Anti-trust regulator the European Commission (EC) has corrected reports which wrongly claimed it had ruled out investigating the sale of Formula One auto racing to Liberty Media following accusations of a “severe conflict of interest” at the heart of the $8 billion deal.
In January auto racing’s governing body the Fédération Internationale de l’Automobile (FIA) gave the green light for the private equity firm CVC to sell F1’s Commercial Rights Holder (CRH) Delta Topco to Liberty which is listed on the Nasdaq with the ticker FWONK. The FIA itself made a $79.5 million profit on the sale and this has driven the accusations that it had a conflict of interest.
In 2013 the FIA bought a 1% stake in Delta Topco and although it was told it was worth $70 million at the time it was offered it for the bargain-basement price of $458,197.34. The FIA bought the 1% stake from Delta Topco itself, which was controlled by CVC. The stake came with the crucial condition that it could only be monetized in the event of a sale by CVC and this required the FIA’s approval. CVC netted $3 billion for its 38.1% stake whilst Liberty paid $80 million for the 1% leaving the FIA with a $79.5 million profit after deducting the purchase price.
In January Damian Collins, chairman of the British government’s Culture, Media & Sport Committee, told the ITV News At Ten programme that the situation amounts to a “severe conflict of interest.” He added that he had written to the EC asking it to investigate as had his fellow politician Anneliese Dodds who represents the south east of England in the European Parliament.
In 2014 Marussia and Caterham, two F1 minnows which were based in Dodds’ region, crashed into administration, the British equivalent of Chapter 11 bankruptcy. This led to the loss of hundreds of jobs and Dodds claimed it was driven by F1’s inequitable structure which sees the top performers getting the lion’s share of its $903.8 million in prize money.
Since then Dodds has called for the EC to investigate F1 and this was endorsed by a formal complaint it received in late 2015 from two F1 teams - Sauber and Force India. In January Marussia’s successor, Manor, hit the wall and this provoked Dodds to take further action.
“The problems in Formula 1 extend well beyond the allocation of prize money,” Dodds said last month. “There is also significant conflict of interest over the recent sale of the Sport to Liberty Media, after the regulator received a $79.5m profit from authorising the sale.”
Her comments were echoed by Tim Owen QC, a public and criminal attorney at London’s Matrix Chambers, who told Forbes that if a regulator stands to gain from a decision it makes it can expose it to accusations of bias and open up the possibility for it even when there is none because its decision is actually made independently.
“No regulator exercising quasi-judicial powers can have a financial interest in the very subject matter it is supposed to be regulating as an independent, unbiased body,” he said. “Once a financial or proprietary interest is established, the risk of bias is presumed.”
The thrust of Owen’s point is that if a regulator has a financial interest in the outcome of a decision it makes it can open up the possibility of bias and expose it to accusations of bias even when in fact it has acted entirely independently. Owen says there is a presumption of bias rather than giving the benefit of doubt.
This is reflected in comments from British sports lawyer Charles Braithwaite who told Forbes last year that “if the FIA approves the sale, people may question whether the approval was driven by the desire to get the multi-million sale proceeds from the sale of its share; despite the fact that the FIA is the governing body and regulator of Formula One and so one would expect it to be independent and to act in the interests of the sport rather than its own interests.”
These concerns haven’t fallen on deaf ears and last month the European Parliament voted to support a call for an immediate investigation into F1. It was tabled by Dodds and was part of an annual Competition Report which makes recommendations for the EC’s agenda.
The Report “calls for an immediate investigation into competition concerns arising from the Formula One motorsport industry” and was approved with a majority of 467 votes in favor compared to 156 against. Although the EC is not forced to follow the recommendations in the Report Dodds now has the backing of an overwhelming majority of the European Parliament.
Although the FIA was aware that it would receive $80 million as a result of the sale going through, it insists there was no conflict of interest. According to a statement released by the FIA it was absolutely impossible and inconceivable that there could have been a conflict of interest as its decision-making body, the World Motor Sport Council, simply didn’t take the financial benefit into consideration.
“There is no conflict of interest on the part of the FIA with regard to its approval of the change of control of the CRH which has been approved by the World Motor Sport Council taking into consideration exclusively the terms of the existing agreements between the CRH and the FIA and the best interests of the Championship.”
The statement added that “the FIA would naturally be happy to demonstrate the absence of any conflict of interest to any competent authority that may so request.”
As Forbes has reported if the FIA did indeed have a conflict of interest it could have significant consequences for the future of F1 as it could raise questions about the decision to approve the sale. This is because Clause 2.2.2 of the FIA’s ethics code states that “FIA Parties and Third Parties may not perform their duties in situations involving an existing or potential conflict of interest.”
If the FIA had a potential, let alone an actual, conflict of interest, when it approved the sale of a sport in which it had a stake then according to its own ethics code, its representatives “may not perform their duties.” However, they most certainly did perform their duties by approving the sale. If they shouldn’t have done this then it could call into question whether their decision, and thereby the takeover, was valid.
What’s more, as ITV reported, if the FIA broke its ethics code then in turn it may have broken a warranty it gave to Liberty Media stating that entering into the deal would not cause it to break “any deed, agreement or arrangement to which it is a party, under which it enjoys rights or by which it is bound.” It remains to be seen what the consequences of this would be.
The F1 industry now faces a nail-biting wait to see what the EC will do. A slew of reports earlier this week wrongly claimed it had already made its mind up.
The reports were all based on a letter sent on 30 January by Dodds to the EC’s anti-trust chief Margrethe Vestager. As Forbes reported last month the EC did not need to approve the takeover of F1 as Liberty does not generate sufficient revenue in Europe to meet key thresholds. Dodds asked Vestager for confirmation of this in her letter below which said: “I am curious as to why the Commission was required to issue a decision on the purchase of the company Speed (owner of Formula One) by CVC Capital Partners in early 2006, but are not required to issue a decision on the 2017 sale when both sales involve a full transfer of ownership to one company."
Letter dated 30 January 2017 from British politician Anneliese Dodds to the European Commission's... [+]
Vestager responded to this question in a letter (see below) dated 23 February which said: “You ask why the acquisition of Formula One’s parent company by Liberty Media was not notified to the Commission. This transaction did not satisfy the turnover thresholds that must be met to fall within the Commission’s jurisdiction which I referred to in my letter of 13th October 2016. The transaction was notified instead to National Competition Authorities in several Member States, namely Austria, Spain, Portugal and the United Kingdom, all which approved it last year.”
Vestager’s reply explains why the EC didn’t need to approve the takeover but it does not give any indication of whether it will investigate an alleged conflict of interest as a result of it. The two are totally separate and unrelated matters. It is perfectly possible for the EC to launch an investigation as a result of the takeover of a company that it didn’t need to approve and there is nothing in Vestager’s letter that says this won’t happen. In fact, it is far from unlikely. If the complaint lodged by the two teams proceeds to an investigation then the EC will have a chance to get stuck into the alleged conflict of interest.
However, although Vestager’s letter does not give any indication of whether the EC will launch an investigation, it didn’t stop a number of media outlets imagining it did.
Business newspaper City A.M. started the chorus by making the honest mistake of misinterpreting a quote from Dodds which said: “In a response to a letter from me, the European Commission have clarified their inability to rule on the takeover of Formula One by Liberty Media.” This is entirely accurate as the takeover fell below the EC’s thresholds so it couldn’t rule on it. However, it doesn’t mean that the EC can’t rule on an conflict of interest which allegedly resulted from the takeover.
The EC’s inability to rule on the takeover was covered in Vestager’s letter but its intention to rule on the conflict of interest which allegedly resulted from the takeover was not. They are totally separate and unrelated matters though the City A.M. article merged them into one by claiming that the EC “would not be further investigating the sale of Formula One.”
This mistake could have been avoided by carefully checking the original letters which make it clear what Vestager’s reply refers to. To its credit, City A.M. based its report on a quote from Dodds but it triggered a slew of inaccurate reports. First in line was F1 blogger Joe Saward and, as Forbes has reported, it is far from the first error in his writing. Next up was the BBC and racing magazine Autosport which both embedded the error by claiming that the EC had confirmed it would not be investigating the takeover. In fact it had said nothing of the sort.
Even though the errors in the reports were not down to Dodds or anyone in her office they acted professionally, swiftly and efficiently to address them. “I sent messages to all those that I saw running the CityAM line, with different measures of success,” said Dodds’ press officer. “CityAM have been particularly bad at conflating the issue and despite me clarifying it directly with the journalist, they are still refusing to change their coverage.”
Today Dodds herself publicly addressed the error in a statement which makes it bluntly clear that Vestager’s reply “does not mean she cannot investigate the sale of the sport, or a possible conflict of interest from the regulator.”
Giving further explanation it adds that “in the Commissioner’s response, she explains that she was unable to rule on the sale of the sport because it did not meet merger thresholds. This has been widely reported as the Commission being unable to investigate any aspect of Formula One, with one outlet reporting that the letter rejected the recent vote in the European Parliament calling for an immediate investigation in competition concerns in Formula One.”
Remarkably this claim came from the BBC which said in its report that: “The European Commission has rejected a call from hundreds of Euro MPs to investigate the takeover of Formula 1 by Liberty Media.” Undoubtedly we live in a world where bloggers and media outlets jump on news to get it out as soon as it breaks, even if that means making major errors, but one wouldn’t expect the BBC to do this.
The EC told Forbes today that it “takes note of the position taken by the European Parliament in its annual report on EU competition policy.” A source close to the EC added that it is perfectly possible for it to investigate a conflict of interest as a result of the sale of a company that it didn’t need to approve.
“The fact that the threshold for merger notification is not met regarding specific companies involved in a transaction has no effect on the Commission’s ability to investigate the behaviour of these companies that could be potentially against EU competition rules. These are entirely separate matters,” said the source.
It clears this speed bump and puts the FIA and Liberty back on tenterhooks waiting to find out what the authorities decide to do about the alleged conflict of interest. Time will tell what comes up next around the corner.
