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Following the road map of Major League Rule 54 (Part 1)
Jim Juliano - Spring 2007

For most teams in minor league baseball, Major League Rule 54 (MLR 54) comes across the desk only when it comes time for the annual report of ownership and the occasional regulated transaction.

When a new owner wants to take control, however, MLR 54 becomes a road map for approval of the transaction—approval not only of the new owner, but also of the financial plan for the team. All three levels of baseball—the president of Minor League Baseball (MiLB), the commissioner of Major League Baseball and the league’s board of directors—use the standards of MLR 54 to measure the incoming control interest transfer application when they decide whether to approve the transaction.

For this article, I am going to comment on two of the important points covered by MLR 54: the equity/liability ratio and the gambling interest restriction. In our next issue, I will look at some of the other provisions.

The Equity/Liability Ratio

Let’s start with a look at the financial requirements. MLR 54(a)(4)(A) requires the seller and the prospective buyer to produce a financial plan, a business plan and operating policies for the first three years of new ownership. The financial plan acts as a representation to MiLB and the commissioner as to the fiscal responsibility and viability of the new ownership.

Why is it any of their business? Because, first of all, they want to maintain the quality of owners in minor league baseball, and, second, they want to avoid a team insolvency that requires the league and MiLB to take over the team’s financing and management. This emergency scenario has several times resulted in great expense to the league and the owners of the other teams. Third, the insolvency of a team creates scheduling problems for other teams in the league. Finally, the financial plan gives MiLB and the commissioner the information needed to make sure that the new ownership’s expectations are in line with the history of the club and the norms of minor league teams in similar markets.

So there is a legitimate interest, and the new owner’s financial representations need to be made in good faith.

The financial plan is closely related to MLR 54’s requirement for a balance sheet that shows the financing sources for the purchase. The financing must satisfy the 55 percent equity/45 percent liability standard set forth in MLR 54(a)(5)(C).

MiLB provides a worksheet that walks the new owner through these computations. The commissioner accepts the same worksheet.

The final computation involves the ratio of adjusted equity to adjusted liabilities. The ratio must fit the standard of at least 55 percent equity to 45 percent liabilities.

The Gambling Interest Restriction

The policy basis for the gambling interest restriction, obviously, is the integrity of the game. MLR 54(a)(5)(F) prohibits ownership or management of a team by anyone who has any equity or other interest in a gambling enterprise. The 2007 National Association of Professional Baseball Leagues gambling guidelines, issued by MiLB, provide specifics on this prohibition.

The guidelines’ definition of a legalized gaming enterprise includes all entities that are engaged, directly or indirectly, in legalized gambling operations, including casinos, jai alai frontons, horse and dog tracks, off-track betting organizations, gaming enterprises operating on riverboats and Indian reservations and bingo parlors, as well as all entities or governmental authorities that own, operate, oversee or otherwise exercise any ownership or managerial control over any such entity.

Permitted lotteries are excluded. Those would include any federal, state or provincial lottery that does not offer, promote or have an involvement, whether direct or indirect, in any form of sports betting.

The guidelines prohibit involvement—including employment, advertising, ownership and service on boards of directors—with legalized gaming enterprises. There are certain permitted activities and exceptions, but these technical points are beyond the scope of this article.

 

 

 

 
 
 
 
 

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.