The BackPage Weekly | What now for the future of golf: a commercial and legal viewpoint
By Andrew Nixon
This is still early days, there are many unknowns and moving parts and it will be a story we will undoubtedly be covering many more times, but in this first PGA & PIF Partnership piece, Andrew looks at the currently understood structure, the implications and what the future may hold.
Introduction
As readers will be now aware, the PGA Tour, and the Public Investment Fund (the “PIF”) have agreed to ‘bring together’ their golf related commercial operations under common ownership. The DP World Tour (the “DPWT”) is also part of the collaboration.
It was a shock announcement, which will undeniably re-shape the future of the sport, initially the men’s professional game, but potentially, in due course, the women’s professional game, too. It comes after a year of unprecedented flux and disruption following the launch of the LIV Golf tour, with the parties (and several named players) involved in public litigation, and private arbitration.
⛳ What is the deal structure?
The deal has been referred to as a ‘framework’. That suggests that the parties have entered into a head of terms, or a memorandum of understanding, and that the final deal terms, including in respect of the ownership structure, will be conditional on certain board, and policy board, approvals, as well as settling the ongoing litigation.
Some reports have referred to it as a merger, but that does not appear to be an entirely accurate description, at least in the sense of the normal legal meaning of the term, which generally involves the absorption of one corporation into another. According to the reports, the plan is to constitute a separate “for profit” special purpose vehicle (which I will refer to for ease of reference as the SPV), into which will be placed the various golf related commercial assets and rights of the three key parties.
Post the valuation of the SPV, the PIF will thereafter invest into it, and will become a (presumably major) shareholder. As part of the deal the PIF will be entitled to board representation, including the right to appoint the Chair of the Board. Corporate control will remain, from a governance perspective, with the PGA Tour, albeit the size of the PIF’s future investment is likely to mean it will now, or in due course, have certain reserved rights, potentially in relation to tournament scheduling, and tournament locations. The initial shareholders will therefore be the DPWT, the PGA Tour and the PIF. Presumably, this will leave open the opportunity to attract further investment, into what will become one of the most powerful rights holders in the sports industry.
⛳ What about the players who joined LIV?
One of the most contentious – and unresolved – issues relates to the futures of the players who defected to LIV, in consideration for significant signing on fees. It is understood that the current LIV schedule will continue, largely unaffected, through this season, and the new ‘model’, commercialised by the SPV, will kick in next season. But, what happens then?
For the sake of convenience, I have looked at this through the ‘lens’ of the DPWT. As has been reported, several defecting players appealed the DPWT’s CEO’s decision to impose sanctions, in accordance with the ‘Conflicting Tournament Regulations’ (the “CTRs”). The lawfulness of the CTRs, from a restraint of trade and competition law perspective, was challenged in the context of those appeals (arguments which were dismissed by an independent panel, appointed by Sports Resolutions). The independent panel also upheld the DPWT’s initial determination that the players had committed serious breaches of the CTRs, and the subsequent sanctions that were imposed. (Golfers v PGA European Tour | Sport Resolutions)
Some players, including the likes of Lee Westwood, Ian Poulter and Sergio García, thereafter resigned their membership. But it is understood that some did not. Obviously, those that did not would be liable, in light of the independent panel’s ruling, to further sanction for future or continuing breaches. However, to the extent that those players pay the fines and/or serve the suspension(s), they could, as members, resume participation in DPWT tournaments. Indeed, this (the ability to pay fines, and serve suspensions whilst remaining members) was one of the (very valid) arguments put forward by the DPWT in support of its contention that the CTRs are reasonable and proportionate, objectively justified and not oppressive. Soon, or in due course, the LIV tour will no longer be a “conflicting tournament” (as defined in the CTRs), not least because, in view of the likely plans going forward, it will no longer exist, as a competitor, in its current format. Those players who did not resign should, having discharged any legitimate regulatory sanction, be able to pick up where they left off.
What of the players who did resign? Those players can presumably reapply for membership. One of the conditions attached to any reapplication would presumably be discharging any sanctions (including the payment of fines and serving suspensions). That would be objectively reasonable. But can the DPWT attach more onerous conditions, or reject applications entirely, perhaps to appease members who remained loyal?
Although it is not a governing body, in the traditionally accepted sense, the DWPT exercises significant control over access to the sport. It makes decisions that have a fundamental effect on the ability of a player to pursue his business. Challenges have, in the past, been mounted against decisions of other sports bodies to reject applications for membership, on the basis that refusal to access was discriminatory, procedurally unfair and/or unreasonable restraint of trade or breach of competition law rules.
The difficulty for the players seeking readmission is that, being outside the fold, by dint of the resignation, there is no longer a contractual relationship between the parties. Nevertheless, there is still a right to having a decision made fairly, and without caprice or bias. For example, in this case, and as foreshadowed above, those players who did not resign, but committed the same breaches (in fact, potentially more breaches, by dint of retaining membership), will be able to return to the fold, once they have discharged their sanctions. A set of readmission conditions which are significantly more onerous than the sanctions that they would have been subject to had they remained members could very well be considered contrary to the duty to act fairly, not least given the “expectation” that ordinarily a sports events promoter would wish to admit world class and/or high profile players in discharge of its objective to create a successful commercial product for the benefit of its members. In McInnes v Onslow-Fane [1978] 1 WLR 1520, the British Boxing Board of Control refused the claimant’s application for a boxing manager’s licence. There was no contractual relationship between the parties, but Megarry V-C held that in an application case (defined as “where the decision is a refusal to grant applicant the right or position that she/he seeks, such as a membership or a license”) there is a duty to reach an ‘honest conclusion without bias and not in pursuance of a capricious policy.’
The DPWT operates, in effect, a promotion and relegation system with the Challenge Tour (and lower tours). There is also a route to the DPWT via the qualifying school, or ‘Q-School’. So, in principle, discretion could be exercised to readmit, but those players may be required to re-enter lower down the pyramid. Another option, in respect of any readmission, that has been mooted is returning players having to pay additional sums, linked to the payments and/or winnings they received as a consequence of their participation in the LIV Tour. That could, conceivably, be on the basis that the DPWT, and its members, are themselves entitled to some of (a percentage of) the benefits received by the defecting players, because it was the defecting players’ performance on the DPWT which created the pathway to LIV. The difficulty with that ‘solution’ is that it is unlikely to be agreed, and thus would need to be imposed, or rather made a condition of readmission. If it is imposed, or made a condition, then it is reasonable to surmise that any such decision would be challenged, for the reasons stated above.
An alternative option might be to seek to compensate those players who received offers, and remained loyal, by making good the ‘losses’ they suffered by not defecting to LIV. That however brings its own challenges, not least because it remains unclear how much of the LIV payments the defectors actually received upfront, and whether there is any right to receive further payments beyond the termination of the LIV golf league, which looks imminent: i.e. in simple terms, how much money did they really receive; and how much would it take to make everyone else ‘whole’, so to speak. As Rory McIlroy stated, in expanding on his comments when asked whether those who stayed loyal should receive some financial pay out, “the simple answer is yes; the complex answer is, how does this happen”.
As an aside, there is also the separate, but intriguing, issue of what happens with the equity some of the defecting players reportedly received in the various franchises set up under the LIV banner: presumably those team assets, part player owned, are now a part of the rights and assets that will soon be assigned to the SPV.
⛳ Does the competition law ‘issue’ now go away?
Subject to the deal terms being finalised and approved, and the litigation thereafter being settled, the antitrust claims brought against the PGA Tour, and the PGA Tour’s cross clams, will be settled.
That does not, however, mean that the competition law issues disappear. At the heart of LIV’s claims was that the PGA Tour is an entrenched monopolist. Yet this deal, on its face and in the context of the SPV, results in an even more powerful rights holder. And when the DPWT, and its assets, are added to the ‘pot’, it becomes the super dominant force in golf.
It is therefore likely that the Department of Justice in the US, and potentially also EU and UK competition regulators, will turn their attention to the makeup and structure of this deal. And it is not a given that it will be waived through, in its current form, not least because the same, or similar, player exclusivity rules around competing tournaments will presumably remain, thus making it very difficult for the relevant market – the market for the promotion and commercialisation of major golf tournaments for golfers – to be infiltrated by competitors.
Indeed, in their challenge to the DPWT’s ruling, it was contended by the players that it was not open to the DPWT to rely on the purported requirement under Article 165 (2) of the Treaty on the Functioning of the European Union (TFEU) for respect to be given to the European Model of Sport, and so called ‘specificity of sport’, because it was not a sports regulator. In so far as can be deduced from the media reports, the SPV will not have any regulatory responsibilities, vis-à-vis golf, going forward, and will be operate purely as a commercial promoter of golf events and tournaments. It will therefore (looking through the lens of EU competition law) need to rely on the ancillary restraints doctrine, with the Courts and Commission recognising that certain restrictions should not be restrictions of competition within the meaning of Article 101 (1) TEFU where, in consideration of the legal and economic context, they are demonstrably necessary to protect the legitimate business interests of the parties to the relevant agreement.
As it happens, in their case against the players, the DPWT was able to successfully argue that the CTRs are restraints which are ancillary to its main operation, and that the CTRs were limited to what is necessary and proportionate. But this was fact specific, and it was impossible to ignore the context that LIV had already managed to enter the market (to paraphrase the Panel) “in spectacular style, signing up a substantial roster of famous players”, which had a bearing on the determination. It seems likely that, with all parties now shareholders in single commercial SPV, their level of control will mean that the chances of potential future rival tours being able to enter the market (in spectacular style or otherwise) are extremely slim. So, the barriers to entry are even higher than before, and the submissions made by LIV in its antitrust case that “golfers who sold their services in the elite professional golf services market had no meaningful option but to play on the PGA Tour if they wanted to pursue profession at the highest level” may well been turned on it, and its new partners.
Of course, we also need to look at this through the lens of the consumer. There is (naturally) great interest in seeing all the best players in the world compete against each other more often. Best v best is a key component of elite sport and the resulting commercial product, which ultimately consumers buy, and buy into. In that sense, the ‘coming together’ is potentially (extremely) beneficial in that sense. But it isn’t that straightforward: the proposed ‘merger’, or the SPV structure, eradicates the competitive benefits of there being more than one large national or international golf tour. Whatever the views on LIV are (and there are many), its emergence has led to several benefits that naturally arise from free-market competition: including playing innovations, enhanced player prize pools, and greater choice for players and fans. As stated above, the sheer power of this new ‘organisation’ will now make it impossible for competition to emerge from elsewhere. So, there is an equally compelling argument that the collaboration will be detrimental to the consumer, long term.
⛳ Going forward
Leaving to one side the (understandable) moral debate, the deal itself, at least on its face, seems a good one for all concerned.
The PGA Tour retains control, but this time of a combined organisation which will be supercharged by the PIF investment. The PIF discharges one of its objectives: to secure a seat (an important seat) at the top table of the sport. And both parties avert the various risks, and costs, attached to the litigation, including a disclosure (or discovery) process which would have appealed to neither. The DP World Tour will undoubtedly be strengthened by the relationship, albeit where its own tournaments will sit in the new world order remains to be seen. And, as stated above, there is an argument that the downstream consumer will benefit, at least to the extent that the best players will compete against one another more often.
But ‘on its face’ is often not ‘in reality’. For a start, a heads of terms is a long way from a final deal, both in terms of the detail; and in terms of the various approvals that will be needed. And the compromising of the litigation will be conditional on getting that deal finalised, as quickly as possible. Then, as foreshadowed above, the thorny issues around player reintegration, and competition law, come down the tunnel. It is likely that both will take some time to resolve.
