17/11/2016
NEWS STORY
Compared to Formula One's current controlling shareholder the private equity firm CVC, incoming owner Liberty Media has been highly vocal.
In the two months since it announced its plans to buy F1 for $4.4 billion Liberty's boss Greg Maffei has expressed his views on everything from the importance of virtual reality and gambling to the possibility of making F1 races week-long events. The FIA's income even gets a mention in his latest comments so we turned to business expert Chris Sylt who specialises in analysing the finances of F1's governing body.
At the Morgan Stanley Technology, Media and Telecoms conference in Barcelona yesterday Maffei spoke about the possibility of increasing F1's calendar beyond the current 21 races. "There is a general line of interest if you increase the number of races to a point. The FIA makes more money, the teams make more money, we make more money," he said.
The FIA? It may come as a surprise to hear that it gets a boost to its income if more races are on the calendar but that is exactly what happens.
It is no secret that the FIA gets fees from teams and drivers. The former is comprised of two components: one is a flat fee of $516,128 and the other is calculated by multiplying the number of points the team scored during the season by $6,194.
In contrast, drivers are charged $10,000 with an additional fee of $1,000 for each point they score throughout the season. It doesn't stop there. In return for governing F1, the F1 Group pays an annual regulatory fee to the FIA of $25 million and, all-in, this came to a total of $26.8 million last year.
The FIA also gets an allowance of freight and airline tickets from the F1 Group. For each flyaway event the FIA gets 16,000 kg of air freight as well as 10 economy class and 10 business class air tickets.
That's not the only benefit the FIA gets from there being more races on the calendar. It is also paid $1 million by the F1 Group for each additional Grand Prix if there are more than 20 on the calendar.
There's more because the FIA is of course also sitting on a 1.07% share in F1's parent Delta Topco which it was granted on 22 July 2013. It bought the stake from Delta Topco itself which was controlled by CVC at the time as it still is now.
The FIA paid the bargain-basement price of $458,197.34 despite the stake having a market value of around $70 million. It came with the condition that the FIA could only cash it in when CVC sells its own shares in Delta Topco. This has triggered suggestions that the FIA has a conflict of interest as its approval is needed for the sale to go ahead. In short, if the sale to Liberty Media is approved, CVC will get $1.7 billion for its 38.1% shareholding in Delta Topco with the FIA pocketing a profit of as much as $44 million in line with its 1.07% stake.
As Pitpass has <b>reported</b>, Member of the European Parliament Anneliese Dodds has written to Margrethe Vestager, the EC's Commissioner for Competition asking her to investigate the transaction as she believes "it is unacceptable that a regulator of any industry should be allowed to benefit financially from sanctioning the sale of one of the companies it regulates."
Sports lawyer Charles Braithwaite added that "if the FIA approves the sale, people may question whether the approval was driven by the desire to get the multi-million sale proceeds from the sale of its share; despite the fact that the FIA is the governing body and regulator of Formula One and so one would expect it to be independent and to act in the interests of the sport rather than its own interests. Hence the potential conflict of interest; despite the FIA's own Code of Ethics requiring all FIA Parties (which includes the FIA itself) to endeavour to avoid any conflict of interest (Article 2.4)."
Tim Owen QC, a public and criminal lawyer at London's Matrix chambers, explained the background to this.
"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. 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."
Owen says that the underlying legal principle transcends geographic boundaries and industries. "It may well be argued that the FIA is not subject to the full panoply of the rules of natural justice but I think my comment makes a point of principle that is legitimate."
Indeed, it seems to be an entirely logical principle that an individual or organisation in any country may be biased if it has a financial interest in the outcome of a decision it has to make. Likewise, although Judges in a court of law are the subject of Owen's example it is clear that others in a decision-making position could be at risk of bias if they have vested interests in the subjects they are deciding on.
Testimony to this, Owen cites an example from a 1988 case in Singapore where the 1852 canal company ruling was successfully applied to the construction industry.
The FIA is based in France and is governed by French law but the Umbrella Agreement, the contract which gives it approval over a change of control of F1, is governed by English law. Clause 8 of the Umbrella states that: "any such change of control shall be subject to the prior written approval of FIA Switzerland."
However, Clause 8.2 of the Umbrella adds that the FIA does not need to give its consent to a change of control if it occurs as a result of what is known as a "trigger event" such as a stock market flotation. CVC of course was planning that in 2012 but it stalled when the Eurozone markets went into melt-down and when F1's boss Bernie Ecclestone received a bill of indictment for bribery as it would have been immensely tough to float a company run by someone who was in court on criminal charges and could have been imprisoned.
In the end, despite all the scaremongering from certain quarters of the media, Ecclestone wasn't convicted at all as the Judge in Germany concluded that "the charges could not, in important areas, be substantiated." He added that "prosecution of the accused due to bribery is not probable as things stand" as "the court did not consider a conviction overwhelmingly likely from the present point of view."
Nevertheless CVC decided to sell Delta Topco rather than float it and this puts the FIA in the position of having to decide whether to approve a sale which will give it a $43.5 million profit if it goes ahead.
The problem for the FIA is compounded by an agreement it made with the European Commission (EC) in 2001 following an investigation into F1. The EC claimed that the FIA favoured F1 but released a statement in 2001 saying that it had closed the file after "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."
Delta Topco's subsidiary SLEC was the buyer and in 2001 it paid $313 million for the rights to F1 for 100 years from 2011. Dodds says that "under the agreement the FIA struck with the Commission in 2001 it clearly stated that it would not retain its commercial interests, yet in 2013 it purchased a 1% stake for a cut price of £213,000 [$458,197.34] and now stands to earn tens of millions of pounds from selling it just three years later. The European Commission needs to step in and investigate whether this conflict of interest breaks the agreement from 2001 before approving any sale of the sport."
The competition commissions in Britain and Austria began looking into the sale last week and only time will tell what they conclude and whether other authorities decide to probe what is proving to be a controversial deal.