Tossing the red flag: official (judicial) review and shareholder-fan activism in the context of publicly traded sports teams.

Author:Greenberg, Zachary A.
 
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INTRODUCTION

For some, it comes after their team squanders away a fourth quarter lead in the playoffs, engages in a hasty trade, (1) or makes an ill-advised substitution. For others, an indefensible draft choice, announcement of team relocation, (2) or decision not to re-sign a star player (3) triggers the thought. Whether at a sports bar or on their own living room couch, at one time or another, every sports fan has transported him or herself to the owner's box and imagined, "If I ran that team, things would be different." Although the average fantasy league owner may envision leading his team to the Promised Land on the field, the pressures in the front office, with the need to balance stadium financing, ticket and concession sales, and upcoming contract negotiations, make the business of sports an entirely different ballgame.

In the last fourteen years the professional sports world has survived seven bankruptcy filings(4)and nearly collapsed in 2011, when two major leagues locked out their players and shut down operations. (5) More than two-thirds of the teams comprising the National Basketball Association (NBA) operated at a loss during the 2009 season. (6) Coupled with the debilitating effects of the current extended economic instability, all professional franchises should be reevaluating their ownership structures and investigating new sources of revenue. (7) Although the notion of a publicly owned and traded sports team is not a new business revelation, (8) current economic conditions have reactivated largely dormant discussions of the opportunity. (9) A publicly owned and traded model for sports teams is versatile, serving the interests of several constituencies, yet brings distinct advantages and disadvantages. Rather than evaluate these benefits and drawbacks from the owner's box, this Note examines the publicly owned and traded model of sports teams as a means of cheeks and balances--a mechanism for fan-shareholders to hold majority owners accountable for their decisions on and off the field of play.

While the decisions posed throughout this analysis are ultimately left to current sports team ownership, this Note is meant to serve as a thought experiment to provoke questions and to spark discussion regarding the viability of a public model of sports team ownership. In an expansion upon preceding scholarship, I hope not only to highlight the corporate governance implications of such a model, but also to bring the concepts to life, using numerous contemporary examples to drive the discussion.

Part I describes the three models of public ownership that have been implemented in recent years, while Parts II and III identify the various advantages and disadvantages of public ownership of sports franchises. Part IV then introduces a basic overview of rudimentary corporate law concepts that would undoubtedly come into play should a sports team pursue a public ownership model. In an attempt to marry corporate law theories with their practical application, Parts V, VI, and VIII draw on real-life examples to bring the corporate law concepts to life. These illustrations provide further analysis and pose numerous questions related to instances in which shareholders might pursue collective action. Part VII proposes a new corporate structure for sports franchise owners to consider. Limited liability companies and limited partnerships maximize the parties' contractual freedom while allowing them to modify or eliminate fiduciary duties. Finally, Part IX highlights additional considerations, including negative externalities, which may also factor into a sports team's decision to "go public."

  1. VARIATIONS AND CURRENT EXAMPLES OF PUBLICLY OWNED AND TRADED SPORTS TEAMS

    Three primary forms of public sports team ownership exist. First, the most common form of public ownership in this context arises when a large publicly traded corporation owns a sports franchise as just a small slice of its operating portfolio. (10) As part of a diversified portfolio, an indirectly traded sports franchise generates a trivial portion of the corporation's profits. For example, the Anaheim Angels of Major League Baseball (MLB) and Ducks of the National Hockey League (NHL) were at one time owned by corporate giant Disney. (11) Thus, when evaluating the viability and potential for financial return of these franchises, fan-investors contemplate the financial health of Disney--whose primary business and other holdings greatly outweigh the profit generated by the Ducks and Angels. This other business, not the franchise, ultimately drives the stock's value. (12)

    Yet a second, largely unused, but wildly successful model of public ownership is the community-owned franchise--a nonprofit corporation that sells shares to generate capital but does not grant equity ownership or other benefits to its shareholders. (13) Rather than earn a return on their investment or receive dividends, shareholders of a community-owned sports team derive purely sentimental value from stock ownership. (14) The National Football League's (NFL) Green Bay Packers is the only sports franchise that has adopted this community-ownership model, and the franchise has enjoyed incredible success since 1923. (15) After five stock sales to the general public (1923, 1935, 1950, and two in 1997), nearly 112,000 shareholders, holding 4.75 million shares of stock, now own a slice of the storied franchise. (16) In 2011, the Packers initiated another public offering in order to fund renovations to historic Lambeau Field. (17) Although shareholders retain voting rights and attend an annual shareholder meeting, the shares are subject to control, transferability, and dividend limitations. (18) Nevertheless, such restrictions have not stopped hordes of "Cheeseheads" from purchasing stock to "become a part of the Packers' tradition and legacy." (19) For nearly a century, the Green Bay Packers have taken advantage of their corporate structure to regain financial stability in the face of insolvency, construct new facilities, and maintain and renovate the numerous faces of their stadium, Lambeau Field. (20) Although this community-based ownership structure provides no true financial return for its investors, the Green Bay Packers capitalized on an opportunity to tap into a previously undiscovered and underutilized source of capital while providing intangible value to its shareholders.

    The third model, and the central focus of this Note, is what Jorge Garrett and Bryan Green coin a "sports team corporation" (21)--a sports team company that is publicly traded, independent of its relationship with another publicly traded corporate entity. Perhaps the most critical distinction between a sports franchise owned by a publicly traded company (indirectly traded) and the third model, a sports team corporation (22) (one that is independently publicly traded), lies in its primary source of revenue. (23) Professors Garrett and Green illustrate this point with an insightful example:

    [C]onsider the following example. Fox Group owns the Los Angeles Dodgers. When potential investors evaluate the possibility of investing in the Los Angeles Dodgers, their decision to invest primarily evaluates Fox Group's ability to generate profits, because it is the business front that generates the majority of the revenue for the corporation. In contrast, when a sports team corporation owns a team, the investors primarily are investing on the basis of the team's ability to raise revenue--though they might also invest for other non-economic reason, such as love for the game. (24) I. ADVANTAGES OF PUBLIC OWNERSHIP

    The success of sports franchises' public offerings depends on the relative weight given to various advantages and disadvantages associated with the business decision. Several factors weigh in favor of adopting a publicly owned corporate structure, including instant capitalization, flexibility, and a competitive advantage to teams willing to pursue an initial public offering. (25) One such advantage relates to the financing of team stadiums and subsequent renovations. (26) In the United States, stadiums are typically publicly funded with taxpayer dollars. (27) In fact, during the twentieth century, of the $20 billion spent on sports facilities, approximately $15 billion came from public subsidies. (28) In the midst of the economic decline, however, taxpayers have voiced their disapproval of these plans. (29) The public's attitude mirrors that of local governments seeking to flannel public funds into true necessities. As a result, sports franchises have been forced to scan the economic landscape in pursuit of alternate means of financing large-scale stadium projects. (30) Although not a sports corporation in its purest form, the Green Bay Packers illustrates the efficacy of utilizing a public offering to raise capital sufficient for stadium construction and renovation. (31)

    In addition, a public offering affords ownership with a new level of flexibility and "enhances the ability of a current owner to liquidate part of his or her investment." (32) Whereas owners of privately held corporations struggle to find a market for their shares, or ownership interest, under a sports corporation model, team owners would not necessarily be at the mercy of the team's fluctuation in value. (33) The freedom of transferability supplied by the issuance of shares provides an exit strategy (34) for current owners which can be a valuable asset given the deteriorating economics of private sports franchise ownership. (35) Although "wealthy individuals are often motivated to own a professional sports franchise[,].... [they] may soon be unwilling to blindly subsidize ... losses from their own pocket." (36) Moreover, under a public ownership regime, majority owners would not be forced to surrender their control at the expense of the liquidation opportunity. (37) Depending upon the degree of initial control (measured by number of shares...

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