Thursday, 18 March 2010

One for the lawyers

Quizz time.

Question 1:       Which of the following events is MOST LIKELY to happen?
Question 2:       Which of the following events was NOT identified as a “Risk Factor” in MU Finance plc’s bond prospectus?

a)                  United being relegated from the Premier League in the next seven years
b)                  A terrorist attack on Old Trafford
c)                   A substantial organised boycott of season tickets and executive tickets by thousands of United fans this summer

I think the answer to both is c).  If a US court is asked the same questions and agrees with me, then things could potentially get very expensive for the Glazer family.

There are no less than fifteen pages of “Risk Factors” in the MU Finance bond prospectus.  Such is the norm with modern debt and equity issues in our (and particularly America’s) litigious culture.  The Risk Factors cover a huge range of potential pitfalls from player injuries, through the nature of English insolvency law to the terrorist attacks I mentioned above.

The purpose of the Risk Factor segment is both to alert potential bond holders to things than could go wrong, but also (and perhaps more importantly) to protect the issuer of the bonds (MU Finance plc and its parent company Red Football Ltd) from any potential litigation from bond holders in the event of something going materially wrong at United.  The reason that the list is so long (other than the fact that football is inherently a risky business) is that if any substantial risks are not disclosed and then come to pass, the issuer can be sued by people who bought the bonds.  In US courts, not only can investors sue for the amount invested, but also for punitive damages in cases where business risks were not adequately disclosed.  Such punitive damages can be several multiples of the original amount invested.

Investor litigation is rare in the UK, but in the United States is a well established practice (check out the Stanford Law School’s “Securities Class Action Clearing House” for many, many examples).  Although things have calmed down since the wave of bubble litigation and then the aftermath of the credit crunch in 2008, US investors in both bonds and equities frequently turn to the courts when they feel a company that has sold them securities has not shared all the relevant information it has with them.  Red Football of course chose to sell bonds into the US (to “qualified institutional buyers” under the 1933 Securities Act), making the identification of risks very important.  The bond prospectus not only lists numerous risk factors, it also makes the following statement:

The risks and uncertainties we describe below [in the Risk Factors section] are not the only ones we face. Additional risks and uncertainties of which we are not aware or that we currently believe are immaterial may also adversely affect our business, financial condition or results of operations.” (page 28 of pdf version)

So the prospectus attempts to list all material risks Red Football is aware of but doesn’t mention supporter opposition to the club’s ownership.  This raises the question whether the risk of action by supporters was considered “immaterial” and was therefore deliberately not mentioned, or whether Red Football’s management aware of it.

Opposition to the Glazers runs deep and is long standing.  Years of ticket price rises, the lack of transfer activity last summer and news that total debt had passed the £700m mark had already increased supporters’ concerns by the end of 2009.  The publication of the prospectus itself was always going to anger supporters as it revealed for the first time all the cash extracted from the club by the Glazers and their intention to take much, much more in the future.

I am not suggesting that the famous Chatmaster’s “green and gold” idea should have been foreseeable, nor the formation of the Red Knights group, merely that when a sizeable proportion of your customer base is already very unhappy about the way things are, when you know you are about to reveal further the gory details and when you are failing to sell out the ground on a growing number of occasions, then a “customer” backlash is a material risk.

A red I know is friends with a (football ignorant) bond manager who had bought bonds in the issue.  When the red asked him if he was worried about a boycott, the bond manager was startled and asked him what he was talking about.  When he heard the answer he didn’t like it.  As the saying goes, I’m no lawyer, but I have seen hundreds of securities offering documents over the years and have a fair idea what constitutes a material risk and what doesn’t for United’s “business, financial condition or results of operations”.  If I was a bondholder and in the next few months supporters’ groups call a boycott with a significant number of season ticket and executive ticket holders taking part, I’d have a lot of questions to ask about why the risk of such an event was not disclosed.  Why even the existence of opposition to the owners was not disclosed.  But before I asked those questions I’d call my lawyers and I’d make sure they were in America.

Interesting times.



Anonymous said...

Just wanted to say carry on the exceptional work. I've been an avid reader for a few months now and find your expert financial view point crucial to understanding what's happening at my club.


BazX said...

Very interesting read Andersred - I hope someone from Camp Glazer takes notice. The fact that they fail to mention to prospective bond holders that they are actually despised by a large section of the fan base/their clientele, is certainly a shocking omission on their part in terms of disclosing risk factors.

Anonymous said...

Mhm, might be the time to buy a couple of those bond's. Does anybody know a good law firm in the US :)

Carry on with your Blog, great job !


United Rant said...

Add huge ticket price rises to come and then the anger will only grow:

While we're on it, what's your take on this story on the Times which says the Glazers may refinance the PiK debt through an additional bond issue:

Stef Szymanski said...

This is a really interesting point. I'm an economist not a lawyer but what you say makes sense to me. But isn't it also the case that the boycott is being proposed by the Red Knights as a means of taking control of the club? In legal terms I think this means that the Red Knights could be sued by the Glazers on the grounds of "tortious interference"- legal speak for maliciously seeking to damage their business. Any damages payable by the Glazers would then fall to the Red Knights, together with any personal losses the Glazers might add to the claim. It seems to me the Red Knights could end up making the Glazers very rich, but might also end saddling the club with even greater liabilities.

Diem said...


I think the ticket price rises need to be considered in relation to those at the other Big Four clubs - I fully expect that the plc would have raised prices in line with them.

With regards to the potential boycott of season ticket renewals, I wonder if the board factored in the following to their assessment:

Firstly, "All mouth and no action" - how many supporters are actually going to follow through on the threat? There's a bucket load of game theory considerations behind this (maybe Stef can muse on it further?!), but it parallels elections. If everyone voted (or even just a reasonable proportion more), the result of elections would differ markedly. But this never happens, and we always see turnout rates at or below 40%. Similarly with the season tickets: if everyone believes that everyone else will act in concert then there's a chance that change will happen. Now, the fans need a far smaller aggregate number to effect a change, and are probably more motivated, which counts in their favour, but there’s still the risk of individual inaction, multiplied up to no impact.

But, if fans follow through on their threat, they lose their season ticket (or have to pay more? I assume there's some sort of early sign-up bonus?). Watching the Milan match last week, I noticed the 'sign up to the waiting list' adverts running around the pitch, which leads me to my second thought:

"How deep is the pool". If the waiting list is longer than the number of fans not renewing, then there's little net loss to the club (other than perhaps increased administrative costs for new members). Maybe even an opportunity to increase merchandising ("Look at all this stuff you can buy to augment your new season ticket")!!

Granted, some of the people on the waiting list may opt not to take up their ticket in protest, but if you’ve been on the waiting list for a while you’d have to be seriously motivated to turn down the opportunity.

Consequently I can see a plausible defence of the materiality condition.

One possible area of attack would be the non-purchase of replica kits. Sadly for timing purposes, the new home shirt was launched for this season so the only opportunity is to not purchase the away kit, with correspondingly less impact.


Anonymous said...


There is no waiting list. Season tickets were available last year to any-one who wanted one.

Diem said...

Thanks for the clarification Anonymous, that certainly puts a different slant on things.

Diem said...

...although, interesting still advertises to "sign up on the waiting list"

Anonymous said...

If I were an investor I would not be happy with a bond manager who bought something without doing adequate research, or who admitted total ignorance of the business he was investing in. I would think about suing him as well.
I think the Glazers suing anyone who advocates a boycott would be as stupid as McDonalds and the Mclibel case.

Anonymous said...

The price of season tickets for next season will be the key, with or without the red knights and their call for boycott, if ticket prices rise that will be the final straw for many.

DRDI said...

The fact that FC United of Manchester was formed in 2005, shortly after and as a consequence of the Glazer takeover, can only have escaped the attention of the truly ignorant. FCUM's average home gate since formation is into four figures, most of whom are ex-Old Trafford attendees executing a boycott of the Glazer regime.

Also, in the last few seasons, United fanzines have consistently mentioned the dwindling to nothing of the season ticket waiting list, reduced overall ticket demands, and the steady pricing-out of fans.

Neither the existence of FCUM nor the comments of fanzines necessarily makes the instigation of a season-ticket boycott inevitable. However, these are two tangible and (at the time of the Bond prospectus' publication) pre-existing factors that indicate a degree of unhappiness with the Glazer regime... and as any history student knows, it only takes a single, sometimes unexpected, event or initiative to harness such discontent into a force for change.

The 'Green & Gold' initiative, arising from the Bond issue may prove to be that catalytic event.

Interesting decision by the Glazers to leave the risk of a supporter boycott out of the Bond prospectus. But was mention of such a risk omitted because of ignorance, under-estimation, or arrogance? And would any of those reasons for omission constitute a decent defence if challenged?

Dylan said...

Diem, I believe the ten year merchandising deal with Nike means that any replica kit boycott would have negligible effect on the club. Sadly. Incidentally, the change of sponsor for the new season will no doubt give Nike the opportunity to create a whole new range of kits. Rumours of a green and gold away strip continue to abound.

Quetzalcoatl said...

Interesting stuff. Putting aside the moot question of whether the issue document has covered off these risks, I feel inclined to echo Diem's observations and add something further.

There's certainly a lot of all- -talk-and-no-trousers going on here when it comes to ditching the season tickets. Yet you can hardly blame fans for that - the single biggest reason the fan boycott will fail to materialise is the lack of time to effect a (legally watertight) strategy to guarantee ST re-enfranchisement. By that I mean set up a scheme to guarantee renouncers that their tickets would be restored in the event of a MUST/Red Knights-backed takeover.

Coupled with the inherent lack of time is the unforgivable prevarication and lack of comms from MUST. They have done a sterling job of transforming their once amateurish / worthy website into a responsive Web 2.0 effort but they've thus far failed to blast out that one guarantee that would make this all hang together.

MUST must get their act together - devise a strategy to encourage season ticket holders to register their details, with a view to future restoration. Surely - the Freshfields guy can give some pointers on the legal issues.

I'm jacking in the season ticket as is, but the only way most folk will be persuaded is to assuage those fears and make it crystal clear there is a way back in.

Anonymous said...

I think Must are devising such a scheme in tandom I would like to enfranchise all season ticket holders to be given a share in the club on renewal along with must members when the club becomes a plc again.

Diem said...

DRDI - I wonder if the "dwindling of the waiting list" tells us that United are highly effective in extracting the maximum 'producer surplus'. Ideally they'd want the waiting list to be as small as possible, as they'd have increased prices sufficiently to balance the supply with the number of people willing to pay!

Dylan - I'm not familiar with such matters, but it would certainly be interesting to know the balance of the shirt fee. Nike will obviously take a percentage, but I wonder how high it is

Quetzalcoatl - interesting point about the guarantee of the season ticket. Since they almost certainly wouldn't get their original seat back, would the accept that risk? Since any subsequent occupier of the seat would probably object to being turfed out of what is now *their* seat!

Andy L said...

andres - first up, great blog. I'm a Liverpool fan, but think the issues you raise are crucial for all football fans. Keep it up, I love your digging in to this stuff.

However, as a City lawyer, I am not sure about your point in this post. The following risk factor is in the bond prospectus, and my opinion would be that this is wide enough to allow them to cover their ars*s. Boycott not specifically mentioned but it does say high attendances are required

"We depend on our matchday supporters, who are concentrated in the United Kingdom

A significant amount of our income derives from ticket sales to our supporters who attend First
Team matches at Old Trafford and our share of gate receipts from cup matches. In particular,
the income generated from ticket sales at Old Trafford will be highly dependent on the
continued attendance at matches of our individual and corporate supporters. Match
attendance is influenced by a number of factors, some of which are partly or wholly outside of
our control. These factors include the success of the First Team, ticket prices, broadcasting
coverage and general economic conditions which affect personal disposable income and
corporate marketing and hospitality budgets. A reduction in matchday attendance could have a
material adverse effect on our matchday revenues and our overall business."

The very first risk factor also says "We are dependent upon the performance and popularity of the First Team"

andersred said...

Andy L,

Thanks for your comment. I'll bow to a lawyer (even a Liverpool supporting one) on this of course.

When I originally read the "risk factor" you quoted, the thing that struck me was that although a boycott could be captured by "match attendance" section, a boycott is not included in the list of various factors which could impact attendance.

If you are going to the lengths of mentioning broadcasting coverage and marketing budgets, surely you should mention organised supporter action too.

Like I say, I'll bow to you in this one.


AndyL said...

It's weaselly lawyer wording, frankly, and not as clear as it should be. However, if I was in court for the Glazers I'd point to

"Match attendance is influenced by a number of factors, some of which are partly or wholly outside of
our control."

Their lawyers would say that the subsequent list is illustrative but not exhaustive. That'd get them off over here, America I don't know about.

However, there is a good point around what you say more generally - although they might not be liable in a court for misrepresentation, there will still be investors who haven't realised about the potential for a boycott and will not like it if there is one. I'd be really interested to know the true length of the season ticket waiting list. If there are games next year which aren't sold out it may spook the bondholders.

I'm not sure the green and gold protest is enough; people are still paying for tickets and going in. Only a genuine boycott puts pressures on Glazer and the debt holders.

Keep up the good fight; we live in interesting times and pressure is needed from all sources to get our clubs back into the right hands.

Frank said...

Your first question begins by saying which of the following is most lkely to occur - but it doen't say which events are most likely to occur.

It doesn't give us a choice to make, as it doesn't give us any alternatives to choose between.