This season has not been particularly kind to Wasps, so far. Christian Wade left for the NFL (discussed here) in October, significant financial losses were reported in November, transfer rumours are circulating about many of their key players, they have been beset by injuries, are still without a permanent training facility and, to top it all off, they have been embroiled in a legal dispute with the owners of Coventry City Football Club (“CCFC”) which has reached the Court of Appeal. Add on Ashley Johnson’s doping suspension at the end of last season (discussed here), and 2018 has quickly become a year to forget for the club.
This article will focus on the litigation with SISU (CCFC’s owners) which appears to be ongoing.
The dispute centres on the commercial transactions by which Wasps acquired control of the Ricoh Arena’s operating company along with a 250-year lease over the stadium in October 2014. SISU have been trying to seek permission to make an application for judicial review against Coventry City Council (“the Council”), arguing that the transactions were unlawful under the EU’s laws on ‘State aid’. Wasps have joined the proceedings as an ‘interested party’. The claim failed at first instance in 2017 but was eventually appealed. However, in October 2018, the Court of Appeal confirmed the judge’s decision and rejected SISU’s claim. Nonetheless, SISU have since stated their intention to appeal to the Supreme Court, meaning that the dispute may well drag on into its fifth year.
This article will analyse the Court of Appeal decision (available here), considering the law on ‘State aid’ and reflecting on what a Supreme Court appeal could mean for all interested parties.
The Facts
The Council owns, as it always has, the freehold interest over the Ricoh Arena (“the Stadium”). However, in 2003, the Council entered a joint venture with CCFC on a 50/50 basis to operate the Stadium, creating Arena Coventry Limited (“ACL”), which was granted a 50-year lease by the Council over the Stadium. When CCFC began struggling, it sold its 50% shareholding in ACL to the Alan Edward Higgs Charity (“AEHC”).
However, as the fortunes of CCFC continued to fall, ACL found itself in financial trouble. The Council provided them with a loan of £14.4m in 2013, but it was decided that a new tenant or purchaser of the Stadium was required for the long-term. Talks were held with SISU to this end but were ended inconclusively in November 2013. It was noted by the Court of Appeal that AEHC were robustly opposed to the idea that any shares in ACL should be sold to SISU and, once Wasps emerged as a viable option, were adamant that they wouldn’t sell to anyone but Wasps.
It is also worth noting that the loan to ACL was subject to a separate legal challenge by SISU in 2014, on the same basis as the more recent challenge, but this was ultimately unsuccessful.
The Council obtained independent financial advice from KPMG and, in October 2014, approved the sale of 100% of the share capital in ACL to Wasps for approximately £5.54m along with an extension of the Stadium lease to a total of 250 years, for an additional £1m. Wasps therefore also assumed the £14.4m debt of ACL to the Council. According to the Court of Appeal judgment, the total consideration paid by Wasps was approximately £20.74m.
Rather than speaking of ‘the transfer of the entire share capital in ACL and the granting of a 211-year lease extension over the Stadium’, it is safe to speak of the ‘sale’ of the Stadium to Wasps. It was noted by the court, and by KPMG, that a 250-year lease is financially equivalent to owning the freehold over the Stadium, and ACL is entirely owned by Wasps. Thus, for semantic ease, this article will refer to the transaction in question as a ‘sale’.
In 2015, as part of a prospectus issued by Wasps for the issuing of its bond, Wasps referred to a report by Strutt & Parker in April 2015 which valued the 250-year term held by ACL at £48.5m. According to SISU, this ultimately meant that Wasps had been sold the Stadium at an undervalue of approximately £26.96m. This, they argued, amounts to illegal ‘State aid’ under EU law. “It is the view of this author that permission to appeal should be refused.”
The Law
SISU sought to challenge the sale of the Stadium to Wasps by way of judicial review. Judicial review is a type of court action in which a judge reviews the lawfulness of a decision or action made by a public body, typically examining the way in which a decision has been made, rather than the rights and wrongs of the conclusion reached. However, under Part 54.4 of the Civil Procedure Rules, permission to apply for judicial review must first be obtained. This permission stage may require a court hearing (Part 54.11A), as in this case.
In the Court of Appeal, SISU argued that the Council’s decision to approve the sale to Wasps was unlawful, as it violated the EU’s rules on ‘State aid’ (Arts.107-8 TFEU). Primary legislation of the EU (including the legislative provisions of the TFEU) is directly effective in English law (Van Gend en Loos [1963]), meaning that they essentially form part of substantive English law. As such, any violation of Arts.107-8 TFEU would mean that the Council’s decision was unlawful and thus liable to be quashed on judicial review.
As Keane has explained, EU ‘State aid’ rules aim to protect fair competition within the EU, which would be undermined if certain companies are given an advantage over their rivals through public subsidies. Art.107 states:
“any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings…shall, in so far as it affects trade between Member States, be incompatible with the internal market”
State aid may take many forms, such as proprietary transactions, tax breaks, or state-backed bank guarantees. Under Art.108, any aid above the ‘de minimis’ threshold must be notified to the European Commission, and any such aid proposal must not be put into effect until the Commission has produced a decision on the question. However, following R v Customs and Excise Commissioners, ex p Lunn Poly Ltd [1999] All ER (D) 208, a national court is entitled to determine whether a measure is or is not aid which should have been notified under Art.108.
SISU, therefore, were arguing that the Council’s decision to sell at an undervalue amounted to State aid under Art.107 and should thus have been notified to the Commission under Art.108. It follows that if Art.108 had been breached, the Council’s decision was unlawful.
The case therefore turned on whether the sale of the Stadium did amount to “aid” under Art.107. Whether a State’s act is “aid” is determined by reference to the “market operator principle” – i.e. whether the state is doing any more than a rational private party, motivated by commercial considerations, would be prepared to do in the same circumstances (Commission v EdF and France [2012]).
That the sale of land at a value other than the true market value can be considered “aid” was confirmed in Commission v Real Madrid CF [2016]. In that case, as Keane explains, Real Madrid exchanged a plot of land known as “Las Tablas” for public land owned by the City of Madrid around the Bernabeu stadium, in an operation to offset mutual debts. The Commission found that the public land had been over-valued by EUR 18.4 million and ordered Real Madrid to pay that amount back to the City.
The Commission’s guidance on State property transactions states that, to avoid illegal State aid, “a sufficiently well-publicized, open and unconditional bidding procedure, comparable to an auction, accepting the best or only bid” should be followed, as this “is by definition at market value and consequently does not contain State aid”. However, closed sales are permissible as long as there is an “independent evaluation…by one or more independent asset valuers prior to the sale negotiations in order to establish the market value” and the price paid reflects the valuation made.
The Decision
It should be reiterated that the litigation to date has merely concerned permission to apply for judicial review, never mind any question of lawfulness or remedies. The Court of Appeal was thus tasked with determining whether the case had any substance on which to proceed.
In October 2018, the Court of Appeal unanimously refused SISU permission to apply for judicial review, finding that its claims about the Council’s undervaluing of the stadium to be unfounded. As such, there was no ‘state aid’ and the decision in question could not therefore be unlawful.
SISU’s argument was premised on considering the transactions as a whole, focusing on the overall consideration paid by Wasps and the overall value of the assets now controlled by Wasps. The court, however, preferred to consider the two elements (the shares and the lease) separately. As McCombe LJ explained (at paragraph 48):
“a benefit is only conferred upon…a person or body corporate by the state, in an undervalue transaction, if it is the state’s asset that has been transferred at such an undervalue. That other assets are already owned by the recipient or are acquired at the same time from other parties, conferring an overall benefit on the recipient, is not relevant to the question whether or not aid has been provided by the state by a transfer of its assets at an undervalue.”
Thus, it was essential to look at what the Council sold, rather than the total assets accumulated by Wasps. McCombe LJ first considered the transfer of shares in ACL. The Council sold its 50% (non-controlling) shares in ACL to Wasps, and AEHC did the same. That these shares had been sold at an undervalue was a point explicitly excluded from the appeal – as it had already been rejected at first instance – but McCombe LJ nonetheless made clear there had been no undervaluing here. Principally, this was evidenced by the fact that the Council’s 50% was sold for the same price as AEHC’s (a private company) 50%. AEHC was, according to the court in an “ideal position to obtain the best price that it could for its shares”. What’s more, KPMG had valued the share capital at £3m – £5m. The sale was completed for over £5m. There can thus be no question of undervaluing this aspect of the transaction.
The second element of the transaction – the extension of the lease – was similarly considered. Although, for the purposes of the conveyancing mechanics, the original 50-year lease was surrendered and a new, longer one granted, McCombe LJ held that the commercial reality was that the lease was simply extended. Therefore, SISU’s submission that the Council had failed to properly value the granting of a 250-year lease was misguided. Indeed, KPMG itself valued the extension of the pre-existing lease (which had been agreed back in 2003 for £21m) at £0.6m – £1m. As such, the lease extension was sold at the upper end of the estimated market value – it was not undervalued.
Finally, the court made clear that S&P’s 2015 valuation “did not value the asset which it was open to the Council to sell in October 2014”. The Council simply sold its 50% stake in ACL and granted a lease extension. It did not sell Wasps a 250-year lease of the Stadium/ACL as a business, for it did not have that to sell. McCombe LJ concluded that to compare the S&P valuation with the KPMG valuation would be to compare “apples and pears”:
“S&P were valuing a trading and operational business, including the presence of both football clubs…Wasps were not going to pay for the synergies that their own business would bring”
The KMPG valuation, meanwhile, focused on the value of the assets belonging to the Council in October 2014, not the product that, when combined with their own assets, Wasps would be able to create. This was the critical distinction on which the case turned, allowing the court to dismiss the appeal – the public assets had not been sold at an undervalue and, thus, there was no ‘State aid’. The sale could not be unlawful.
Opinion
In spite of the clarity which this decision appears to bring, SISU have expressed their intention to appeal to the Supreme Court. However, it is submitted that this would be a waste of time.
The law in this area is settled and, once the complicated transaction is properly understood, the Court of Appeal’s decision must be correct. It is clear that the two valuations in question were of different commercial assets and, as such, there is simply no evidence to suggest that the Council made the sale at an undervalue such that it would amount to ‘State aid’ under Art.107 TFEU. McCombe LJ made clear that the valuation had to be of the assets owned by the Council, not the total assets owned by Wasps.
It is unclear, therefore, what an appeal to the Supreme Court would seek to achieve, and it is the view of this author that permission to appeal should be refused. It would not only be a waste of SISU’s time, but it would also be a waste of precious judicial resources.
Indeed, it is in the interests of all parties that the litigation ends now. From Wasps’ perspective, continuing uncertainty is problematic for their business, particularly as they seek to reduce their debts, or obtain further finance. Having questions hanging over their rights to one of their biggest assets will be making those in charge uncomfortable and may be limiting the desire to undertake fresh projects. Similarly, the huge legal costs that the case has racked up, and would continue to rack up, only contribute to the club’s losses.
An appeal to the Supreme Court would also be contrary to CCFC’s interests, and thus the interests of SISU themselves. CCFC’s deal with Wasps to allow them to play their home games at the Ricoh Arena expires at the end of this season, and a new one has not yet been reached. With no clear alternative grounds for CCFC to play at, Wasps hold all the bargaining power. Causing them to incur huge legal costs will be doing nothing to make a deal more likely and one would imagine that Wasps will be using the ongoing litigation as a bargaining chip – there will surely be no deal until the case is dropped.
Of course, as in all litigation, there is the possibility of the winning side recovering (some of) their costs from the losing side – here, SISU. In judicial review proceedings, costs orders are less likely at the permission stage but given the costs the respondents will have incurred, it is likely that a costs order would be made – if requested. This is particularly so given that the substance of the appeal was not materially different to the original, unsuccessful claim – which the court, when allowing permission to appeal, suggested it ought to be. Such an order would primarily be for the benefit of the Council, but Wasps (as an ‘interested party’ in the litigation) would likely recover something. However, applications for a costs order must ordinarily be at the time of the substantive judicial review claim, rather than afterwards, and no such order was made by the Court of Appeal.
Finally, one would be entitled to ask whether this case would have had any substance at all post-Brexit, given that the laws allegedly infringed were EU laws. However, as Mark Elliott explains here, the European Union (Withdrawal) Act 2018 ensures that all EU law which is directly effective – including Arts.107-8 TFEU – will be retained in English law after 29th March 2019, subject to future changes. ‘State aid’ challenges can thus continue to be brought for the time being.