By Alec Roberson
We have looked at what it takes to bid to purchase an NHL team and to close the transaction. But for an NHL team purchase, there is one party’s approval that is of particular interest. If you have not had a chance to read Part I or Part II of our three part series on purchasing an NHL team, please take a second to check them out for a good backdrop to this article.
The NHL’s Approval
So here is where these transactions get more interesting, the NHL’s input. As a condition to purchase the team and close the transaction, the NHL Commissioner and Board of Governors has to approve the sale.
As an organization, the NHL is set up like a joint venture. The league itself is a conglomerate of all of the teams and their owners. The Commissioner and other officers under him oversee the league. The NHL itself is a 501(c)(6) tax-exempt organization (this is a sort of unique designation and a story for another day). It is governed under its own Constitution and Bylaws. The NHL’s relationship with its players is in the form of a multiemployer-employee relationship. The league and the NHL Players Association representing the players enter into a Collective Bargaining Agreement. What is important for this article, however, is who has a say when a team is sold.
Finding the exact rules the NHL follows specifically for approving such sales is not the easiest. Unlike the NHL’s Collective Bargaining Agreement with its players, the NHL’s Constitution and By-Laws are not really publicly available. HOWEVER, when the then Phoenix Coyotes filed bankruptcy in 2009, some of the contents of these documents became publicly available through those court proceedings. So, thank you for filing bankruptcy Coyotes.
The NHL Board of Governors and Governing Documents
The decision for the approval of an NHL team sale rests with the NHL’s Board of Governors and the Commissioner. The Board of Governors is a group of various individuals representing each team and headed by a Chairman of the Board. Currently the Chairman is Jeremy Jacobs. Jacobs is the governor for the Boston Bruins. Most (but not all) of the governors are the owners of the teams. Usually, upper management such as General Managers serve as alternate governors. The Board of Governors are responsible for various items such as approving rule changes, salary cap limits, hiring and firing the Commissioner, and approving the structure of game schedules. They operate somewhat like a board of directors for a corporation. The other item that the Board of Governors are responsible for is approving the sale and/or relocation of a team.
The NHL’s Constitution and By-Laws govern how the Board of Governors decide on team sales and relocations. (Please keep in mind I am going off of the records released in the Coyotes bankruptcy case from 2009. While some specifics may have changed, the general parameters remain intact and this is what is important here).
Requirements for Transfer of Ownership
While we are talking about the complete sale of a team, keep in mind this approval process is required for the transfer of any ownership interest of a team, even a minority interest. Exceptions include for an ownership interest under 5% (which only requires Commissioner approval), ownership interest between 5% and 10% (which only requires approval of the Commissioner and the Executive Committee), and transfers of various publicly traded companies, if applicable.
Article 3.5 of the Constitution requires “consent of three-fourths of the members of the League” to transfer team ownership. Other requirements include that the purchaser agrees to be bound by the requirements of the Constitution and assumes or guarantees all debts, obligations or liabilities of the team existing at the time of transfer. Keep in mind, it is possible that a condition of the sale could be that the seller settles various debts prior to closing. A transfer of ownership does not extinguish any debt or obligation the seller may owe to the league. The buyer pays any fees associated with the transfer incurred by the NHL unless the parties agree otherwise.
The potential purchaser must make an application to purchase in writing and submit it to the Commissioner. The Commissioner then reviews the application and makes his own investigation. Once complete, the Commissioner submits the application with any recommendations or information he deems relevant to the Board of Governors for their review.
Standards of Review for the Purchase
So what types of things are the Commissioner and Board of Governors looking at when they conduct their review? It can’t be completely arbitrary but there is some discretion.
Section 35 of the NHL’s By-Laws provides, among other requirements, that a proposed new owner should have “sufficient financial resources to provide for the financial stability of the franchise” and have “good character and integrity”. These requirements are the parameters to which the Commissioner and Board of Governors must base their decisions. You probably noticed they are not very specific rules. How much is “sufficient financial resources”? What exactly is “good character and integrity”?
Precedents and typical practices or averages likely influence those determinations. If a potential purchaser has a history of white collar crime for example, that’s probably enough to be blocked. If a potential purchaser messed up one time but has straightened out his or her path, the Board of Governors likely need additional evidence to show reasoning to disapprove. The Board of Governors may also look at the potential purchaser’s dealing practices in the transaction at hand. Long story short, there is not a clear rule showing when approval or disapproval is warranted. There are some instances that are more obvious but a lot likely take multiple pieces of evidence.
Outside Overseers of the Purchase
So if the Commissioner and the Board of Governors are the final sayers over the approval process, what keeps them in check? Even though the court system typically prefers to stay away from sports league governance, they will step in if the “governors” of that league fail to follow their own rules. A potential purchaser could bring a lawsuit against the league if he or she felt like the Commissioner or Board of Governors disapproved their purchase arbitrarily.
Other government actors may step in too. If the Board of Governors are blocking a potential sale for no viable reason, the FTC or Canadian Bureau of Competition (CBC) may step in and say their actions violate antitrust rules by blocking competition. While the rules governing the approval process itself have been deemed legal by the CBC under antitrust law, the actual actions of the league could move into illegal territory. The rules are fine, if you follow them.
Long story short, the bar to have a “viable” reason for blocking a sale is probably not super high. But with that said, there is a bar.
Requirements for Relocation
So if you really want to make things even more complicated than just purchasing an NHL team, how about buy one and try to relocate it.
Article 4 of the Constitution provides that (1) the League shall have exclusive control over all hockey games played by the member teams, (2) the home team shall have exclusive control over the hockey games played in its “home territory”, and (3) no games and no franchises shall be granted in a home territory without the written consent of the home team. Home territory means the city where the team is located and fifty miles of that city’s corporate limits. The addition of any cities or boroughs to the league requires three-fourths vote of the Board of Governors as well.
Section 36 of the By-Laws requires, among other things, that a detailed written application for a transfer be filed no later than January 1 of the year prior to the proposed transfer. An applicant “shall be afforded an opportunity to make a presentation” to the NHL and its members (i.e. Board of Governors). The members can question the applicant regarding “any aspect of the transactions”. Once presented with an application, the Commissioner is to assign one or multiple league Committees to investigate the proposed transfer. The Committee then must present the results of such investigations to the Board of Governors before they make their decision. The applicant and potential purchaser also have an opportunity to present to the Board of Governors.
Factors for Relocation to Consider
This Section 36 of the By-Laws lists 24 factors the Board of Governors should consider in voting on the relocation application. Those 24 factors include items such as the financial status of the team, fan support, if efforts have been made to find a purchaser who will keep the team in place, the effects the relocation may have on the league, the state of the team’s current facilities, and actions that have or may have been taken to make the team work.
The Board of Governors could be voting on both the relocation and the transfer of ownership depending on the situation. Relocation decisions seem to give deference for the team to stay in its current location. For good reason, however, it may be moved. The transfer decision deals more with the potential purchaser’s character and ability. The purchaser’s desire to move the team and actions surrounding that desire could influence the decision on the transfer though. You can see this in play in the case of Jim Balsillie and the Phoenix Coyotes below.
The league may also require a transfer fee “to reflect the goodwill developed by the League in the new location” and an indemnification fee “to reflect the goodwill developed by” the neighboring teams in the new location. In re Dewey Ranch Hockey, LLC, 414 B.R. 577 (Bankr. Ariz. 2009).
Disapproval of a Sale – the Jim Balsillie Story
So how do these rules apply in actual transactions? Without anything more specific in the Constitution or By-Laws, let’s take a look at an actual example to help explain.
In 2009, Jim Balsillie, through his entity PSE Sports and Entertainment LP (PSE), attempted to purchase the then financially struggling Phoenix Coyotes. This is the same Balsilllie who attempted to purchase the Pittsburgh Penguins in 2006 and the Nashville Predators in 2007. His goal with all three potential purchases was to move the teams to Hamilton, Ontario. In re Dewey Ranch Hockey, LLC, 414 B.R. 577 (Bankr. Ariz. 2009).
The Penguins deal fell through after the parties couldn’t reach an agreement. That breakdown specifically centered around provisions providing the NHL with an option to purchase the team if Balsillie attempted to relocate them. The Predators deal never reached the point of a binding agreement and fell through as well.
Looking for the Phoenix Coyotes
After the Coyotes filed for bankruptcy, they entered into an asset purchase agreement with PSE conditioned on a number of items including relocation and the bankruptcy court’s approval regardless of NHL consent. The bankruptcy court denied the motion to approve that agreement. Following that denial, there were a number of judicial actions and proceedings that ultimately led to the NHL Board of Governors deciding on the approval of the sale to PSE (as well as other bidders). They ultimately decided not to approve the sale to PSE. Even though they found that Balsillie and PSE were financially sound to own a team, they decided that he lacked the “character and integrity” required under Section 35 of the By-Laws.
The Board of Governors Block Balsillie
The Board looked at five instances to reach that conclusion. These included Balsillie’s conduct surrounding the sale of the Penguins, the sale of the Predators, a CBC investigation into the NHL’s transfer and relocation procedures and the potential Penguins and Predators sales, his wrongdoing at his own company Research in Motion related to backdating options, and his conduct surrounding the then current sale of the Coyotes. There were a lot of specifics for each of these instances but mostly they surrounded various actions Balsillie took that were perceived as being in bad faith.
For example, he threatened to have the CBC involved if the then owner refused to sell him the Predators. He also took actions that were perceived as devaluing that team prior to sale. During interviews by the Board of Governors Balsillie gave questionable responses when asked if he would uphold the NHL Constitution and By-Laws. He also performed conduct during the Coyotes potential sale to attempt to instigate antitrust litigation against the NHL and ridicule the NHL’s goodwill. In re Dewey Ranch Hockey, LLC, 414 B.R. 577 (Bankr. Ariz. 2009).
There was more evidence in addition to that mentioned above supporting the disapproval of the sale. As a whole, there was enough evidence in that case for the NHL Board of Governors to disapprove the sale of the Coyotes to Balsillie and PSE. Ultimately, the NHL stepped in and bought the team (another story for another day). While there could be a one instance magic bullet supporting disapproval, most disapproval decisions likely rest on a culmination of a lot of evidence.
Conclusion
As we come to a close in this series, you can see how a transaction of this magnitude is almost always complex. The NHL’s say in the matter adds another layer. Obtaining their approval can happen at any time before the closing of the transaction but if a binding purchase agreement is executed, the parties would have to have it conditioned on the NHL’s approval. That might reach malpractice to leave a provision such as that out.
I hope that you can use this three-part series as a somewhat brief overview of some of the requirements for buying an NHL team the next time you decide you need one. Obviously for most of us I’m kidding. But in reality, you can see that it is not so simple to just step in and buy a team. Even if you have the money and desire. There are economic hurdles, legal hurdles, and league hurdles that all have to be jumped to fully consummate the purchase of an NHL team. Of course if you want to relocate the team that involves even more.
So, could Ryan Reynolds become the next owner of the Ottawa Senators? With the right financial support, I absolutely think so. I do not know him, but I am not aware of any significant bad actions that would tarnish his moral character. His experience owning Wrexham FC could actually help his case as well. Whatever the result, remember it will not be a quick process and one that will require a lot of work.
Post image by: Dannel Malloy, CC BY 2.0 https://creativecommons.org/licenses/by/2.0, via Wikimedia Commons
