Insert Coin To Save Milan: Or, How Milan Tried To Game FFP and Played Themselves

Li Milan.jpg

By: Elizabeth Cotignola

Rash. Reckless. Irresponsible. All words my darling, devoted Italian father has used to describe my behaviour in regard to Boxing Day sales of years past. All words that could equally apply to the sale of Associazione Calcio Milan and its subsequent spending spree. As it turns out, all that glitters is not gold, and beleaguered Milan fans begin the new year, once again, battening down the hatches as a storm swirls ‘round their beloved club. The Rossoneri have faltered on the pitch (to put it kindly), but their situation fuori dal campo is even more dire, as the once-storied Italian club has run afoul of UEFA’s Financial Fair Play regulations. Insert coin to save Milan, or the game’s up.

UEFA’s Executive Committee introduced the notion of “financial fair play” in September of 2009 in an attempt to, as they put it, “introduce more discipline and rationality in club football finances”. In the years leading up to the introduction of Financial Fair Play, many clubs throughout Europe had reported repeated, and worsening, financial losses, creating a spillover effect in the market conditions for clubs in Europe, leading to delayed payments to other clubs, employees, and tax authorities. In order to staunch the bleeding and rein in unfettered spending, UEFA imposed an obligation for clubs, over a period of time, to balance their books or break even. While the devil’s in the details, the overarching premise of Financial Fair Play is quite simple: a club’s expenditures cannot exceed their reported revenues, and clubs must meet their financial commitments or face the consequences.

It might come as a surprise to learn that for all its endemic corruption, UEFA’s regulations are fairly straightforward and transparent, and accessible to anyone interested enough to rifle through them. The machinations of Financial Fair Play are set forth in two governing statutes: the UEFA Club Licensing and Financial Fair Play Regulations, which set forth general requirements, and the Procedural Rules Governing The UEFA Club Financial Control Body, the operating principles of the Club Financial Control Body, which is tasked with ensuring clubs comply with those general requirements.

Article 60 of the Financial Fair Play Regulations explains how UEFA calculates “break even”, the most fundamental of Financial Fair Play requirements. The difference between relevant income and relevant expenses is a club’s break-even result, which is calculated for each reporting period in accordance with Annex X of the Regulations. Simply put, if a club’s relevant expenses are more than 5 million euros greater than its relevant income in a given reporting period, then the club has failed to break even and is in breach of Financial Fair Play.

However, Article 61 of the Regulations provides a certain degree of leeway for ambitious clubs, or what UEFA terms “acceptable deviation”. In addition to the 5-million euro buffer to which all clubs are entitled, more cunning clubs can exceed this amount by up to 30 million if “such excess is entirely covered by contributions from equity participants and/or related parties” – a loophole which has, in effect, created a mechanism for shrewder club owners to laugh in the face of Financial Fair Play and endlessly game the regulations by shuffling massive cash flows back and forth between other entities they own. Chi vuole arricchire in un anno, è impiccato in sei mesi, as they say in la bella Italia.1

UEFA financial fair play money.jpeg

UEFA’s Executive Committee approved the formation of the two-chamber Club Financial Control Body in June of 2012 to oversee the application and enforcement of the Club Licensing and Financial Fair Play Regulations. The Control Body, created by Article 34 of UEFA’s General Statutes, is the body tasked with monitoring and enforcing FFP requirements. All clubs that wish to participate in pan-European competition, such as the Champions and Europa Leagues, must obtain a license from UEFA and fulfill certain obligations in order to maintain that license. The Control Body has the jurisdiction to determine whether clubs have fulfilled these obligations and impose disciplinary measures, as defined in the relevant rules, in the event of non-compliance. The Control Body is subdivided into two separate bodies, or “chambers”: an investigatory chamber, which monitors and investigates instances of non-compliance, and the adjudicatory chamber, responsible for the judgment stage of the proceedings and imposing any appropriate disciplinary measures.

Annex XII of the Regulations provides a mechanism by which clubs who aren’t presently in compliance with Financial Fair Play, but who harbour “the aim of complying with the break-even requirement”, can temporarily shirk requirements. A club may apply to the Control Body’s investigatory chamber to enter into a voluntary agreement, valid for four reporting periods, if it has been subject to “a significant change in ownership and/or control.” As we’re all well aware by now, Milan experienced a fairly significant change in ownership with the end of the Berlusconi era in 2017, and submitted a request for a voluntary agreement in November.

A club that applies for a voluntary agreement must submit a long-term business plan, consisting of a balance sheet, an accounting of profits and losses, and a cash flow statement which must be “based on reasonable and conservative assumptions” and demonstrate its ability to continue as a going concern until at least the end of the period covered by the voluntary agreement. The Control Body’s investigatory chamber reviews each application and is free to conclude the corresponding voluntary agreement or not.

Any breach of the Financial Fair regulations – including, as in Milan’s case, one that cannot be resolved in a voluntary agreement – are dealt with in accordance with the Procedural Rules Governing The UEFA Club Financial Control Body. At the end of an investigation, the Control Body’s chief investigator, after having consulted with the other members of the investigatory chamber, may decide to dismiss the case, conclude, with the consent of the defendant, a settlement agreement, or, with the consent of the defendant, impose disciplinary measures limited to a warning, a reprimand or a fine, or refer the case to the adjudicatory chamber. This is where Milan find themselves: at the end of an investigation that did not go favorably for them, awaiting their fate.

It was the hammer drop heard ‘round the (footballing) world: on December 15, UEFA announced that it had unequivocally rejected Milan’s request for a voluntary agreement. So where did it go wrong for Milan? Contrary to prevailing opinion, it was not Milan’s freewheeling spending that brought them into the Control Body’s crosshairs. Their troubles began much earlier, with the Sale That Should Have Never Been.

Elliott Management founder Paul Singer

Elliott Management founder Paul Singer

As is common knowledge by now, Silvio Berlusconi, at long last, relinquished control of the club last year, when he transferred control of his Rossoneri to a Chinese consortium headed by the mysterious Mr. Li. The sale, however, had to be rescued by an American private equity fund, Elliott Management,2 which tossed the drowning deal a lifeline in the form of a loan of over $350 million when Mr. Li failed to raise the required funds. The loan comes due in October of 2018, and the lifeline thrown Mr. Li had several strings attached.

In the negotiations that sealed the sale, Mr. Li told Milan that his holdings included phosphate mining operations in the city of Fuquan in China’s Guizhou Province. According to Milan, Mr. Li’s control of his mining business had been verified by the lawyers and banks involved in the transaction. However, Chinese corporate records show that - on paper, at least - someone else owns his mining empire. The mines that Mr. Li told Milan he controlled have been owned by four different people in the last year. Chinese records also show a series of business disputes and run-ins between Mr. Li and the Chinese regulators. Whoever was driving Milan’s due diligence fell asleep at the wheel and drove the club off a cliff.

It should have shocked absolutely no one, then, that UEFA roundly rejected Milan’s request for a voluntary agreement:

"After careful examination of all the documentation and explanations provided, the Chamber decided not to conclude a voluntary agreement with AC Milan. In particular, the Chamber considered that, as of today, there are still uncertainties in relation to the refinancing of the loans to be paid back in October 2018 and the financial guarantees provided by the main shareholder."

In other words, UEFA doubts Milan’s ability to pay the proverbial piper. The club’s brass themselves acknowledged the inevitability of this result, with CEO Marco Fassone conceding in an official statement that UEFA’s was “an expected decision.” Specifically, UEFA had requested that Milan refinance its debt with Elliott prior to submission of the voluntary agreement, provide a bank guarantee or make a deposit of an important sum- conditions Fassone stated were “impossible to meet” for Milan or “any other club…in Milan’s situation.” What Signore Fassone failed to explain to Milan’s fans – and what I will unhappily do for them in his stead – is that these conditions are impossible to meet because the sale of Milan and its subsequent spending spree were absolutely and irreversibly reckless and idiotic.

I say this not as a disgruntled Milanista (which, of course, I am, on any given day), but from my seat as a lawyer – one who currently serves as a Due Diligence Officer for the Corporate and Institutional Banking métier of the world’s eighth-largest bank.3 Please allow me to explain, in all my righteous anger, why Milan can’t even begin to think of contending for trophies, given the dire straits they’re in. I’m no runner, but I imagine it’s hard to drag yourself across the finish line once you’ve shot yourself in the foot and you’re bleeding out.

Marco Fassone toured China as part of AC Milan's push to expand revenues.

Marco Fassone toured China as part of AC Milan's push to expand revenues.

First and foremost, the sale to Mr. Li should never have been allowed to proceed, and the fact that it was represents an egregious failure in the required due diligence of all parties involved. The words “due diligence” may sound fancy, but they stand for a very simple premise: know your customer. Mr. Li was Milan’s customer. It was incumbent upon them to undertake a comprehensive appraisal of his finances and to establish his assets and liabilities. At the very least, their due diligence should have been able to unearth that what he offered up as collateral for the sale – his mining empire – wasn’t even his to begin with. That it did not is mind-bogglingly catastrophic. Had they uncovered this damming detail in their investigations, perhaps they might not now be beholden to a third party.

Water under the bridge, alas. On the other side of that bridge, in the Promised Land of the New Milan: a business plan so full of holes it may as well have been printed on Swiss cheese. Milan’s business plan, as submitted to UEFA, hinged largely upon two hypothetical occurrences: growth of its market in China - the primary source of its anticipated revenue - and revenues from Champions League qualification. Milan also projected increased revenue from stadium receipts and sponsorships, but Milan has actually lost sponsorships this year, ending long-term deals with both Adidas and Audi. In other words, Milan premised its ability to repay its loan to Elliott Management entirely on fancy plans and fantasies, rather than anything that can be transcribed in ink. Imagine you walk into your local bank and tell them you’d like to buy a house, and need a mortgage. The bank asks what collateral you can provide them. You tell them that you intend to start a business, but you haven’t quite yet worked out the details, and that if all else fails, you’ll recoup the funds you need by winning the lottery. Do you think the bank will (a) pony up for your McMansion or (b) laugh in your face and kick you the hell out? Kudos to everyone who went with (b): you’re smarter than whoever’s running the show at Milan right now.

What does this all mean for Milan? And what does it mean for everyone else, now that UEFA’s opted to (rightfully) make an example of them? Milan’s fate is uncertain, as UEFA stated they would take up the matter in the new year. In the best-case scenario, Milan is able to refinance their loan, appease the powers that be, and return to winning ways. In the worst-case scenario, at least in sporting terms, the team whose total of Champions League trophies is second only to Real Madrid’s is barred from European competition. Milan’s sorry state of affairs, however, should serve as a cautionary tale for all other clubs whose lofty ambitions don’t quite line up with their bank statements. In refusing to give Milan a free pass, UEFA has signalled that it has finally begun to take Financial Fair Play seriously, and Milan has unwittingly offered up to the rest of Europe a lesson in absurdity.



1.     The literal translation of this is that “he who would be rich in a year will be hanged in six months”, and corresponds to the English idiom that no one gets rich quickly if he is honest.

2.     If you’re interested in Elliott Management and its interest in sport more broadly, check out the Let’s Fix Football Podcast episode featuring James Rushton, the Editor-in-Chief of SBNation’s AC Milan site, the AC Milan Offside.

3.     In the interest of full disclosure, and in a delightful twist of irony: Elliott Management is a client of my employer, though I do not manage their file, have never done so, and I am not privy to anything that could even be remotely considered insider information.

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