Last summer Hogan Lovells attorneys advised Joe Tsai in a deal to acquire 49.9% of the NBA’s Brooklyn Nets with the option to eventually have a controlling interest in the team. Now that option is on the threshold of coming to fruition. Tsai is set to have full ownership of the Brooklyn Nets and operating rights to the Barclays Center. The previous deal didn’t include the venue.
Hogan Lovells partner Matthew Eisler said Tsai and soon-to-be-former Nets owner Mikhail Prokhorov decided to accelerate Tsai’s acquisition of his controlling ownership of the team.
Eisler and partner Craig Umbaugh, both from the firm’s Denver office, again led the firm’s team on the deal. The attorneys likened the transaction to buying a home: The deal has been signed but not officially closed. They said they hope for the deal to close around late September, before the start of the NBA preseason.
They said a full transfer of team ownership is different than a deal for a partial interest. The latter has to consider factors such as minority ownership protections and whether a minority-interest buyer might become a controlling owner sometime down the line.
The seller’s main concern when they’re fully divesting their ownership, Eisler said, is making sure they don’t have any remaining obligations. Umbaugh added that because taking on ownership and rights to a venue are long-term commitments, the buyer has to look closely at existing elements such as concessions deals and player contracts because choices the seller has made will reflect on them.
“Decisions the seller has made impact the buyer for years into the future,” he said.
Eisler said the period between signing a deal and it closing can be an odd gray area for decision-making because technically the buyer hasn’t taken ownership yet, but they won’t want the seller making decisions in that period that could hurt their long-term vision for the team.
“This is one of those tension points where everything between signing and closing is under a microscope,” he said.
Deals with a lag period between signing and closing tend to contain covenants such as requiring the seller to keep running the business as they have in the past and to keep good relationships with key partners. Umbaugh again brought in the analogy to selling a home.
“If you sell your house and you’re not closing and moving out for a month, you probably can’t knock out the back wall, build a new porch, remove the pipes, those kinds of things,” he said. “What’s interesting about sports deals is, you have a league that is also very concerned about what you’re going to do.”
On the flip side, Eisler said, the seller wants to maintain some operational flexibility while they still have controlling ownership of the team.
“It does not want the buyer looking over its shoulder with respect to every little decision. So that becomes a pretty big tension because the more covenants you have, the more you have to comply with … the harder it is to run your business on a day-to-day basis between the signing and closing period.”
Deals sometimes involve a team and the venue in the same transaction. But Eisler said the venue comes with extra layers of complexity, in part because sometimes approval for components such as changing the lease or the venue’s name has to go through various state or local government bodies.
“We actually experience this a lot, where you have to convene and get a majority of some local governance body to approve the transactions, and they have their own political interests,” Eisler said, though he added government involvement didn’t come up in the Nets deal.
He added when scrutinizing the buyer, government bodies involved mainly look at practical considerations such as the buyer’s ability to stand behind obligations they are taking on with the venue.
On a hyperlocal level, Umbaugh and Eisler said government bodies involved look at how a venue influences the economy of the community it’s in. Sports venues provide a significant source of tax revenue and local jobs and can also drive business development around them. It’s important for a buyer has to understand the need for cohesiveness.
“Do you have the talent and the capabilities to drive content and ensure continuity of this venue?” Eisler said of vetting someone getting operating rights for a venue. “Because this is important not just to [the government] as a public facility, but something that’s critical to the well-being of the entire community.”
— Julia Cardi