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Following the road map of Major League Rule 54 (Part 2)
Jim Juliano - Fall 2007

In the last issue of Legally Speaking, I outlined some of the basics of Major League Rule 54 (MLR 54), which, among other things, governs transfers of team ownership. In this article, we will look at several of the details—MLR 54 requirements that must be met when transferring controlling interest in a team (Control Interest transfer, or CIT).

The rule requires the ball club to provide specific information when the CIT involves the transfer of an equity interest, the typical situation. That information includes:

  • IDENTIFICATION OF THE PERSON IN CHARGE. MLR 54 requires the identification of the individual who will have ultimate authority to act on club matters. Most investors who are new to the baseball business expect a high degree of anonymity through the use of fictitious entities such as corporations and limited liability companies (LLCs). But baseball is a hands-on business, and Minor League Baseball (MiLB) and the commissioner of Major League Baseball will want direct access to the boss.

  • RELEASE FOR BACKGROUND CHECKS. Although MiLB may require background checks of any owner, regardless of percentage of interest, you should expect that it will conduct a background check of any owner with more than 5 percent direct or indirect interest in the franchise. By “direct” and “indirect,” I mean direct ownership of equity in the franchise entity and indirect ownership through a parent or affiliate entity. As an example of indirect ownership, a person who owns 20 percent of an entity that in turn owns 40 percent of the franchise has an indirect 8 percent interest in the franchise. The background checks pick up both criminal and civil litigation and other relevant information. If MiLB has questions about the report, you will hear about it.

  • ENTITY DOCUMENTS. Perhaps the most crucial document that MiLB requires is the document that sets forth the governance procedures for the entity. For a corporation, this document would be the bylaws or close corporation agreement; for an LLC, it would be the operating agreement. MLR 54 language must be included in the document. MiLB will also require information about the method of management, financial practices and debt and equity transactions. MiLB will review any debt instruments, especially security agreements, in light of MLR 54’s prohibition against securing any debt with the franchise asset. The CIT application prompts you on which documents to attach.

MLR 54 also includes broad language that permits the president of the Minor League Association to require such information about the transaction as the president may reasonably request.

It’s not unusual for MiLB to request additional information after the application is submitted. Since all ownership changes have deadlines, the best way to shorten the time for CIT review is to document as much of the transaction as possible with the first submittal. This may not be so easy, depending on the nature of the deal. Be prepared to exercise some patience until all of the information is available for MiLB review.

 

 

 
 
 
 
 

This website contains general information that should not be considered legal advice or legal opinion concerning individual situations. Legal counsel should be consulted for specific advice.

Copyright 2007 by L. James Juliano Jr.
Legally Speaking® is a registered trademark of the law practice of L. James Juliano Jr.