In recent decades, the relocation of professional sport franchises has steadily increased. While there are a multitude of factors that influence franchise relocation, the existing ownership structure in the major North American men’s professional sport leagues puts significant power in the hands of one or two majority investors for decisions such as relocation, often to the detriment of the team’s existing community.
Various legal methods have been invoked to prevent relocation, including legal challenges based on contract law,1 antitrust law,2 and eminent domain,3 but none of these methods have proven to be reliably successful.4 Implied contractual obligations proved insufficient for the city of New Orleans to prevent the then-New Orleans Jazz departure.5 Antitrust law arguably cuts in favor of permitting the relocation of teams, especially when considering the restrictions on relocation that some sports leagues impose,6 and while cases in which cities have asserted their authority to seize teams via eminent domain have foundered for reasons other than a direct rebuke of such purported authority, eminent domain’s appeal is limited by the fact that actually using the power would require the city to seize the team and pay fair market value for the team—a price tag that can run into the billions of dollars given the current valuation landscape for professional sports teams.7
Given the limitations of these legal remedies, consideration should be given to the use of alternative corporate forms, specifically the use of a “public benefit corporation” as the ownership vehicle, in order to explicitly require community interests to be taken into account in corporate decision-making and reduce the threat of team relocation.
In 2013, the state of Delaware adopted the statutory Public Benefit Corporation (PBC) as an alternative corporate form pursuant to Article XV of the Delaware General Corporation Code (Delaware Code). The PBC is a for-profit entity and remains subject to the same statutory requirements as traditional Delaware corporations but is required to include in its charter a specific public benefit to be promoted by the PBC. Pursuit of the public benefit is supported by the statutory requirement that the PBC’s directors and officers manage the PBC in a manner that balances the public benefit, the best interests of those materially affected by the PBC’s conduct, and stockholder value. PBCs are required to provide their stockholders with a report on the PBC’s pursuit of its public benefit(s) at least every two years. Delaware has also adopted a public benefit statute for limited liability companies.
Given there is a finite number of professional sports teams in the United States and expansion is rare,8 there are two primary ways for implementing PBCs into the existing franchise ownership structures: (i) use of the PBC by a prospective buyer of a current franchise or (ii) conversion of an existing owner to a PBC (or public benefit limited liability company).
Because sports franchises are typically held for extended periods of time given the high value appreciation, sales are relatively infrequent. However, it is not uncommon for owners to be pressured into selling teams following revelations of improprieties by the controlling owner (e.g., the recent example of the NBA’s Phoenix Suns). This presents an opportunity for the incoming controlling owner to build community value and trust (and separate themselves from the prior owners) by utilizing a PBC to demonstrate they are serious about valuing the community and other stakeholders and not just profiting off of the team.
The second option would be the conversion of an existing owner to a PBC, which requires board and majority stockholder approval. While it may be unlikely any current owners would proactively seek to convert to a PBC, such a conversion could be initiated by existing stockholders focused on the benefits of stakeholder capitalism or mandated by a municipality prior to the receipt of any public benefits by the franchise. Some examples where this conditioned conversion could be implemented include public funding for a new stadium, receipt of tax credits, or the terms of the lease agreement.
PBCs have the potential to provide unique benefits in the context of professional sports franchises compared to traditional corporations or partnerships by mandating that the interests of stakeholders, such as team communities and employees, are balanced against stockholder value, particularly in the context of relocation, which often promotes the latter at the formers’ expense.
The Delaware Code requires that a PBC’s directors and officers manage the PBC in a manner that balances the public benefit,9 the best interests of those materially affected by the PBC’s conduct, and stockholder value. As a result, directors and officers are provided considerable discretion in weighing social and environmental impacts with economic returns, as well as expanded protection of the “business judgment rule” for such decisions. In the context of a proposed relocation, the directors of a PBC would be required to consider the effects of such action on the public benefit, not just the financial implications to the stockholders. Given that courts have been unwilling to recognize the non-economic interests of fans in sports teams,10 requiring directors and officers of a franchise to consider the non-financial impacts of relocation on, if not the fans of a team, the community they live in, could help level the playing field.
The public benefit of a franchise could include promoting the economic interests of the surrounding community, including team and arena employees, surrounding businesses, and the city’s economy as a whole. Incorporating the public benefit in a PBC’s charter can be simple and fit into a single sentence, such as the following:
To promote the following specific public benefit by providing a positive effect (or reduction of negative effects) on the following categories of persons, entities, communities or interests (other than stockholders in their capacities as stockholders): To produce a positive economic and cultural impact on [city/region/state] (the “community”), instill civic pride and camaraderie into the community, enhance the community’s image on a nationwide basis, and provide recreation, entertainment, and cultural activities to the citizens of the community, through the ownership and management of [the franchise].
While this is just one possible approach, the above example is specific (the sports team must be located in a particular city or region) without mandating any particular actions on the part of management, whether in the day-to-day operations of the team or in broader strategic decision making (such as whether incur a higher player payroll in order to maximize the team’s competitive quality).
As noted above, in addition to a specified public benefit, PBCs are also required to consider the best interests of those materially affected by the PBC’s conduct. It is best practice for the board of a PBC to enumerate those categories of stakeholders that it believes are materially affected by the PBC’s conduct, which in the case of a sports team could be the community the team is located in. Thus, as a stakeholder, regardless of the specified public benefit, the PBC is required to consider the impact of the team’s actions on the community, assuming the community is deemed to be “materially affected” by the team’s conduct.
Case law supports the idea that a public benefit is realized by having a sports team in a city and therefore expressly tying a “public benefit” to a franchise through the use of a PBC can strengthen (and ideally retain) this community good. In Poe v. Hillsborough, the Florida Supreme Court held that public funds could be used to finance the Tampa Bay Buccaneers stadium, as there was a public purpose realized through the economic benefits of having a sports team in a city, as well as non-economic benefits, such as instilling “civic pride and camaraderie into the community,” enhancing the “community image on a nationwide basis,” and providing “recreation, entertainment, and cultural activities to its citizens.”11
Critics of using public financing for private sports stadiums argue these deals are lopsided in favor of the sports team, and the economic impacts of sports teams are overstated.12 PBCs can help solve this issue by requiring, as a matter of fiduciary duty, that franchises promote the public benefit, whether that be economic development or civic pride and engagement. By incorporating the interests of the broader community into the governing documents of the entity which owns the franchise, this provides stakeholders (i.e., fans, employees, and the community at large) with confidence in the franchise’s mission and standing in the community. This sort of authentic commitment to a team’s community can create a unique relationship between a team and its fanbase.
As mentioned above, a PBC is required to provide its stockholders with a report on the PBC’s pursuit of its public benefit(s) at least every two years. This mandatory internal reporting provides additional accountability and certainty to stockholders that the PBC is pursuing its public benefit.
The use of PBCs to achieve the goals set forth above is not without its challenges, including (i) limitations on what types of entities can own sports team, (ii) limited case law on enforcing PBC statutes, (iii) restrictions on who can bring a claim for breach of mission, and (iv) lack of non-public reporting.
Most major professional sports leagues have limitations on the types of persons who can own teams, favoring ownership by natural persons over legal entities. For example, the NBA bars transfers of teams to governmental entities,13 and has imposed limits on the number of owners a team may have14 and the percentage of a team that can be owned by institutional investors.15
Proposals for public ownership models to address issues such as increased relocation have been proposed, but most leagues bar community ownership. Use of a PBC would likely qualify under the current restrictions for the same reasons traditional corporations are allowed; however, the league restrictions on number of ultimate beneficial owners reduces the amount of stockholders that could bring a claim for breach of fiduciary duty.
Corporations, as a function of state law, are governed by the corporations code of their state of incorporation, as interpreted by its courts. Delaware courts are the leading arbiter on corporate law; however, there is limited case law to date on how the Delaware courts will rule on weighing of “dual” fiduciary duties of a PBC. As a result, there is lack of legal precedent decision-making where there is a trade-off between financial and impact returns.
The Delaware Code currently provides that only a stockholder owning at least 2% of a PBC’s outstanding shares has the right to bring a claim for breach of the fiduciary duty, meaning a stockholder that does not own a sufficient number of shares is barred from suing the PBC or its directors for a breach of its mission. One mechanism to address this limitation would be for a municipality to receive non-voting shares in the PBC as consideration for public funding, which would give the municipality the right to bring a claim for breach of the public benefit, without the controlling owners giving up traditional voting rights. Some sports leagues (including the NBA) bar ownership of teams by governmental entities, so such arrangements would need to be in compliance with existing league governing documents.
In addition, even among ownership groups composed only of natural persons, there can be divergent interests where certain members care more about maximizing profits, while others may care more about the community good. If a relocation is proposed, the fiduciary duties under the PBC would strength the position of owners who care more about the community good and oppose relocation, even if their holdings in the team are small (so long as they are greater than 2%).
As mentioned above, a PBC is only required to deliver a biannual report to its stockholders and is not required to make such report public. The limited disclosure could pose problems with the ability of non-stockholders to determine whether the PBC is fulfilling its mission and to mount a public relations bid to maintain compliance.
Under the Delaware Code, the default rule for amending a PBC’s charter is that a majority in interest of stockholders can vote to amend the charter, including amendments to the public benefit. Similarly, the default rule for the conversion of Delaware PBCs into another type of Delaware corporation is that a majority in interest of stockholders could vote to convert a PBC into a traditional corporation. Thus, the stockholders holding 51% of the voting power of the PBC could, absent specific protective provisions to the contrary, circumventing the intended protections of the PBC by voting to amend the public benefit statement or to convert the PBC into a traditional corporation.
However, there are possible remedies for this issue. One such solution is to give a mission-aligned owner a consent right in the PBC’s charter over amendments to the public benefit and conversions out of the PBC form or to increase the approval threshold from a simple majority to a higher amount that prevents a single stockholder or group of stockholders from controlling the vote. Another potential solution is to grant a consent right to a key contractual counterparty, such as a local government that enters into a stadium financing agreement with the team, though in the event of a conversion out of the PBC, the contractual counterparty would only have a breach of contract claim.
The use of PBCs is well-suited for mission-driven organizations that are focused on stakeholder capitalism, where companies create value by taking into account the needs of all their stakeholders. For these organizations, the dual fiduciary duties of directors and officers allows them to take actions that balance the company’s “public benefit” along with stockholder value. A professional sports team, like any other multibillion-dollar organization, has countless stakeholders outside of its investor stockholders that would benefit from the use of the PBC, including reducing the risk of relocation.
For the reasons set forth above, owners should consider the use of PBCs on the basis of stakeholder capitalism (either through the conversion of an existing entity or as the acquiring entity in a sale) and cities should condition financing and other public support on conversion to a PBC to prevent relocation. Not only is it in the interest of cities for their teams to be structured as PBCs to limit relocation, but existing owners and leagues should consider how the long-term financial value of teams may be improved in a world where teams embed their larger community into their fiduciary duties. While adopting PBCs on its own will not solve all problems associated with sports team relocations, this would be a step in the right direction in ensuring that sports are truly oriented towards the public good.
1. HMC Management Corp. v. New Orleans Basketball Club, 375 So. 2d 700 (La. Ct. App. 1979) (HMC).
2. Matthew J. Mitten & Bruce W. Burton, Professional Sports Franchise Relocations from Private Law and Public Law Perspectives: Balancing Marketplace Competition, League Autonomy, and the Need for a Level Playing Field, 56 MD. L. Rev. 57, 108–09 (1997).
3. City of Oakland v. Oakland Raiders, 220 Cal. Rptr. 153, 157 (Ct. App.1985).
4. See Robert Taylor Bowling, Sports Aggravated: The Fan’s Guide to the Franchise Relocation Problem in Professional Sports, Stetson L. Rev. 646 (1999), 679.
5. The city of New Orleans argued in HMC that the New Orleans Jazz had impliedly contracted with the city to remain in New Orleans for as long as it existed, but the court rejected that claim because the city failed to establish a mutual intention to contract between the city and the team. HMC.
6. Los Angeles Memorial Coliseum Comm’n v. National Football League, 726 F.2d 1381 (9th Cir. 1984), cert. denied, 105 S. Ct. 397 (1984). In any event, cities can have difficulty as plaintiffs in proving a direct economic stake in relocation and can only obtain an injunction against relocation, if they prove that such harm is caused by anti-competitive effect of relocation. See Matthew J. Mitten & Bruce W. Burton, Professional Sports Franchise Relocations from Private Law and Public Law Perspectives: Balancing Marketplace Competition, League Autonomy, and the Need for a Level Playing Field, 56 Md. L. Rev. 57, 108–09 (1997).
7. See Kurt Badenhausen, NBA Valuations: Warriors Top $7.6 Billion as Teams Average $3 Billion, Sportico, December 13, 2022 (identifying an average value of $4.14 billion for NFL teams, $3 billion for NBA teams, $2.31 billion for MLB teams, and $1.01 billion for NHL teams).
8. While this article focuses on the issue of relocation among the major North American men’s professional sport leagues, we note that the PBC form may also be appropriate for teams in new sports leagues that are trying to build fan and community support. For example, a team like the Oakland Roots in the United Soccer League (USL), that has built its ethos and brand around being “Oakland first” and trying to harness “the magic of Oakland and the power of sports as a social force for good.” See Oakland Roots SSC, https://www.oaklandrootssc.com/. For teams like this, the PBC form can help signal a credible commitment to the community.
9. “Public benefit” means a positive effect (or reduction of negative effects) on one or more categories of persons, entities, communities, or interests (other than stockholders in their capacities as stockholders) including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific, or technological nature. Delaware General Corporation Law § 362(b).
10. Robert Taylor Bowling, Sports Aggravated: The Fan’s Guide to the Franchise Relocation Problem in Professional Sports, Stetson L. Rev. 646 (1999), 659.
11. Poe v. Hillsborough County, 695 So. 2d 672 (“Poe”); Nicholas Baker, Playing a Man Down: Professional Sports and Stadium Finance—How Leagues and Franchises Extract Favorable Terms from American Cities, 59 B.C.L Rev. 281, 678–679 (2018).
12. See Jesse Stephenson, Letting Teams Walk: Exploring the Economic Impact of Professional Sports Franchises Leaving Cities (2014) (arguing the economic impacts of sports relocation are negligible), Brent Bordson Public Sports Stadiums: Communities Being Held Hostage by Professional Sports Team Owners, 12 Hamline L. Rev. 505, 535 (1998) (arguing that if tax-exempt dollars are used to finance privately owned stadiums, the tax code should require that cities to hold a minimum number of other events at the stadium, require voter approval of the funding plan, and require a minimum percentage lease agreement with the team for which the public constructed the stadium).
13. Section 5(j) of the NBA Constitution and Bylaws, as amended as of September 2019.
14. Martin Greenberg, 25 Person NBA Ownership Rule, March 4, 2015, Law office of Martin Greenberg https://www.greenberglawoffice.com/25-person-nba-ownership-rule/.
15. Alonzo Adams, Why Private Equity Investors Love the NBA, Front Office Sports (July 18, 2021) https://frontofficesports.com/newsletter/private-equity-is-here-to-stay-in-the-nba/.