The coming of David vs Goliath? European Commission to address foreign subsidies in sports

The European Commission (EC) has recently tabled proposals to address foreign subsidies that distort the internal market (see our client alert on the EC’s White Paper on Foreign Subsidies). The proposals may well lead to the creation of a new regulatory system – from an unexpected source – to help redress the perceived imbalance and level the playing field in sports competitions across the European Union.

“State-owned clubs do what they want in Europe”

Over the last decade, sports leagues around the world have seen a significant increase in the number of state-supported clubs or franchises. In a range of sports, from football to cycling, newspaper columns are rife with rumours and accusations that (foreign) states are manipulating markets for the acquisition of sports players and construction of sports infrastructures, thereby ‘unfairly’ tilting the balance of sports competitions.

In the EU, despite various calls from sports leagues and club representatives to address head-on a disparity triggered by the provision of state subsidies, the sports regulatory framework arguably still contains a loophole. For example, UEFA’s Financial Fair Play rules to increase competition (see more on these rules here and here) – by preventing football clubs from spending more than they earn – do not fully consider the club’s income source. Existing EU legislation likewise falls short of offering a comprehensive solution. Foreign subsidies are not subject to EU state aid control rules, since such subsidies are granted by non-Member States. Meanwhile, merger control rules focus on the creation of market concentration, but not on the existence or effects of foreign subsidies as such.

Accordingly, clubs that benefit from foreign subsidies may enjoy a relatively unfettered advantage over non-subsidised clubs. Though there are undoubtedly many contributing factors at play, it is clear that several clubs in receipt of substantial foreign subsidies have leveraged such financial backing to achieve success on the sports field.

Defence is the best form of attack: The EC parks the bus

The EC’s proposal to address foreign subsidies that distort the internal market may prove to be a game-changer in the sports sector. The White Paper uses a broad notion of “foreign subsidy” (which is distinct from the EU notion of “state aid”): any financial contribution by a non-EU state entity directly or indirectly conferring a benefit to a firm active or established in the EU. It proposes to give the EC enforcement powers through three complementary tools (referred to as ‘modules’). A first tool would establish a system of investigation and possible remedial action against existing foreign subsidies. The second and third tools would put in place separate compulsory notification systems in relation to foreign subsidies (a) that support acquisitions of EU-based businesses, and (b) in the context of public tender procedures. As such, the proposal would empower the EC to neutralise on its own initiative the distortive effect of foreign subsidies and to police distortive conduct by foreign-subsidised sports clubs. Moreover, it seems likely1  that sports clubs and associations will be able to pro-actively file complaints to the EC, even if the EC’s proposal is not explicit in this regard.

It is still an open question as to what exactly would trigger the EC’s enforcement against a foreign-subsidised sports club. On the basis of its nature and form, the mere existence of a foreign subsidy (for example, of a capital injection or a sponsorship) may in itself be considered a distortion of the internal market. If this proves to be the case in practice, such widespread enforcement could potentially lead to an extreme – but not impossible – outcome: the end of foreign state-backed clubs. The EC might also be able to police distortive conduct by a foreign-subsidised club. At this early stage, the EC’s proposal remains vague as to the type of conduct – other than subsidised acquisitions – that can be considered aggressive or distortive. The EC might consider that subsidies used to finance player transfers are liable to distort the transfer market, since players are a key competitive asset of sports clubs.

This would potentially complicate the transfer of players for foreign-subsidised clubs, particularly in football, where the drama of ‘deadline day’ means that many transfers are often only completed moments before the end of the transfer window.

The EC also envisages a specific tool to limit the subsidised acquisition of EU targets. Subsidised sports clubs may therefore see their investments in sport infrastructures, such as stadia, either limited or subject to approval. There is precedent here; under the EU state aid control regime, the EC has on multiple occasions launched an investigation into the aid granted by Member States to renovate and build stadiums, and attempted to tackle land transfers at subsidised prices. The ‘acquisitions tool’ envisioned in the White Paper is, however, limited to the acquisition of companies.

Taking it to penalties

The White Paper may well pave the way for some very far-reaching penalties. If the EC considers a foreign subsidy distortive, it could (i) prohibit the conduct linked to the subsidy; (ii) ban the subsidised acquisition; (iii) require the divestment of certain assets (yet to be defined); and/or (iv) prohibit certain investments.

If the proposed toolkit to address foreign subsidies comes to light, we may end up seeing the EC as the ultimate referee in sports competitions.

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1 The White Paper provides that the EC (and national authorities) may open an investigation on the basis of any elements it considers could indicate the granting of a foreign subsidy to a beneficiary active in the EU. Any information could “e.g. stem from market operators or Member States.”