topco which is controlled by CVC. The transfer authorisation reveals that the FIA was offered the shares for just £0.008 ($0.01) each so it only paid a total of £277,844 ($458,197.34). It was the sale of the century as the shares were worth well over 100 times more than the FIA paid for them and it was in no doubt about that. The transfer authorisation states that the value of the stake was estimated to be £45 million (€54 million) at the time and although it has since fallen from that it still stands at a healthy £34 million ($44 million).
Crucially, the prospectus for the planned flotation of F1 reveals that if it had listed in Singapore the FIA would have been obliged to waive its right to approve a change of control. This is important because F1 didn't float so the FIA still needs to give its approval to the sale.
The transfer authorisation reveals that the FIA's shares can only be cashed in, pro rata, in the event of a sale by CVC and that is exactly what it plans to do as Liberty's investment presentation states that it "has agreed to acquire all outstanding shares of Delta Topco."
This makes the FIA the gatekeeper to riches as if it approves the sale it stands to make a £33.7 million profit on its purchase price of the shares. CVC stands to gain even more as its 38.1% stake in Delta Topco is worth £1.3 billion.
This has fuelled the claim that if the FIA gave the green light to the sale it could call into question the legitimacy of the deal.
Enter Max Mosley
In an interview with Sky Sports earlier this week former FIA president Max Mosley was asked if he thought the situation was a conflict of interest. "You could actually say that I suppose," he said. "The thing is that they have to sanction it in the sense they are entitled to look at the purchaser and if it was the head of the mafia or someone they could say no but if it is a reasonable purchaser, a proper businessman, it wouldn't be open to the FIA to refuse. They could be challenged."
However, Mosley added "the principle is that the FIA can get a proper fee for the work they do, looking after Formula One, which they get, but they can't have a commercial interest in any branch of motorsport. That fundamentally was the deal."
The deal he is referring to is the reason that the FIA sold the rights to F1 for 100 years in 2001. It followed an investigation by Europe's lawmaker, the European Commission (EC) which had received complaints that the FIA was biased towards F1. As a result of the investigation the FIA and F1 separated themselves commercially to ensure that they did not break European law. This is why the FIA sold its rights in F1 for such a long time.
The EC's notice about the closure of its investigation stated that "the FIA agreed to modify its rules to bring them into line with EU law... The modifications introduced by FIA will ensure that: - The role of FIA will be limited to that of a sports regulator, with no commercial conflicts of interest... To prevent conflicts of interest, FIA has sold all its rights in the FIA Formula One World Championship."
So, to summarise, the FIA sold all its rights in F1 to prevent conflicts of interest which in turn brought its rules in line with EU law. Now the FIA has a 1% stake in F1 and this could break the agreement with the EC according to Mosley.
The FIA "have one percent of the commercial rights. Now that's arguably contrary to the deal that we did with the Commission back in 2001," Mosley told Sky. "The Commission said to us ‘If you want to be the governing body of all motorsport worldwide, and you want to stop anybody starting a new rival federation - as has happened for example in boxing and various other sports, if you want to be able to do that then you must have no commercial interest in any part of motorsport because you might have an inducement to aid one rather than another.' So it may be that the Commission might come along [now] and say to the FIA ‘You're not allowed [to have the 1%]' but they might not. I've no idea."
Solutions
It is worth stressing that there is no suggestion of wrongdoing by an entity or person being in a conflict of interest. It is perfectly normal, perfectly common and derives from the circumstances rather than the person or entity it applies to. The FIA has not done anything wrong or acted improperly in any way. Indeed, it is entirely innocent as it took the shares in good faith and it is not the FIA's fault that F1 didn't float.
If the flotation had taken place, the FIA's right to approve the sale would have been waived and there would have been no risk of a conflict of interest. However, this isn't what happened and now there is a conflict of interest which needs to be resolved. It only becomes a problem if the person or entity who is conflicted acts regardless of knowing this. It is believed that the FIA has not yet decided whether to approve the Liberty sale as it recently issued a press release stating that "the Federation awaits further information regarding the proposed terms of the transaction and welcomes the opportunity to discuss with all parties the possible consequences of this agreement on the promotion of the FIA's flagship championship."
If the FIA approves the sale it could be suggested that it did so in order to cash in its stake. The buyer could be Liberty or anyone else and this question would still hang over it. Likewise, if the FIA blocks the sale it could also be said that it was motivated by self-interest as it may believe that a buyer should pay more for its stake. In fact, there should be no reason to suggest conflict of interest in this kind of decision as it should be entirely independent to determine whether the new owner is fit and proper.
Perhaps the FIA would argue that the 1% does not give it any control over F1 but in fact, it has control over the most important aspect of the destiny of the series - its sale to a new owner. Not only does the FIA have that control but it is also in a position to benefit financially from approving the sale. Likewise, having a financial interest in F1 gives the FIA an incentive to favour it which is exactly what the EC wanted to stop.
Maybe the EC might try to claim that the commitments by the FIA in 2001 were not legally binding so do not constitute a breach of the law if they are not adhered to. However, according to the EC's notice, the commitment to prevent conflicts of interest brought the FIA's rules into line with EU law. Acquiring the 1% stake in F1 breaks this commitment as it creates a conflict of interest which could thereby bring the FIA's rules out of line with EU law and that is of course legally binding.
To put it another way, buying the 1% creates conditions which could be considered anti-competitive as they give the FIA a financial incentive to favour F1 over another series that it governs but doesn't own a stake in. This is the very reason that the EC investigated F1 15 years ago.
A solution to the problem does not seem to be immediately obvious. The FIA could return its 1% stake but there is no evidence that it can do this and even less that it would be prepared to do so given that it is worth 100 times more than it paid for it just three years ago.
Even if the FIA decided not to sell its shares to Liberty it doesn't look like it would solve a conflict of interest as it may not come from it cashing in its stake. Its origin appears to be when the FIA received the 1% stake in 2013. This can be clearly seen by comparing the F1 rights to a block of flats. CVC owns the block of flats but the deeds say it can't be sold without the consent of Mr Smith. CVC agrees to sell him one of the flats, which is estimated to be worth £30 million, for £300,000 on the condition that Mr Smith can only sell it on when they sell the block, which is when they need his consent.
The experts
"The potential conflict of interest arises because FIA is a shareholder of Delta Topco and would therefore receive many millions on the sale; a sale which allegedly the FIA has a right to approve or veto," says Charles Braithwaite, corporate, commercial and sport partner at law firm Collyer Bristow. "If the FIA approves the sale, there may be people who question whether the approval was driven by the desire to get the multi-million sale proceeds from the sale of its share."
Rowland Jack, founder of sports governance agency I Trust Sports, adds that "it is clearly a conflict of interest for the FIA to have a stake in Formula One when deciding in its role as regulator whether or not to approve the sale. However, it is not obvious how the FIA can manage the conflict in a satisfactory way, even if there is a will to do so."
Tim Owen QC, a public and criminal law Silk at Matrix chambers, gives some detail as to the legal reason, in Britain at least. why the FIA shouldn't own any shares in F1. "No regulator exercising quasi-judicial powers can have a financial interest in the very subject matter it is supposed to be regulating as an independent, unbiased body." he says. "Since a case in 1852 about a canal company where it emerged that the Lord Chancellor, Lord Cottenham, had presided over a case despite owning shares in the company, it's been a basic principle of English law that no Judge can sit in a case in which he has a direct financial interest in the outcome. Once a financial or proprietary interest is established, the risk of bias is presumed."
The conclusion
Some sports writers have suggested that Liberty would not have gone so far without considering this position. However by that argument, no takeovers would ever collapse as the parties would have covered all avenues before the deal was announced.
In fact, deals regularly get the red light. Indeed, when CVC bought F1 the EC forced it to sell MotoGP and in 1998 the Competition Commission blocked Sky UK from taking over Manchester United due to possible conflict of interest. Bearing this in mind it is hard to see how another media owner would be allowed to take over an entire sports series. And that's before you get to the consequences of the 1% stake.
On the face of it, the FIA's 1% stake may seem to be a breach of the agreement from 2001 but the EC has not publicly objected since it was transferred three years ago so presumably it is happy for the FIA to own shares in F1. However, benefiting financially from the shares to the tune of £33.7 million could be a different matter and it remains to be seen whether the EC would be happy for the FIA to do this.
The EC already had a close eye on F1 and there is good reason for this. In September last year Sauber and Force India, made a formal complaint to the EC about alleged anti-competition in F1. The complaint was driven by the top teams getting more prize money than the minnows and having an influence over the regulations. That's not all.
The teams' concerns were fuelled by Caterham and Marussia crashing into administration in 2014. Both teams were based in the constituency of Anneliese Dodds, the MEP for south east England, and in the wake of their collapse she wrote to the EC suggesting that it look F1. Dodds added that "the Federation obtained a direct commercial interest in the championship. This seems to be inconsistent with the terms of the 2001 agreement."
We may soon find out whether Dodds was right as the teams' complaint is currently being assessed by the EC. The Times recently reported that the EC has sent letters requesting information from key F1 stakeholders in a possible pre-cursor to a full-blown investigation.
The last thing that Liberty needs is the EC looking into possible anti-competition in F1, not just because it could lead to an investigation but because EC approval is also needed in order for the sale to proceed.
Bearing this in mind, the only logical decision seems to be for the FIA to abstain from deciding on the sale until the conflict of interest has been cleared up. It would mean that the sale of F1 to Liberty couldn't go ahead as planned but that is surely better than the sale taking place under questionable circumstances as it could be challenged at any time in future. Time will tell whether Liberty minds running that risk.