Professional Sports Franchises as Publicly-Traded Companies: A Cost-Benefit Analysis (Part 2 of 3)

Professional sports franchises are multi-million dollar businesses which rely heavily on a variety of revenue streams to stay afloat.  In fact, one of the most important sources of revenue for sports franchises is locally generated revenues. [1]  One method of increasing such revenues would be to offer shares of stock to the public.  But if going public would help generate more revenue, why have almost all sports franchises opted out of such a business form?  This article explores the reasons why more sports teams have not gone public, by discussing league regulations of teams which want to go public, and by analyzing the costs and the benefits associated with offering shares of stock to the public.

It is important to note that there have been instances where a sports franchise has sold shares of stock to the public.  In 1998, the Cleveland Indians, a Major League Baseball team, made an initial public offering of stock, which was listed on the NASDAQ, until the year 2000, when the team was sold back to a private investor. [2]  In 1996, the National Hockey League's Florida Panthers also went public on the NASDAQ, only to be sold to private investors in 2001. [3]  Also, from 1986 until 2002, the Boston Celtics, a National Basketball Association franchise, was a public company, with shares listed on the New York Stock Exchange. [4]  Currently however, there are no professional teams which are purely publicly traded companies. [5]

There are of course, a number of teams which are owned by corporations.[6]  However, these teams are not purely publicly traded in the sense that Microsoft, or Disney, are purely publicly traded.  This is because although the owner of a team may be a corporation which is publicly traded, the team that the corporation owns generally does not make a substantial contribution to the corporations overall performance. [7]  Thus, these teams differ substantially from a pure stock market team.

As previously mentioned, there are currently no professional teams that are pure publicly traded corporations.  But there are a number of benefits to be had by going public.  First and foremost is the increase in revenue from the sale of stock.  Such revenues can be used to sign better players, thereby increasing the competitiveness of the team.  Going public would also provide liquidity to the original owner, making it easier for the owner to sell his or her interest in the company.

But there are also restirctions to going public.  The different professional sports leagues in the Unites States vary in their stance regarding whether individual franchises could go public.  Each league, which includes the National Basketball Association, Major League Baseball, the National Hockey League, and the National Football League, has adopted specific rules and regulations regarding whether a team can go public. [8]  The National Basketball Association generally permits the sale of stock to the public. [9]  In Major League Baseball, public ownership is allowed, but league policy requires that voting control is held by a majority shareholder, and also requires that proposals of going public be reviewed and approved by the league. [10]  In the National Hockey League, sale of stock is also allowed, with some restrictions on dividend payouts, majority shareholder requirements, and league approval requirements. [11]  The National Football League is the only league where purely public offerings do not seem to be allowed. [12]  That league's constitution prevents ownership by corporate entities and requires that seventy-five percent of franchise owners approve the sale of ownership. [13]  But, the National Football League's policy is vulnerable to antitrust regulation, as "[i]t is generally believed hat these League prohibitions are an unreasonable restraint of trade and would not pass muster under the Sherman Antitrust Act." [14]

Going public also entails a number of costs and regulations distinct from individual league policy.  For example, the original owner would be ceding some control to the public, and depending on how many shares are sold, going public may render a team susceptible to a corporate takeover (although it should be noted that league restrictions on the dispersion of stock may help prevent this.)  Another drawback is the tremendous costs involved in going public.  The process is long and complicated, and would render a team subject to state and federal securities regulations. [15]  Such regulation is perhaps the greatest reason why sports franchises do not, and most likely should not go public.

Securities regulation adds increased costs to running a business, due to disclosure requirements.  Also, if a team goes public, such a move would result in the corporate managers of the team owing fiduciary duties to shareholders.  This is perhaps one of the most complicated issues involved in going public for a professional sports franchise, due to the inherent conflict between running a successful team, and running a successful business.

The last installment of this series of articles will discuss this inherent conflict, and attempt to find a solution.  As it currently stands, going public may not be advisable for a sports franchise, but there may be a middle ground that would help generate more revenue, and provide the public an opportunity to own a part of a team, while minimizing the drawbacks of going public.

Sources

[1] Ryan Schaffer, A Piece of the Rock (or the Rockets): The Viability of Widespread Public Offerings of Professional Sports Franchises, 5 Va. Sports & Ent. L.J. 201, 202 (2006).

[2] Id. at 204.

[3] Id.

[4] Id.

[5] Id. (stating that the Boston Celtics were the last major independently-owned public sports franchise).

[6] See Robert Bacon, Comment, Initial Public Offerings and Professional Sports Teams: The Regulations Work, But Are Owners And Investors Listening?, 10 Seton Hall J. Sports L. 139, 146 (2000) (stating the importance of differentiating between teams that are publicly traded and teams that a part of a publicly traded company).

[7] Schaffer, supra note 1, at 205.

[8] See Bacon, supra note 6, at 144-146.

[9] Id. at 144.

[10] Id. at 145.

[11] Id. at 144.

[12] Id. at 145.

[13] Id.

[14] Id.

[15] See generally Eugene J. Stroz, Jr., Note, Public Ownership of Sports Franchises: Investment, Novelty, or Fraud?, 53 Rutgers L. Rev. 517 (discussing the application of federal securities laws to sports franchises which choose to go public).