Co-authored by Matthew Dixon-Ward
Brazilian football clubs have been the subject of increased investment following the introduction of a new law last year. Law No.14,193 of 6 August 2021 follows the “PROFUT Law” (Law No. 13,15/15) in attempting to increase investment in Brazilian football following a period of rising debt among many clubs.
Background: The need for reform
Football is a major part of Brazil’s culture and the country represents the world’s second largest football audience. The Seleção (Brazilian national football team) has won more FIFA World Cups than any other country and is the only team to have played in every FIFA World Cup tournament. It is surprising, therefore, that the nation’s clubs represent just two per cent of global football revenue. In part, this can be attributed to the way the clubs have traditionally been structured, where clubs were owned and run by members as non-profit associations. Clubs in Brazil have only been permitted to be for-profit organizations since the 1998 “Lei Pele” (Law No. 9.615); however, by 2019, only nine per cent of Brazil’s football clubs were operating in this manner, with the rest remaining as non-profit associations.
The non-profit association structure prevents investors taking ownership positions as equity funding is prohibited. Within this structure, club executives are elected by associate members every 2-4 years (depending on the club’s internal statutes), often without receiving a salary. Many of those elected have been fans who have been elected due to their popularity among club members, rather than their ability to manage the clubs and their finances. It could be argued that the short period of leadership has also encouraged short-term planning; Brazilian clubs, for instance, have one of the highest turnover rates for managers, with a 2014 study by El Economista estimating that the average manager in Brazilian football retains their job for only 15.2 games.
In April 2015, less than a year after the country hosted the FIFA World Cup, eight of the top 12 Brazilian clubs were behind on payment of salaries. Only one club in 2014, Flamengo, announced that it had earned enough to service its debts and pay its taxes. By April 2015, the government was the Brazilian clubs’ largest creditor, with around US$1.3 billion in unpaid taxes.
In response to these issues, the government passed the 2015 “PROFUT Law” (Law No.13.155/15). This waived a portion of outstanding tax debt and divided the rest into instalments. In exchange, clubs were forced to adopt certain compliance and modernization practices.
Whilst most clubs complied with the fiscal requirements of the PROFUT law, overall debt levels continued to rise significantly. Although the government did take steps to ease the effect of the pandemic on clubs (e.g. Law No. 14,117 of 8 January 2021, which suspended the payment of PROFUT instalments during the pandemic), the clubs’ finances were exacerbated by the losses in revenue caused by COVID-19. In 2020, Brazilian clubs faced US$200 million in net losses and total debts reached US$2 billion.
On 6 August 2021, President Jair Bolsonaro promulgated Law No.14,193. This created the new corporate structure, Sociedade Anônima do Futebol (SAF), the aim of which was to encourage football clubs to be transformed into limited companies in order to entice new investors. Article 2 of this law sets out the three ways an SAF may be created:
- The original club or legal entity can be directly transformed into an SAF;
- The original club can transfer its assets and football department to an SAF in a corporate spin-off; or
- Natural persons, legal entities or investment funds may establish a new SAF.
In the first two of these options, the SAF is obligated to issue Class A common shares exclusively to the original club or legal entity that founded it. These shares must confer certain rights, including a veto power over important issues such as changing the SAF’s name and symbols or moving its headquarters. The shares the original club or legal entity holds in the SAF can be paid without authorization of creditors or other interested parties.
The new SAF structure will assume the club’s right to participate in competitions under the same conditions. Despite this, Article 10 states that the original club or legal entity (i.e. not the new SAF) remains responsible for the payment of obligations prior to the establishment of the SAF. These will be paid through its own revenues and the following revenues that will be transferred by the SAF:
- Allocation of 20 per cent of the monthly current revenues earned by the SAF according to the plan approved by the creditors; or
- Allocation of 50 per cent of dividends, interest on equity or other remuneration received from it as a shareholder.
As limited companies, SAFs are capable of creating subsidiaries (provided they undertake footballing activities), which allows for better risk delimitation. SAFs will also be subject to inspection by the Brazilian Securities Commission (Comissão de Valores Mobiliários) and will be entitled to submit reorganization requests under the terms of Law No. 11,101/2005. This all aims to provide greater security for investors.
The law also introduces the possibility of issuing bonds, called “fut-bonds”, with certain set characteristics listed in Article 26. This includes the requirements that the bonds must have a minimum maturity of two years and have a minimum yield equal to that of savings accounts. Once a fut-bond has been issued, it cannot be repurchased by the SAF or any party related to it. The ability to issue bonds may also improve investor confidence in the clubs’ financial stability.
Initial effect of Law No.14,193
Since its inception, Law No.14,193 has been very successful in its aim to bring new investments to Brazilian football. In January 2022, Botafogo, which had recently adopted the SAF structure, received a US$330 million investment from John Textor, a digital entrepreneur with existing interests in the English Premier League side, Crystal Palace F.C, and the Belgian First Division B side, RWD Molenbeek.
In December 2021, a 90 per cent controlling stake in Cruzeiro (another club that had adopted the SAF structure) was acquired for US$70 million by Ronaldo Luis Nazario de Lima with the help of Brazilian investment bank XP Inc. Pedro Mesquita, XP Inc.’s head of investment banking, predicted that: “[the law] has opened a new path… there will be at least another five or six big transactions by the end of the year.”
Mesquita’s predictions seem on track to be accurate, with a number of other funds looking to Brazilian teams for investment opportunities. On 22 February 2022, Miami-based investment firm 777 Partners signed a non-binding memorandum of understanding to purchase a 70 per cent stake in Vasco da Gama. In addition, DaGrosa Capital Partners LLC is reportedly in talks to purchase a stake in America Mineiro. Both of these clubs have recently adopted the SAF structure under the new law.