Manchester City Challenge Over Soccer Spending Rules: Explained

Reigning English football champion Manchester City has reportedly launched a legal challenge to the way the Premier League polices overspending. The challenge comes as the club prepares to answer the league’s more than 100 charges of breaking financial rules.

The Premier League has charged that Manchester City provided false financial information and received inflated sponsorship revenue from companies linked to its wealthy owner. That allegedly breached a requirement for how clubs must value so-called associated party transactions. This requirement is intended to avoid letting clubs artificially boost revenue so they can spend more on players than their competitors.

A successful counter-move by Manchester City to challenge regulations underpinning the charges could make it even harder for other clubs to compete with those backed by wealthy owners.

The Times of London reported June 4 that City had launched private arbitration against the league saying that restrictions over sponsorship from firms linked to a club’s owner were illegal, and also challenging the need for 70% of Premier League clubs to approve any rule changes.

Manchester City has won the Premier League championship for six of the past seven seasons. If found guilty of financial rule-breaking, City could face sanctions including points deductions, expulsion from the Premier League, and large financial penalties.

The club didn’t reply to a request for comment. The Premier League declined to comment.

What is Manchester City challenging?

Manchester City’s legal action reportedly aims to eliminate the Premier League’s associated party transactions rules, which the club claims are unlawful and anti-competitive. The rules govern transactions between clubs and people or companies linked to their owners.

City is also reportedly challenging the way that Premier League decisions are made, claiming it discriminates against large clubs. The league is owned by its 20 constituent clubs and all decisions require support from at least 14 of them. That means the league’s smaller clubs can outvote giants like City.

A two-week private arbitration hearing was set to start this week, according to the Times report.

Daniel Gore, senior associate at London law firm Withers, said the Premier League’s status as a private company means the details of Manchester City’s legal claims aren’t publicly available.

Why would City care?

Manchester City has become the dominant English soccer team since Emirati royal Sheikh Mansour bin Zayed bin Sultan Al Nahyan bought the club in 2008. In addition to winning in the Premier League, it’s won a series of other club competitions, including Europe’s Champions League and the FIFA Club World Cup.

Manchester City relies more heavily on commercial revenue than London clubs with higher gate receipts from fan tickets, such as Chelsea and Arsenal. So clubs like Manchester City need to earn more from sponsorships to compete, the club reportedly claimed in legal documents.

The Premier League is accusing the team of artificially inflating shirt and stadium sponsorship money after its 2008 takeover to free up more cash.

As part of league financial rules meant to prevent clubs from going bust, clubs must declare any deals between them and people or companies linked to their owners. An outside assessor then reviews the transactions to check that the clubs aren’t paying over the market rate, especially for things like sponsorship.

The Premier League hardened its definition of associated-party transactions after the 2021 acquisition of Newcastle United by Saudi Arabia’s Public Investment Fund. The new definition includes a specific mention of sponsorship from people or firms associated with government or state bodies.

So how does the value of these transactions matter?

Fair-value calculations are a well-established concept in accounting and they’re commonplace in business deals, according to Christina Philippou, associate professor in accounting and sport finance at University of Portsmouth.

Such calculations would probably come up with a range of values based on sponsorship deals at similar clubs, with Premier League sanctions against the club if a deal fell outside this range. It’s one of several tools the League uses to prevent overspending by clubs. Clubs also face a cap on total financial losses.

“The fear is that if a wealthy owner injects money into a club through inflated sponsorship deals, then things could turn sour if the owner stops spending or sells up,” Philippou said, referring to the owner selling the club. She pointed out that up to a quarter of Premier League clubs are technically bankrupt, with negative equity, and they rely squarely on their owners’ money for survival.

“The associated party rules are consistent with the wider aim of keeping clubs financially sound,” Philippou said.

Is Manchester City trying to avoid the wider charges?

No, according to Kieran Maguire, an accounting lecturer at Liverpool University who teaches classes on football finance. “This is looking to the future not to the past,” he said of the reported legal challenge to Premier League rules.

In November, an independent tribunal appointed by the Premier League is expected to hear the 115 financial rule-breaking charges that the league brought against Manchester City. The charges relate to seasons spanning 2009 to 2018.

These charges will be judged according to existing regulations and won’t be affected by City’s effort to change the league’s financial rules. While the new case from City might not directly impact the outcome of the Premier League’s allegations against the club, it could stretch the league’s legal resources.

What is the potential legal impact?

A City win in challenging Premier League rules could be huge. Clubs could be free to spend almost unlimited amounts on players, backed by the wealth of their owners and related companies.

Questioning the Premier League’s decision-making system also threatens to narrow smaller clubs’ ability to keep the giants under control. That, in turn, could add to pressure for removing the league’s status as a football self-regulator, Matthew Caples, senior associate at Stewarts Law, said.

The UK government in March introduced plans for a new independent football watchdog with a broad remit.

The league may want to be seen as acting tough against City to show it can effectively police the clubs that own the league, Liverpool University’s Maguire said.