A Look at the MLS Constitution (Part VI): Owners Behaving Badly (or, Activities Prohibited)

The last section in the MLS Constitution goes over the rules for team owners. You may think that sports team owners are “above the law,” and they enjoy privileges that regular employees do not for sure. But there are rules in place to govern their behavior, and they are spelled out–in part–in the MLS Constitution. From relocation or paying salaries, MLS keeps a tight leash on certain activities that the owners can engage in.

Section 6. Relocation

No Team Operator may relocate its Team from its Home Territory or its stadium without the approval of a Super Majority Vote of the Board of Governors.

Section 7. Tampering

A. “Tampering” means any attempt by or on behalf of any Team Operator or any Owner thereof, whether direct or indirect, to hire, negotiate with, make an offer to or influence (i) any Player (or his representative) who is (a) a member of a different Team or (b) not a member of a different Team but with respect to whom such Team Operator does not have priority rights (as described in the Competition Guidelines), unless such Team Operator has received written confirmation from MLS that no other Team has priority rights to such Player, or (ii) any employee of a different Team Operator without first receiving written consent from such Team Operator.

B. No Team Operator nor any Owner, officer, director, employee, agent or representative thereof, may tamper with (i) any Player (or his representative) who is (a) a member of a different Team or (b) not a member of a different Team but with respect to whom such Team Operator does not have priority rights (as described in the Competition Guidelines), unless such Team Operator has received written confirmation from MLS that no other Team has priority rights to such Player, or (ii)(a) any employee under contract with a different Team Operator or (b) any employee of a different Team Operator at the director level or above, in each case of clauses (ii)(a) and (ii)(b), unless written permission is first obtained from the General Manager or principal of such other Team Operator. With respect to an employee referred to in clause (ii)(a) above, permission may not be denied for more senior positions after such employee’s then- current Team is eliminated from all postseason matches in the final year of such employee’s then- current contract with such Team. With respect to an employee referred to in clause (ii)(b) above, who is not also covered by clause (ii)(a) because such employee is not under contract with his or her current Team Operator, permission may not be denied for more senior positions. The Commissioner or his designee(s) shall have sole discretion to determine whether any tampering has occurred.

C. Where the Commissioner determines that the anti-tampering rule has been violated, the Commissioner has the authority, in his/her sole discretion, to impose a penalty for such offense. Penalties for tampering may include (without limitation) the suspension of the person that tampered for a definite or indefinite period; the prohibition of the offending Team Operator from hiring the person being tampered with for a definite or indefinite period; the forfeiture or deferment of draft picks, allocations, discovery player slots or designated player slots by the offending Team Operator or the transfer of such draft picks, allocations (including value thereof), discovery player slots or designated player slots to the Team Operator aggrieved by the tampering; the deduction of points in the League standings and/or disqualification from any tournament or competition; and/or the imposition of a fine upon the offending person and/or the offending Team Operator up to $500,000. In the event that the Commissioner imposes a fine, he may direct that some or all of the fine be paid directly to the Team Operator aggrieved by the tampering.

Section 8. Conflict of Interest

A. Interest in or Control of Other Team Operators. No Team president, general manager, coach or any other personnel of a Member may (i) obtain a position with, or directly or indirectly exercise control of any management authority over any other Member or (ii) obtain any direct or indirect financial interest in any other Member, unless, with respect to this clause (ii), (x) the facts in connection with such intended financial interest are disclosed in detail in an application provided to the Commissioner by the applicable Member and such interest is expressly approved by the Board of Governors in accordance with the procedures set forth in the MLS LLC Agreement or (y) such interest represents less than one percent (1%) of any outstanding class of securities that are publicly traded on any generally recognized stock exchange or over-the-counter market.

B. Lending Money. No Member (including any Team Operator) or Owner may, directly or directly, lend money or become a surety or guarantor to any other Member (including any Team Operator) or Owner, any Player, or any employee of any other Member (including any Team Operator). The exception to this rule is that Owners that engage in commercial lending as a principal business activity may enter into such lending, surety or guarantee arrangements only if (i) such arrangements are disclosed in detail to the Board of Governors and approved by a Super Majority Vote of the Board of Governors, or (ii) the lending party does not have effective control of a Member, the lending, surety or guarantee arrangements are between the lending party and a Player or an employee of a Member, and such arrangements are on customary commercial terms (i.e., similar for individuals not affiliated with MLS).

C. Interest in Other Leagues. Members (including Team Operators) or Owners may own an interest in a team in another league (including a soccer league) only if such Team Operator or Owner complies with the terms of Section 9 of this Constitution and Article 13.3 of the MLS LLC Agreement.

D. Prohibited Interests of Commissioner and MLS Employees. No MLS employee may directly or indirectly, hold stock or have a financial interest in any Member (including any Team Operator), unless such interest represents less than one percent (1%) of any outstanding class of securities that are publicly traded on any generally recognized stock exchange or over-the-counter market. No MLS employee may lend money to or become a surety or guarantor for any Member or Owner thereof.

Section 9. Non-Competition

In accordance with Section 13.3 of the MLS LLC Agreement, no Member (including all Team Operators), Owner nor any of their respective Affiliates may, without MLS’s prior written consent, directly or indirectly undertake certain soccer-related activities.

A. Soccer-Related Activities. Until 10 years after the date on which a Member ceases to be a member of MLS, none of such Member, any of its Owners nor any of their respective Affiliates may, unless acting with MLS’s prior written consent, directly or indirectly, anywhere in North America, be involved in any way with any soccer-related business that, directly or indirectly, competes with or is otherwise similar to the business of the MLS.

B. Player Representation. Until 10 years after the date on which a Member ceases to be a member of MLS, none of such Member, any of its Owners nor any of their respective Affiliates may, unless acting with MLS’s prior written consent, directly or indirectly represent any soccer player (i) who is under contract with MLS, (ii) who expresses an interest in contracting with MLS for his playing services, (iii) with whom MLS expresses an interest in contracting with for playing services or (iv) who has United States citizenship or is playing soccer in the United States.

C. Exceptions. Notwithstanding the foregoing restrictions in Section 9.B, a Member (including any Team Operator) or Owner may (i) participate in any sports or entertainment business not principally involving soccer, (ii) acquire control of any Person which derives less than 5% of its revenues from a business which competes directly with the business of the MLS, or (iii) make passive investments of less than 5% of the outstanding equity securities in any entity listed for trading on a national stock exchange or quoted on any recognized automatic quotation system.

D. SUM Non-Compete. Section 17 of the SUM Operating Agreement contains additional non-competition provisions.

Section 10. Diversity Initiative

The Commissioner has the authority to enact diversity initiatives that facilitate the process of consideration of minorities for coaching staff positions under guidelines adopted by the Board of Governors. Upon the opening or creation of any position involving a technical director, head, assistant or youth coach, the Team Operator’s General Manager must notify the League Office. Upon notification, the Team Operator shall interview at least one (1) minority candidate for such available position. Each Team Operator must provide the League Office with information related to the minority candidates interviewed and considered for the available position. If the Team Operator does not adhere to these guidelines, the Commissioner shall have the authority to impose sanctions in the Commissioner’s sole discretion.

Section 11. Team Personnel

All Owners, officers, directors, employees, agents and representatives of MLS and of each Member (including each Team Operator) are subject to and must comply with all League Rules, including the tampering policies, confidentiality obligations and other provisions contained in this Constitution. Each Member shall be liable for any non-compliance by any such Member’s Owners, officers, directors, employees, agents, representatives or any other Person associated with such Member.

Each Team Operator must include in every contract with any employee of such Team Operator certain language provided by the League Office that, among other things, provides that such employee will be subject to the Commissioner’s jurisdiction and bound by all League Rules and provides a non-exclusive list of prohibited conduct (the “Required Employee Language”). Each Team Operator must also include such Required Employee Language in all employee handbooks, of which all employees must acknowledge in writing. Each Team Operator must file each employment contract with the MLS legal department within three (3) business days of the execution of such contract for MLS’s review and approval with respect to compliance with any applicable League Rules. Additionally, the Chief Business Officer (e.g., the Team President) of each Team Operator must annually certify in writing that each employee of such Team Operator has acknowledged, in writing, the Required Employee Language. The failure to timely file such employment contracts or submit such employee handbook certification as required by this paragraph may subject a Team Operator to sanctions as determined by the Commissioner. For clarity, the prohibited conduct required to be expressly included in employment contracts and employee handbooks as set forth in the Required Employee Language is prohibited by the League Rules and, if committed by an employee of a Team Operator, will be grounds for discipline of such employee by the Commissioner (or his designee(s)), regardless of whether such conduct is listed in the applicable employment contract or employee handbook.

Section 12. Confidential Information and Non-Disclosure Obligation

A. Confidential Information. Members (including Team Operators), Board of Governors representatives, Owners and MLS and Team executives and other employees receive confidential information relating to internal player policies and collective bargaining, business strategy and the overall health and viability of the League and each of its Teams. Such information is privileged and confidential as between the Board of Governors and MLS and Team executives and employees.

B. No Disclosure. No Member (including each Team Operator), Board of Governors representative, Owner or MLS or Team executive or employee may disseminate, disclose or otherwise share this confidential information with any individual or entity that is not subject to confidentiality restrictions, including members of the media, other employees (not bound by confidentiality restrictions), agents and third-party contractors.

C. Discipline. For the avoidance of doubt, each Member (including each Team Operator) must cause its employees to be bound in writing by this obligation of confidentiality. Any violation of this Section 12 shall be subject to discipline by the Commissioner as set forth in Section 3, including a fine up to $1,000,000.

Section 13. Player Compensation

This Section 13 summarizes certain provisions of the Competition Guidelines related to player compensation and salary budget rules and circumvention.

A. General. Except as otherwise provided in the League Rules, MLS is solely responsible for compensating all Players. Generally, no Member (including each Team Operator), Owner, officer, director, manager, Team president, general manager, coach or other employee of any Team Operator may, directly or indirectly, give any additional compensation to any Player in any manner whatsoever, including without limitation, lodging, car or other transportation or Team ownership rights. Any apportionment of a salary or related compensation paid to a Player for Player’s dual services as both a Player and a coach, or in another similar Team management role, must be approved in writing by MLS prior to such Player’s provision of such services.

B. Prohibited Circumvention. The following conduct is a non-exhaustive list of prohibited circumvention of League Rules unless approved by MLS in writing: (i) payments to a Player’s previous Team or to a Player’s representatives; (ii) marketing or endorsement agreements between Players and Team sponsors (or other businesses if the deal is brokered by the Team); (iii) agreements between a Team Operator and player agents (e.g., consulting or scouting services); (iv) employment of any relatives of Players; and (v) promises of future employment or payment. In each case of the foregoing, such acts or arrangements must be disclosed in advance and approved by MLS in writing. In the case of clauses (ii), (iii) or (iv) above, MLS will determine whether any payments pursuant to such agreements are in excess of the fair market value of the services rendered.

C. Records and Required Disclosures. Each Team is required to keep records of all payments and compensation provided to Players and Player-Related Parties (including Player representatives). Failure to maintain such records may be deemed to be an independent violation of the anti-circumvention rules set forth in this Section 13 and in the Competition Guidelines. A certification of compliance under salary budget rules must be signed and submitted to MLS by the Team representatives set forth in the Competition Guidelines. A monthly report of all fringe benefits payments must also be submitted to MLS. To assist MLS in investigating and making determinations regarding potential prohibited circumventions, each Member (including each Team Operator), Team-Related Party, Player and Player-Related Party is required to disclose to MLS any fact or action that such party is, or becomes, aware of that would reasonably appear to indicate the occurrence of a prohibited circumvention by any party.

D. Discipline. In the event the Commissioner (or his designee(s)) determines that any prohibited circumvention has been committed by a Team Operator or a Team-Related Party, the Commissioner may impose any or all of the penalties set forth in Section 3.B; provided that any fine levied may be in an amount up to $1,000,000 for any Team Operator or Team-Related Party that is an entity and up to $500,000 for any other Team-Related Party.

Section 14. Team Operations; Termination

A. Operating Agreement. The day-to-day operations of the Team by any Team Operator shall be governed by the Team Operator’s Operating Agreement.

B. Contracts. Each Team Operator may, as agent for MLS, enter into local broadcast rights agreements, local commercial affiliations, a stadium lease and other related agreements to conduct local marketing and Team operations in accordance with League Rules. All of the foregoing agreements are subject to and conditioned upon MLS review and approval.

C. Exhibition Games/International Tours. Subject to prior MLS approval, a Team Operator may participate in, host, manage or promote Local Exhibition Games or MLS Exhibition Games (each of the foregoing as defined in the Operating Agreement) or international tours. Notwithstanding the foregoing, MLS or SUM has the right to participate in any Exhibition Games subject to the Governing Documents.

D. Termination. Each Operating Agreement provides that, under certain circumstances, the Board of Governors may, by a vote of at least 75% of the ownership percentages of MLS, terminate the Operating Agreement or an Owner’s Ownership Interest in the Team Operator, including, for example, upon a determination by the Board of Governors that the Team Operator or any Owner has failed to act in the best interest of the League. Generally, in the case of any such termination vote, the Team Operator or Owner will first be given six (6) months to consummate a sale of the Team Operator’s assets or the Owner’s Ownership Interest (as applicable), after which MLS will be entitled to consummate such a sale to a purchaser approved by the Board of Governors at such price and on such terms as the Commissioner deems reasonable and appropriate. Further details on the circumstances permitting termination and the related procedures and remedies are set forth in each Operating Agreement.

Section 15. Disclosure of Financial Information

Each Team Operator is required to provide financial information to MLS, as requested. The primary required financial information is as follows:

(i) Audited financial statements for its Team; and
(ii) A completed Team and stadium financial information questionnaire at least once per year.

The questionnaire requests, without limitation, information related to ticket revenue, local sponsorship and naming rights revenue, stadium revenue, salary information and other cost information. The information collected will be assembled (absent identification of specific Teams) into useful models for (i) Team Operators to benchmark their financial performance against the financial performance of other Team Operators and (ii) prospective Team Operators or prospective Owners to evaluate the investment opportunity. The League Office will not distribute this information outside the League Office, except to potential investors and lenders who have executed a non-disclosure agreement with MLS.

So that is it for the MLS Constitution. Again, to get a full look inside MLS’s operating structure, we’d need to get a look at the MLS Operating Agreement the SUM agreement, to name a couple of documents. Unfortunately, those remain under lock and key, until some enterprising person decides to leak them (hint hint). I hope you’ve enjoyed this look under the hood of MLS.