UEFA AC Milan financial fair play break-even requirement

The recent decision of the Court of Arbitration for Sport (CAS) to annul the UEFA Adjudicatory Chamber’s decision to exclude AC Milan from participating in the next UEFA competition is the occasion for CBV Avocats to publish a quick overview of the UEFA’s financial fair play rules (hereafter “the FFP rules”) and in particular of the break-even requirement provided for by the UEFA Club Licensing and Financial Fair Play Regulations (hereafter “the CL&FFP Regulations”).

In various press articles or TV interviews, the FFP rules are regularly criticized and considered as impeding the small clubs’ ability to invest and recruit new talented players with notably two alleged harmful consequences:

–          Preventing the clubs from accessing/qualifying to the UEFA’s interclub competitions at European level implying negative financial consequences for those clubs; and

–          Protect the well-established clubs from the competition of newcomers.

On the opposite, Article 2(1) of the CL&FFP Regulations reminds that the FFP rules (introduced in 2010 and regularly updated since then) mainly aim to improve the economic and financial capability of the clubs, to introduce more discipline and rationality in club football finances and to protect the long-term viability and sustainability of European club football.

CBV Avocats therefore considers that it might be useful to present this quick overview of the UEFA’s break-even requirement (I) and some preliminary comments of the AC Milan’s case (II).

For the record, the application of FFP rules is overseen by the UEFA Club Financial Control Body (CFCB) which is underpinned by an Investigatory Chamber, led by the CFCB chief investigator for the monitoring and investigation stage of the proceedings, and an Adjudicatory Chamber for the judgement stage of the proceedings led by the CFCB chairman. Its final decisions may only be appealed before the CAS in Lausanne.

 

I. The break-even requirement

The scope of this article is not to make an in-depth analysis of the CL&FFP Regulations but to provide a quick overview of the break-even rules (A) and of the disciplinary measures that the UEFA CFCB can impose in case of breach of the FFP rules (B).

A. The break-even rules

The break-even rules are mainly provided for by Articles 58 to 64 of the CL&FFP Regulations. CBV Avocats proposes the below quick overview of the current applicable rules.

The two main notions on which is based the break-even requirement are the following: relevant income and relevant expenses.

The relevant income notion is defined as the revenue of the club notably linked to gate receipts, sponsorship and advertising, broadcasting rights, commercial activities etc. On the contrary, the relevant expenses are especially linked to the cost of sales/materials, the employee benefits expenses, other operating expenses etc.

However, a number of costs are excluded from the break-even calculation, i.e. investment in stadiums, training facilities, youth development and (from 2015) women’s football.

The result of the break-even calculation is therefore equal to the difference between the relevant income and the relevant expenses.

The current monitoring period (to be distinguished from the projected monitoring period which might also be monitored in some specific cases) covers three consecutive reporting periods on which a licensee is assessed for the purpose of the break-even requirement. As an example, the monitoring period assessed in the license season 2018/19 covers the reporting periods ending in 2018 (reporting period T), 2017 (reporting period T-1) and 2016 (reporting period T-2).

Therefore, the sum of the break-even results of each reporting period covered by the monitoring period leads to the aggregate break-even result. If this result is positive (equal to zero or above) then the licensee has an aggregate break-even surplus for the monitoring period and is considered as compliant with the FFP’s rules. In case of negative result (below zero), then the licensee has an aggregate break-even deficit for such period and is considered as having failed to comply with such rules.

In the latter case, the licensee may demonstrate that the aggregate deficit is reduced by a surplus (if any) resulting from the sum of the break-even results of the two reporting periods prior to the monitoring period (i.e. reporting periods T-3 and T-4 for the current monitoring period).

Plus, the CL&FFP Regulations include a notion of acceptable deviation which is the maximum aggregate break-even deficit possible for a licensee to be deemed in compliance with the break-even requirement.

The acceptable deviation is EUR 5 million. However, under conditions, it can exceed this level up to EUR 30 million if such excess is entirely covered by contributions from equity participants and/or related parties.

Furthermore, the CL&FFP Regulations provide that if one of the monitoring requirements is not fulfilled, then the UEFA CFCB shall take into consideration mitigating factors such as force majeure, major and unforeseen changes in the economic environment, squad size limit etc.

Those mitigating factors are notably taken into account in case of conclusion of a settlement agreement as provided for by Articles 14(b) and 15 of the Procedural rules governing the UEFA Club Financial Control Body (hereafter “the UEFA Procedural rules”).

The settlement agreement aims to ensure that a club, which does not fulfil the break-event requirement, becomes break-even compliant at the end of the period covered by the agreement (i.e. generally four sporting seasons). The club will then be subject to on-going restrictions which have been agreed by it in order to reach the FFP rules compliance.

The settlement agreement, which is a measure that the CFCB investigator might propose to a FFP rules’ non-compliant club (see below), should be distinguished from the voluntary agreement provided for by Article 57 and Annex XII of the CL&FFP Regulations that, since 2015 and under specific conditions monitored by the CFCB (e.g. change of ownership), the clubs may apply for with the aim of complying with the break-even requirement.

Therefore, to sum up, under the CL&FFP Regulations, a club must break-even over a period of three years which means that, to be compliant with the FFP rules, the football related expenses of a club must not exceed its football related income, subject to an acceptable deviation.

B. Disciplinary measures

Before the Investigation Chamber of the CFCB, Article 14(1) of the Procedural rules provides that at the end of an investigation, the CFCB chief investigator, after having consulted with the other members of the investigatory chamber, may decide to:

  1. dismiss the case; or
  2. conclude, with the consent of the defendant, a settlement agreement; or
  3. apply, with the consent of the defendant, disciplinary measures limited to a warning, a reprimand or a fine up to a maximum amount of €100,000; or
  4. refer the case to the adjudicatory chamber.

Any decision of the CFCB chief investigator to dismiss a case or to conclude or amend a settlement agreement or to apply disciplinary measures within the meaning of Article 14(1)(c) may be reviewed by the Adjudicatory Chamber on the initiative of the CFCB chairman or at the request of a directly affected party within ten days from the date of communication of the decision to the CFCB chairman or, in the latter case, from the date of publication of the decision.

For example, on July 3rd, 2018, the CFCB chairman has decided to send the decision of the CFCB Chief Investigator to close the investigation into Paris Saint-Germain (which commenced on September 1st, 2017) for review by the Adjudicatory Chamber.

Before the Adjudicatory Chamber of the CFCB, Article 29(2) of the UEFA Procedural rules provides that the following disciplinary measures may be imposed to the club in case of failure to comply with FFP rules:

  1. warning,
  2. reprimand,
  3. fine,
  4. deduction of points,
  5. withholding of revenues from a UEFA competition,
  6. prohibition on registering new players in UEFA competitions,
  7. restriction on the number of players that a club may register for participation in UEFA competitions, including a financial limit on the overall aggregate cost of the employee benefits expenses of players registered on the A-list for the purposes of UEFA club competitions,
  8. disqualification from competitions in progress and/or exclusion from future competitions,
  9. withdrawal of a title or award.

The disciplinary measures may also be combined.

However, the disciplinary measures imposed to the club are subject to the principle of proportionality. Indeed, as highlighted by the CAS, “even if the Adjudicatory Chamber, under Article 29 of the Procedural rules, is given a while range of disciplinarily measures which may be imposed on a club as a result of the club’s failure to comply with the [FFP rules], the disciplinary measures imposed on a club must, inter alia, be proportionate and consistent with other decisions on similar facts and circumstances.” (see section 2.14 of CAS 2016/A/4692 Kardamir Karabükspor Kulübü Dernegi v. UEFA).

As above-mentioned, further to Article 34(2) of the UEFA Procedural rules, final decisions of the CFCB may only be appealed before the CAS in accordance with the relevant provisions of the UEFA Statutes.

 

II. AC Milan’s case

After briefly introducing the proceeding of the AC Milan’s case (A), we will try to understand the CAS approach in the light of the break-even requirement principles we have exposed above and the CAS’s precedent case-law (B).

A. Proceeding

On December 15th, 2017, the Investigatory Chamber of the UEFA CFCB has reviewed the application for a voluntary agreement made by AC Milan as part of the FFP rules and decided to not accommodate it.

On May 22nd, 2018, the Investigatory Chamber of the UEFA CFCB has decided to refer AC Milan’s case to the Adjudicatory Chamber of the CFCB for breach of the FFP rules, in particular the break-even requirement.

On June 27th, 2018, the Adjudicatory Chamber of the UEFA CFCB determined that AC Milan failed to fulfil the break-even requirement and decided to exclude the club from participating in the next UEFA club competition for which it would otherwise qualify in the next two seasons (i.e. 2018/19 UEFA Europa League for which AC Milan qualified during the 2017/18 regular season).

On July 4th, 2018, AC Milan filed an appeal at the CAS seeking the annulment of the CFCB Adjudicatory Chamber Decision.

On July 20th, 2018, the CAS Panel partially upheld AC Milan’s appeal and ruled as follows:

–          the decision of the Adjudicatory Chamber of the UEFA CFCB establishing that AC Milan has failed to fulfil the break-even requirement is confirmed; but

–          the decision of the Adjudicatory Chamber to exclude AC Milan from participating in the next UEFA club competition for which it would otherwise qualify in the next two seasons is annulled; then

–          the case is referred back to the Adjudicatory Chamber of the UEFA CFCB to issue a proportionate disciplinary measure.

Please note that, neither the full reasoned decision of the Adjudicatory Chamber nor the CAS one have been published yet.

Nevertheless, CBV Avocats will propose a preliminary analysis of the CAS decision based of the break-even requirement principles we have exposed above and in the light of the CAS’s precedent case-law.

B. The CAS approach

First of all, in the AC Milan’s case, there is no doubt that the club has not complied with the break-even requirement and the CAS has confirmed the Adjudicatory Chamber’s decision on this point.

However, a failure to comply with the FFP rules does not necessarily imply that the club should be excluded from the UEFA club competition.

Indeed, as exposed above, such disciplinary measure is particularly high on the scale of the sanctions that the Adjudicatory Chamber may impose to the non-compliant clubs.

In this respect, the CAS has previously considered that, in carrying out its responsibilities, the Adjudicatory Chamber must respect the principle of proportionality and ensure the equal treatment of all licensees by bearing in mind the FFP rules’ objectives at all times (see in particular sections 2.14 and 7.11 of CAS 2016/A/4692 Kardamir Karabükspor Kulübü Dernegi v. UEFA).

In this respect, the UEFA itself considers that granting a “second chance” to a club failing to comply with the break-even requirement is in line with the FFP rules’ objectives (see section 6.3.2(e) of CAS 2016/A/4692 Kardamir Karabükspor Kulübü Dernegi v. UEFA).

That is why, in both the cases that came to the CAS on this subject matter before the AC Milan’s one (i.e. Galatasaray and Karabükspor cases), we note that the UEFA CFCB first tried to grant a second chance to those clubs, which failed to comply with the break-even requirement, by concluding a settlement agreement.

Then, when the clubs failed to comply with the settlement agreement, the Adjudicatory Chamber decided to exclude them from the next UEFA club competition.  In such cases, the CAS confirmed the Adjudicatory Chamber’s sanction for breach of the settlement agreement they previously entered to.

Therefore, in these cases, the clubs benefited from a second chance (i.e. the settlement agreement) that they failed to comply with. This failure was then sanctioned by the exclusion of the clubs from the UEFA competition.

The CAS considered that this latter disciplinary measure is not disproportionate when it is imposed as a sanction for a second violation. In Galatasaray’s case, indeed, the CAS Panel highlighted the fact that “the club had the benefit of a second chance through the conclusion of a settlement agreement, the content of which was defined with its participation. The club first avoided sanctions and benefited from the settlement agreement, the purpose of which is precisely to provide an opportunity to allow compliance by clubs with UEFA [FFP’s rules], in view of their indication that they can and are willing to do so if provided with extra time, under the conditions mutually agreed. But still it failed to comply with this second chance and has to bear the consequences thereof”, i.e. exclusion from the UEFA competition (see para. 115 of CAS 2016/A/4492 Galatasaray v. UEFA).

However, in AC Milan’s case we note that, on the first hand, the Investigatory Chamber of the UEFA CFCB refused the AC Milan application for a voluntary agreement and then decided to refer the case to the Adjudicatory Chamber which decided to exclude AC Milan from the next UEFA club competition for breach of the break-even requirement.

Thus, it seems obvious that AC Milan did not benefit from a second chance as it was the case in the previous CAS’s case-law. It has immediately been sanctioned by the exclusion from the UEFA club competition.

Nevertheless, “two cases are rarely entirely similar to each other, and it is therefore very difficult to compare the sanction imposed in one case to a sanction imposed in another case without taking the circumstances of each case into consideration.” (section 7.37 of CAS 2016/A/4692 Kardamir Karabükspor Kulübü Dernegi v. UEFA).

In this regard, we know that Investigatory Chamber of the UEFA CFCB considered that in the view of “the uncertainties in relation to the refinancing of the loans to be paid back in October 2018 and the financial guarantees provided by the main shareholder” (please refer to the UEFA’s media release), it was not possible to accommodate AC Milan’s voluntary agreement application.

This decision leads to the Adjudicatory Chamber’s one to exclude AC Milan from the UEFA club competition and then to the proceeding before the CAS.

The CAS confirmed the fact that AC Milan failed to comply with the break-even requirement.

However, it considers that the sanction is not proportionated. The interesting fact is that the CAS Panel considers the recent change of ownership (which was not occurred at the time of the Adjudicatory Chamber issued its decision) should notably be taken into account to issue a new proportionate disciplinary measure on the basis of the current financial situation of the club.

At this stage, we can only imagine that it is in particular this change of ownership that leads AC Milan to ask for a settlement agreement before the CAS. In addition, this request from the club was in line with the above-mentioned second chance principle especially now that the new owner of the club (i.e. takeover of AC Milan by the US hedge fund Elliott after Mr. Li failed to repay back his loan to the fund) might have the guarantees requested by the UEFA CFCB to conclude a voluntary or settlement agreement.

Furthermore, we know that in the past, beside Galatasaray and Karubükspor, clubs like Manchester City, Paris-Saint-Germain, AS Monaco, AS Roma and FC Internazionale benefited from the settlement agreement’s second chance after failing to comply with the break-even requirement. AC Milan might consequently have asked to benefit from equal treatment by the UEFA CFCB.

However, the CAS Panel rejected AC Milan’s request to order UEFA CFCB to enter into a settlement agreement and preferred to refer the case back to the Adjudicatory Chamber considering that it is in a better position than the CAS Panel to issue a new proportionate disciplinary measure on the basis of the current financial situation of the club.

In any case, we know that the financial situation that notably led the Investigatory Chamber of UEFA CFCB to reject the voluntary agreement application from AC Milan has now disappeared.

CBV Avocats therefore considers that the CAS Panel’s decision in AC Milan’s case is in line with the CAS’s precedent case-law and with the FFP rules’ objectives. We look forward for the publication of the reasoned CAS’s decision in order to have a full picture of the CAS Panel’s approach on this case.