Co-authored by Damien Vickovich
Despite negotiations slowing in the wake of a second wave of COVID-19 in Australia, the Australian Rugby League Commission (ARLC) remains committed to adding a new club to expand the national first grade competition, the National Rugby League (NRL). The benefits of expansion are obvious – it has the potential to:
- Foster increased fan engagement from new geographical areas;
- Increase the volume of professional matches to be televised; and
- Provide greater opportunity for corporate sponsorships and advertising.
However, expansion inevitably raises commercial and legal issues for both clubs and the governing body. In Part I of this two-part series (accessed here), the focus was on the challenges for an expansion club in its initial financing and what could occur if a new club goes into financial distress. Pivoting to the dynamics between clubs and the governing body, Part II focuses on the legal, regulatory and governance considerations of corporate structure, and the profit-sharing and contractual considerations with regards to broadcasting agreements.
Like any business, how an NRL club is incorporated, owned and structured has implications not only for its finances and business operations, but also its core values. As the NRL looks to expand, entrant clubs must consider how to structure their new entity. The corporate structure of existing NRL clubs can be divided into three categories.
Firstly, clubs such as the Cronulla-Sutherland Sharks and Penrith Panthers are ‘member-owned’ clubs. Generally, this means the club is owned by the football club itself, and it is this legal entity that holds the NRL licence, conducts football operations and generates revenues from sponsorship and the broadcasting arrangement. These footballing entities operate in combination with a ‘leagues club’ entity, which owns part of the NRL club and operates as a non-profit organisation that generates revenue from hospitality facilities and membership. These leagues club entities generally incorporate as a company ‘limited by guarantee’ under the Corporations Act 2001 (Cth). This is a common company structure used for non-profit organisations in Australia that reinvest any surplus profit towards the organisation's purposes, as it presents start-up cost and tax advantages. These clubs are ‘member-owned’ because individuals can pay and apply for membership status in the club, which may grant them voting rights. This corporate structure is particularly suited to conducting non-profit activities as entities do not pay dividends and each member of the company has a single vote1. The leagues clubs’ revenues are fed directly into financial assistance for the footballing operations. These clubs rely heavily on revenue from their entertainment venues, particularly from poker machines. Consequently, they are sensitive to changes in entertainment and gambling legislation, such as the Gaming Machines Regulation 2019 (NSW).
Secondly, some clubs are privately owned. As with Autex Industries’ ownership of the New Zealand Warriors, majority stakes in these clubs are held by a private corporate entity. In a unique case, Brisbane Broncos Ltd, the NRL’s richest club2, is the NRL (and Australia’s) only ASX-listed sports franchise, with News Corporation a majority shareholder. To list on the ASX, a club must meet the minimum admission criteria, including specific conditions about an entity’s size and revenue, the spread of shareholders, working capital standards and ongoing reporting requirements. For these private clubs, the aim is to maintain financial stability from footballing operations alone, through sponsorship, merchandise, ticket sales and the NRL grant. As discussed in Part I, private equity ownership is a possibility for expansion bidder the Brisbane Jets.
Third, clubs may be a hybrid of the two types described above. These clubs are incorporated as private or unlisted public companies, with equity ownership split between private investors and a sport focused entity. Examples include Russell Crowe and James Packer’s majority ownership of the South Sydney Rabbitohs or the Penn Family’s ownership of Manly-Warringah Sea Eagles. In each case, the clubs’ members or leagues club hold a minority stake. This more complex ownership model may give rise to a divergence of shareholder interests.
For entrant clubs, consideration must be given to corporate structure. Specifically, they must have regard to:
- The club’s financing structure, investor relationships, and the sources from which they wish to earn revenue;
- The extent to which they value member ownership and the benefits of leagues club and ‘grassroots’ community involvement; and
- A willingness to be dynamic and change corporate structure where financial positions change.
Profit-sharing and broadcasting rights
Relationship with the Governing Body
Running parallel to issues of corporate structure and governance at club level, two considerations come to mind in respect of the governing body itself. The first is the NRL’s legal and commercial relationship with clubs. This manifests itself in various ways. Firstly, through the broadcasting deal discussed below. Secondly, the intellectual property of clubs, such as name, brand and logo, are controlled trademarks of the ARLC. Thirdly and by extension, the NRL has licensing arrangements with each club.
Another issue is how the NRL itself is owned and operated. Since 2012, when the ARL and News Limited (as it was then known) brokered a deal to institute the ARLC with full control, the NRL has operated as an independent, non-privatised entity. The ARLC consists of 18 members – the 16 clubs and the New South Wales Rugby League and the Queensland Rugby League Commissions3. In recent times, the partial privatisation of the league has been considered. In 2020, UK-based corporate finance firm Oakwell Sports Advisory valued the NRL at $3.1 billion4. Following this valuation, the NRL rejected multiple private equity bids for partial ownership. Private equity firms investing in sports is becoming increasingly common – for example, CVC Capital Partners recently purchased a share in Rugby Union’s Six Nations and Premiership Rugby competitions5. Selling a stake in the NRL competition would provide immediate funds to invest in expanding the game overseas or at community level. For now, the NRL remains in the hands of clubs through the arrangements described above.
As discussed in Part I of this series, the interests of private investors have the potential to diverge with those of fans and clubs. Should they accept private equity investment in the future, the ARLC will need to conduct the appropriate due diligence on any potential buyer to ensure its long-term commitment to the sport and may wish to consider a buy-back clause.
The profit-sharing model
The NRL’s television broadcasting arrangement – revised every few years and currently serviced by a joint arrangement with subscription television (Foxtel) and free-to-air (Nine Network) until at least the end of 2022 – is the central revenue stream for the competition. In simple terms, the arrangement distributes total broadcasting revenues, totalling almost $2 billion, to individual clubs. With a 17th team, this may lead to amendments to the broadcasting arrangements with the potential for improved revenues from a greater number of fixtures.
Since the broadcast deal signed in 2015, viewership has increased by 24 per cent. This has outpaced growth in the Australian Football League (AFL) and is largely attributable to simulcasting on Foxtel and Nine and the addition of a Thursday night fixture. With a 17th team and the potential for 24 additional games per season6, including the possible return of a Monday fixture, regular season viewership is modelled to increase by between 3 and 10 per cent7.
Future broadcasting negotiations will be critical to the commercial viability of expansion. This can lead to the intersection of participant interests – clubs both compete with each other but also have a vested interest in the collective success of the competition. With that in mind, a 17th and potentially 18th team would need to increase broadcasting revenue for the competition long term by more than the income it would itself be entitled to receive. In the eyes of existing clubs, this presents a free-rider problem, wherein new entrant clubs ride on the collective brand success the other clubs have spent time creating. Meanwhile, existing clubs will have to weigh up the potential for revenue losses, the cannibalisation of fans and the opportunity cost of ARLC expenditure invested elsewhere. According to a report published by Gemba, a consultancy, the NRL securing another joint broadcast deal (where as many games as possible are simulcast on both Foxtel and Nine) would be critical to increasing viewership. For the broadcasters however, as a greater share of the games are jointly televised, this creates greater competition for, and potential dilution of, advertising revenue.
An expansion will also present an opportunity for broadcasters and the NRL to reconsider in-venue and peer-to-peer broadcasting. These methods seek to allow spectators to bypass paywalls for access. While social media coverage and peer-to-peer streaming is less of a concern for Australian sports than, in say the US or UK, as technology advances broadcasters and the NRL will be forced to protect their content through legal mechanisms drawn from contract, competition law and intellectual property law.
As it seeks to maintain an efficient profit-sharing model, it is arguable that the NRL should consider:
- How the broadcasting contract will distribute revenues between clubs, with a view to maximising profits while maintaining fairness; and
- How to navigate the legal challenges from a competition law and intellectual property perspective.
As the NRL seeks to expand, three considerations will be critical:
- New clubs should closely review their own legal structure when pitching to enter the competition to ensure appropriate governance and financial security;
- The ARLC will need to consider their legal and contractual relationships with the expansion clubs to protect the existing NRL brand, while actively promoting the entry of the new clubs; and
- Working together, clubs and the governing body will need to effectively manage the existing profit sharing model, particularly in the negotiation of future broadcasting arrangements.
1 See, for example, the Company Constitution of Cronulla-Sutherland District Rugby League Football Club Limited. Accessed at <https://sharkies.com.au/wp-content/uploads/2015/08/CSLC-Revised-Constitution-as-approved-at-AGM-19-March-2015.pdf>.
2 Laine Clark, ‘The NRL's richest club in a 'fight for survival'’, Sydney Morning Herald, 25 March 2020. Accessed at <https://www.smh.com.au/sport/nrl/nrl-moneyball-the-dire-financial-state-of-sydney-clubs-revealed-20200320-p54c71.html>.
3 Australian Rugby League Commission, ‘About Us: ARL Commission’. Accessed at <https://www.nrl.com/about-us/arl-commission/>.
4 Brent Read, ‘NRL private equity a $3bn call’, The Australian, 21 September 2020. Accessed at <https://www.theaustralian.com.au/sport/nrl/nrl-private-equity-a-3bn-call/news-story/0998b3319d86b334ab7ca1db38ace13c>.
5 Murad Ahmed and Kaye Wiggins, ‘CVC seals £365m Six Nations rugby deal’, Financial Times, 11 March 2021. Accessed at <https://www.ft.com/content/3c861824-040c-474b-b94c-251c9bdd5dae>.
6 Gemba Group, ‘NRL Expansion Analysis - Final Report’ Published 17 June 2021. Accessed at <https://origin.go.theaustralian.com.au/wp-content/uploads/2021/06/Gemba_NRL-Expansion-Analysis_Final-Report_170621.pdf>, p.20.
7 Gemba Group, above n 6, p.20.