Sociedade Anônima de Futebol: a tool for restructuring Brazilian football clubs
In little over a year, a law that created a new corporate type known as ‘Sociedade Anônima do Futebol’ has enabled transactions that signal the arrival of a new era for the Brazilian football market
On August 6, 2021, Federal Law No. 14,193 was enacted. This law regulates a new corporate type in Brazil, named Sociedade Anônima do Futebol, as well as certain matters pertaining to football clubs in Brazil. The law’s main purpose is to provide a safer legal framework for transitioning the operation of professional football from non-profit associations to companies, by enhancing corporate governance requirements and shielding new investors from legacy liabilities incurred by the football club.
This article provides a brief overview of the background that gave rise to the new law (which we will refer to as the SAF Act), its main features and the perspectives brought by the SAF Act to the financial restructuring of football clubs in Brazil.
Historically, most football clubs in Brazil, including the top-tier clubs, were organised as non-profit civil associations. In the final decade of the last century, major Brazilian football clubs, such as Sociedade Esportiva Palmeiras, Sport Club Corinthians Paulista, Clube de Regatas Flamengo, among others, had partnered with institutional investors that provided financial and managerial support to their professional football departments, but maintained their legal status as civil associations, while others relied only on traditional models of advertising sponsorship. For different reasons, such contractual partnership model did not last much.
During the last 35 years, football evolved as a business in Brazil, with clubs amassing increasingly higher revenues from ticket sales, transmission rights, IP licensing and ancillary products and services directed to their fan bases. Such increased financial capacity led football clubs to increase spending on signing top-tier players and hiring technical staff, including engaging in complex international transfers to and from Brazil, as well as participating more in international competitions organized by CONMEBOL, the football federation in South America.
All these factors made the operation of professional football departments more challenging to be conducted by civil associations, which missed the professional management team and proper corporate governance structure to handle this transformation. As a result, most, if not all, major football clubs went into financial disarray, struggling with tax, labour, and social security liabilities, as well as lacking financial firepower to assemble competitive teams, by having to sell registration rights of promising talents coming from its own junior rosters, as well as not being able to sign consummate top-tier players.
All in-house attempts to turn the operation around were hampered by corporate governance issues., given that the civil associations generally are not organised to provide the swift decision-making required for a professional environment, or to provide disciplined execution of actions defined in long-term strategic planning. In addition, the increasingly large financial losses and negative cash flows require additional investment that the partners of a civil association are not able or willing to make.
Given that the business opportunities in the Brazilian professional football market are more and more compelling, professional investors have become interested in investing in football clubs. However, these transactions lacked a legal framework that would secure governance rights as well as protection from pre-existing liabilities, which were the topics that the SAF Act came to address.
After the law’s enactment, football clubs such as Clube de Regatas Botafogo, Clube de Regatas Vasco da Gama, Esporte Clube Bahia and Cruzeiro Esporte Clube were able to structure their respective corporate vehicles and sell their controlling stakes to professional investors.
Main Features of Sociedades Anônimas do Futebol
Sociedades anônimas de futebol, or SAFs, are corporate vehicles akin to sociedades por ações, or corporations. The rules governing corporations in general, particularly Federal Law No. 6,404, are applicable to SAFs on a supplemental basis, to the fullest extent not conflicting with specific provisions of the SAF Act. The supplemental regime gives more predictability to corporate arrangements using this corporate vehicle, as well as ensures that SAFs may have access to capital markets and issue equity securities, such as shares and warrants, and debt securities, such as debentures and commercial notes. Financial institutions acting as securities depositaries are also allowed to issue depositary receipts backed by SAF securities.
SAFs are subject to particular corporate governance requirements, given their specific corporate purpose.
Class A shares
Class A shares may be issued to the club that incorporates the SAF, with specific voting rights for certain matters to be set out in the by-laws, mandatorily including the following:
- Approval for the sale, encumbrance, assignment, transfer, donation or disposition of real estate assets or intellectual property rights granted by the club or the founding entity to the SAF as a capital increase;
- Corporate reorganisations such as mergers, spin-offs, share mergers, amalgamations, or asset transfers;
- Dissolution, winding-up or termination of the entity;
- Enrolment in an official football competition;
- Change of name;
- Modification of proprietary distinctive signs such as the brand, symbol, nickname, hymn, or chant.
For the approval of the first four matters listed above, as long as class A common shares represent 10% or more of the total shares or total voting shares issued by the SAF, the consent of the holder of Class A common shares is required for its approval; for the approval of the other matters, the consent of the holder of Class A common shares is required, regardless of the number of shares held.
Restrictions to shareholders
There are legal provisions designed to prevent conflicts of interest at the shareholders’ level. The controlling shareholder of a SAF may not hold shares in another SAF. In Any shareholder that holds more than 10% of shares issued by a certain SAF, in case it holds shares in another SAF, may not participate or cast votes in shareholders’ meetings of such other SAF, and may not be engaged in the management of such other SAF, directly or by appointing directors and officers.
Disclosure of material shareholders
Any entity that holds more than 5% of the shares of the capital stock of a SAF must disclose to the SAF and to the entity responsible for administering football on a national basis (Confederação Brasileira de Futebol, or CBF) its name, address and the beneficial owner of its equity interests. Any failure to make such disclosure prevents the shareholder from exercising voting rights as well as receiving dividends and other distributions to shareholders made by the SAF. This rule is designed to ensure that any failure to comply with the restrictions imposed on SAF shareholders may be avoided.
The SAF Act provides for a robust management structure for SAFs. All SAFs need to have a board of directors and a fiscal council (conselho fiscal, a corporate body akin to an audit committee, provided in Brazilian corporation law) in place.
There are also rules designed to prevent conflict of interests on the level of the SAF management, by setting certain restrictions that need to be complied with by members of the SAF management on a formal basis.
Any officer, director, or member of the fiscal council of a certain SAF may not be:
- An officer, director, or member of fiscal council of another SAF or of a football club other than the one that incorporated the SAF;
- A member of management or of deliberation or supervision body of any entity that organises football competitions;
- A professional athlete or team manager with a valid and effective contract to act as athlete or manager;
- A football referee.
Any director that is also an associate and member of the management of the civil association that controls the SAF may not receive any financial compensation from the SAF. In addition, no member of the management of the civil association may be appointed to be an officer or member of the fiscal council of the SAF. These rules ensure that any members of SAF management are formally independent of the founding civil association and therefore do not have to comply with any fiduciary duties towards the association, therefore being free to act in the SAF’s best interests.
The main safeguard provided by the SAF Act regarding SAF’s liability exposure is that the newly created SAF is not liable for indebtedness of the civil association, other than the obligations directly related to its “specific corporate purpose”, and that the SAF is liable for the obligations assigned to it by the civil association, in connection with its incorporation and formation.
Payment obligations incurred before the incorporation and formation of the SAF are payable by the civil association with its own revenue sources and, in addition, with the following funds that the SAF will transfer to it:
- 20% of the SAF net revenues;
- 50% of the dividends and other cash distributions made by the SAF and received by the civil association in its status as SAF shareholder.
The law sets out that the payments owed to players, members of the technical staff and employees of the football department that were incurred before the incorporation and formation of the SAF are included in the obligations that are payable by the civil association in one of the two manners set out above.
SAF directors and officers are personally liable, on a joint and several basis, for the transfers of funds to the civil association for the payment of these financial commitments. In the same vein, members of the civil associations’ management are personally liable, on a joint and several basis, for the payments to creditors using funds received from the SAF.
While the SAF is timely making distributions to the civil association to allow it to comply with its commitments towards creditors, the SAF assets and revenues may not be encumbered or attached in support of any enforcement proceeding initiated by creditors of the civil association for obligations assumed before the formation of the SAF.
Centralized enforcement regime
The SAF Act provides for a specific remedy, named regime centralizado de execuções, to allow the restructuring of past indebtedness and protection from creditors. The remedy is available to civil associations that contribute professional football assets to a SAF. The civil association may file requests to centralize the enforcements lawsuits filed against it in a civil court and a labour court by presenting a centralized enforcement plan, and will be granted a six-year period in which all such enforcement lawsuits will be conducted at those courts, following a statutory creditor ranking. That period is extendable for additional four years in case the civil association repays sixty percent (60%) of its total indebtedness.
The ranking order for creditors is:
- Elderly individuals;
- Individuals with severe diseases;
- Individuals with credits amounting to less than sixty (60) times the minimum wage set out in Brazil;
- Pregnant women;
- Victims of work accidents suffered in connection with the employment relationship with the football club;
- Creditors that agreed to a haircut equal or larger than thirty percent (30%).
The centralized enforcement plan shall provide the order of preference for payments, following the statutory ranking order, with a priority to repay labour liabilities. The indebtedness will be subject to monetary adjustment pursuant to the SELIC base interest rate published by the Central Bank of Brazil.
Credits may be converted into SAF shares at the discretion of the creditor, according to the provisions of the SAF by-laws. Labour and civil creditors may agree to a haircut, and labour creditors may assign their credits to third parties without losing priority in ranking, to the extent the civil association and the centralizing court are notified of the assignment.
While the civil association is complying with its commitments to creditors in accordance with the centralized enforcement plan, the assets and revenues of the civil association may not be encumbered or attached in support of enforcement lawsuits in any proceeding initiated by creditors of the civil association.
After the term of the centralized enforcement plan has ended, the SAF will be subsidiarily liable for the civil association’s obligations incurred before the formation of the SAF. The SAF may contract out of this liability with the creditors’ consent in the centralized enforcement plan.
Bankruptcy Law remedies
The SAF Act makes clear that the restructuring remedies under the Bankruptcy Law are available to civil associations that are football clubs, in addition to the centralized enforcement regime. Contracts with football players are not automatically terminated in case a judicial reorganization or pre-packaged reorganization request is filed, and such contracts may be assigned to the SAF formed by the football club.
SAFs are allowed to issue special debt instruments, the debêntures-fut. These instruments are similar to debentures and the proceeds of their distribution must be used by the SAF to fund the operation of the professional football activities, with certain particular features, such as:
- Interest above the rate applicable to savings accounts (caderneta de poupança), that may be added with a variable remuneration related to the SAF activities or assets;
- Minimum of two years for payment of principal;
- Periodic interest payments;
- Redemption and repurchase are not allowed, other than as regulated by the Comissão de Valores Mobiliários, or CVM;
- Registration of the securities in a custody service authorized by the CVM.
The original bill of law provided for certain tax advantages to acquirers of Debêntures-Fut, similar to those applicable to the regime of infrastructure debentures, but this provision was vetoed.
Future Perspectives for Restructuring Football Clubs
In our view, the SAF Act establishes a coherent mechanism for the financial restructuring of football clubs and grants adequate protection to new, professional investors from liability exposure to obligations incurred before their investment.
The subsidiary application of corporate law regime to SAFs ensures the application of a stable and well-tested legal and regulatory framework for access to the capital markets, which may be an important mechanism to facilitate the restructuring of the founding civil association. By issuing debt and equity securities to the public, the SAF will be able to finance its operations, generating revenues and profits to be used in the repayment of the founding civil association’s liabilities.
Courts, in particular those with jurisdiction to decide labour claims, which traditionally have a very expansive view on subsidiary and successor liability, will play a crucial role in the enforcement of the provisions of the SAF Act. The SAF Act provides that the newly created SAF is protected from legacy liability of the clubs, which will be addressed in centralized enforcement regimes or bankruptcy remedies. Respect for this segregation is crucial to allow a safe and predictable environment for investment in professional football in Brazil.
Although some labour courts are leaning towards a position against the scope and principle of the law, one may say that the legal framework established by the SAF Act is already a historical landmark by fostering investment in many debt-ridden clubs, with more to come, and enhancing the legal environment for the development of professional football in Brazil.