On the Forecheck
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Boots bankruptcy a boon to Ballsillie? Maybe not
by Forechecker on 10/08/08 at 11:39 AM ET
Comments (8)
For Jim Balsillie to obtain the minority position in the Nashville Predators that Boots Del Biaggio bought into, bankruptcy court appears to offer a potential “back door” into NHL ownership, as he could simply outbid other parties for the shares. Since the bankruptcy trustee is bound to obtain top dollar for Del Biaggio’s creditors, this offers a potential legal end-run around the NHL’s process, which kept Balsillie from buying the Predators in 2007. For instance, the Globe & Mail’s Stephen Brunt wrote the following last week:
If Balsillie is indeed interested, he must have similar views [regarding Del Biaggio’s relocation schemes] – minus the Kansas City part – and he understands that by working through the bankruptcy courts he can’t be derailed by NHL politics or the legal butt-covering that prompted Bettman to twice make sure a sale to Balsillie was never consummated.
But it may turn out that this back door is closed, as well. One intrepid Nashville fan has dug up a legal presentation entitled “Sports Franchises and Bankruptcy Law”, which appears to shed some light on this question of whether the Del Biaggio minority position can simply be auctioned off to the highest bidder, regardless of NHL rules.
The following is an excerpt from the presentation, which dates from 1999 when the Pittsburgh Penguins were on the financial ropes:
The NHL Constitution, exhibit “A,” expressly prohibits the transfer of membership in the league or of any ownership interests except pursuant to its approval process. Citing an 1876 Supreme Court case, Hyde v. Woods, 94 U.S. 523, 24 L.Ed. 264 (1876), the NHL’s position was that membership in a voluntary association may be transferred only pursuant to the association’s rules, even after an individual member’s bankruptcy. The Hyde v. Woods case involved the transfer of a seat on the San Francisco Stock Exchange Board and the use of proceeds to pay debts of the exchange memberships. The Supreme Court in Hyde v. Woods held that:
“A seat in this Board is not a matter of absolute purchase. Though we have said it is property, it is encumbered with conditions when purchased, without which it could not be obtained. It never was free from the conditions of (the rule requiring such payments at transfer), neither when the debtor bought, nor at any time before or since. That rule entered into and became an incident of the property when it was created, and remains a part of it in to whose hands soever it may come.”
Similarly, the portion of the Nashville Predators owned by Forecheck Holdings (Boots Del Biaggio’s holding firm) is governed by the terms and conditions outlined in the ownership group’s operating agreement. That includes the right of the majority ownership group to approve (or disapprove) of any new partners, as noted by David Freeman.
Now, there are a couple caveats to consider; first of all, this presentation is nearly a decade old; that said, the current situation doesn’t appear to bring anything new to the legal arena, so it’s likely that it remains relevant today. Secondly, the bulk of the document discusses the possibility of the Pittsburgh Penguins having their NHL franchise revoked due to team bankruptcy. The topic of ownership transfer outside of the NHL approval process is a secondary issue.
Nevertheless, it’s pretty clear that the NHL has some legal backing to ensure that any franchise ownership transfer abides by its regulations. If Balsillie still wants to join the NHL club, he’ll still have to walk through the front door to do so.
Filed in: Nashville Predators | On the Forecheck | Permalink
Tags: Jim+Balsillie,
Comments
And then what happens when Balsillie is rejected by the Board of Governors, and all of Boots’ creditors start asking why it was, exactly, that the man with the most money was turned down?
The NHL can make all the rules that it likes, but come auction day, one of the considerations by the judge will have to be: who will give the creditors the most money on the dollar?
And in fact, other Governors could even turn on Bettman when it comes to this. After all, their own franchise values depend on what NHL franchises sell for in today’s market. Is there any reason to think they’d look favourably upon a rejection of the highest bidder if it means that their net worths all decline as a result?
Posted by Josh from Montreal on 10/08/08 at 12:27 PM ET
A couple notes:
1) The relevant document which outlines the conditions attached to the Del Biaggio shares is the operating agreement between the Predators owners. It’s that, not necessarily the NHL Constitution, that would be enforced.
2) The whole notion that the sale price of one team (or in this case, the minority share of a team by an owner in bankruptcy) has an effect on the valuation of other franchises is deeply flawed. Whatever the Boots shares go for has no impact on the value of teams around the league.
Granted, you can pay lawyers to challenge just about anything, but the notion that Balsillie could use bankruptcy court as a shortcut to NHL ownership appears not to be the case.
Posted by Forechecker from Nolensville, TN on 10/08/08 at 12:44 PM ET
@Forechecker: #1 - So, any agreement between other parties can supersede the NHL Constitution? Is that what you’re saying?
#2 - Do you have any links (Forbes, Financial Times, random blogs…) that back you up on this point (which, I point out, you offer without even so much as an explanation)?
Posted by Josh from Montreal on 10/08/08 at 02:13 PM ET
#1) I’m not saying the operating agreement supersedes the NHL Constitution, but rather that the bankruptcy proceeding needs to respect the terms & conditions of the operating agreement.
#2) I can try and dig up some links to back this up, but the idea is basic Economics . If someone overpays for a particular franchise, how does that impact the value of a team in another city? The answer is it doesn’t; the present value of a team is driven by the expected future cash flows, and it’s up to the bidding parties to figure out what those are likely to be and what that’s worth paying for, given the risks involved.
The only case where such overpayment might help another franchise is if multiple parties were chasing that top bidder, and after losing out, decide to go after another franchise that’s on the market. That’s a scenario that doesn’t even apply to the vast majority of teams that aren’t for sale, and it doesn’t appear here that there are a broad number of potential buyers bidding up the price.
Posted by Forechecker from Nolensville, TN on 10/08/08 at 02:54 PM ET
#1 - Ok, but if the Constitution was around before the operating agreement, wouldn’t it take precendence if there’s any kind of conflict between the two?
#2 - This makes sense, but (and I think you agree on this point): the franchise is worth more to Balsillie elsewhere than it’s worth to *anyone* in Nashville. I think that fact is worth something in bankruptcy proceedings.
Posted by Josh from Montreal on 10/08/08 at 03:04 PM ET
#1) The operating agreement is the primary document here, as it governs the transfer of ownership of shares with the team. Now, I would think that the current majority owners would need to abide by the NHL Constitution in how they go about approving or disapproving any prospective new partners. I wouldn’t think there’d be a conflict between those two documents, considering how close Bettman appears to have been to the situation.
#2) I agree that any franchise is probably worth more to an owner who has a realistic chance of relocating to southern Ontario; I’ve said before that moving (or better yet expanding) there is probably the best single move the league could make, business-wise. But that doesn’t influence the value of the Anaheim Ducks, for example. Many columnists ran with that idea, portraying a scenario in which owners around the league would cheer on Balsillie’s overbid because it would somehow magically inflate the value of all their teams.
Posted by Forechecker from Nolensville, TN on 10/08/08 at 03:25 PM ET
Your analysis regarding the bankruptcy is interesting, and has some relevance, but it is far from absolute. Quite simply put, there have been significant changes in bankruptcy law and attitudes in the last 4 years, and reliance on caselaw dating back to 1876 and a position paper written in 1999 is pretty sketchy. No bankruptcy court is going to let creditors get the shaft if a reasonable solution is at hand; there is plenty of legal wiggle room on this.
Interesting stuff though.
Posted by shazam88 from SoCal on 10/08/08 at 03:28 PM ET
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Meh, this is all based on adhereing to the NHL’s constitution, which is unconstitutional. Since Al Davis beat the NFL no league’s constitution will stand up in court in a matter like this.
Posted by bcrt on 10/08/08 at 12:20 PM ET