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.