Monday, November 29, 2010

Drayton McLane Theoretically Selling Astros Because of Estate Planning Issues?

I've read a few articles on the internet lately, including this one at MLB.com, which report that Drayton McLane, owner of the Houston Astros, is selling the team for "Estate Planning Reasons".

Now, I've never met the man, and I do not know the man's business nor do I know much about the man's personal wealth other than what is in the public domain, but something really bugs me about the reason he is giving for wanting to sell the team. Frankly, I think it is a public relations snowjob - and here's why:

1) Drayton McLane has been trying to sell the team for years, unsuccessfully. He had a deal fall through just a few years ago because the buyer, Jim Crane, was concerned about the economy.

2) There may be a very large estate tax when the SURVIVOR of Drayton and his wife, Elizabeth, dies - but there will be a large capital gains as soon as he sells the team. Moreover, the Drayton family will still have a super large taxable estate. So let's talk taxes:
  • Let's say the McLanes are worth about $1.5 Billion. and the Astros make up about $450 million of that. If they were both to pass in 2012, and the estate tax law reverts to pre-2001 levels, they would owe an estate tax of about $825 million assuming nothing goes to charity. (Incidentally, I believe that they would donate substantial sums to charity.)
  • Now let's say Drayton McLane sells the team for $450 million and pays a $70 million capital gains tax (because he bought the franchise for about $100 million and there is a 20% capital gains tax in 2011). The McLanes would then have an estate worth $1.43 Billion. If they were both to pass in 2012, then the estate tax would be $786.5 million - a savings of $38.5 Million. However, because of the payment of the capital gains tax, there is a net loss of $31.5 million in taxes.
  • If the McLanes wait until Drayton passes before selling his interest in the Astros, it will receive a step-up in basis. This means that there will not be any capital gains tax due because the team will receive a basis equal to the fair market value on Drayton's death.
  • One might argue that if Drayton McLane does not sell the team while he is alive, his estate must sell it in a firesale to raise capital to pay the taxman. This argument really only works if Drayton and Elizabeth die in the same year because if they were working with even a semi-competent estate planning attorney, they could guarantee the tax gets postponed until the second to die.
  • Well - what if they did both die within the next two years, then there would be a firesale and they wouldn't receive as much for the team. This may be true, but would that firesale cost them $38.5 million PLUS the time value of the interest? Probably not.
3) There is a throwaway line at the end of the MLB article which reports that Drayton's children "never entertained taking over the club." To me, this is far more important than any tax planning reason they could have for selling the team. If the children wanted the business, Drayton and his attorneys could easily have found a way. Most likely he would have borrowed heavily against the team to reduce its value, transferred it in a part sale-part gift transaction, and then used the liquidity to pay any taxes.

There are many reasons to sell an asset like a baseball team, but estate planning should not be one of them - except to the extent that the McLanes wish to simplify their life and have come to the realization that their children do not wish to be in the family business.

So why does the MLB article upset me so? Mainly because of the implication that he's selling off the team to avoid the estate tax and for the reasons stated above, I think that would be a bad decision. Since I believe Mr. McLane is a smart man who doesn't make many bad decisions, I think he's selling the team for personal and business reasons - not estate planning reasons.

Friday, November 12, 2010

Should Baseball have a Worldwide Draft?

I recently came across a very thoughtful law review article by Daniel Hauptman arguing that Major League Baseball (MLB) should have a worldwide draft. Currently, MLB only drafts players from the United States of America, Canada, Puerto Rico and other U.S. territories.

The crux of Hauptman's argument is that since MLB does not have a worldwide draft, they are engaged in a type of reverse discrimination.

Background
The MLB draft acts as an orderly way for teams to bring in new talent. It has the effect of reducing competition for a particular player. Normally this would be an anti-trust violation, but MLB enjoys a long-standing exemption from the anti-trust laws.

No super talented player actually wants to be drafted. MLB has rules, both formal and informal, that dictate how much a drafted player should be compensated. If a players signed as a free agent, the player would be have more control over the team he signs with, the salary and the contract terms. The effect of this for very talented players is that they could earn a lot more money if there were no draft because there would be competition for their services.

Since the MLB draft only affects players from the United States of America, Canada, Puerto Rico and other U.S. territories, they are at a competitive disadvantage compared to players from other parts of the world who can sign as free agents.

To be clear though, free agency really only helps top athletes. Everyone else has to take what they can get and teams will not bid up these players.

The Law
The draft, as it stands, is something that arrived at as part of the collective bargaining agreement between MLB and the Major League Baseball Player's Association (MLBPA). It is important to note that players who have not signed a major league contract can not be part of the union.

Collective bargaining agreements are governed by federal labor law and it has been traditionally very difficult for individuals who are not a party to the agreement to affect them. Read Hauptman's article for more details.

One argument that can be made to challenge the agreement is that the draft violates a federal or state employment discrimination law. However, these anti-discrimination laws may be preempted by the national labor law which encourages employers and employees to come up with their own agreements - i.e. the collective bargaining agreement.

Non-Legal Issues
Hauptman goes to great lengths in discussing the history of the draft and the effect of the draft on the economies of Latin American countries. In particular, MLB teams used to spend a lot of money developing players in Puerto Rico. Once teams could draft players from Puerto Rico instead of having to bid on their services, teams stopped investing time and resources there and moved to places like the Dominican Republic.

In these Latin American countries where there is no draft, teams are able to sign many players as free agents, but terms and conditions highly favorable to the teams and at very low cost. It also gives large market teams a tremendous advantage because they can sign more players hoping a tiny fraction of them work out.

What a Worldwide Draft Would Accomplish
In the end, Hauptman argues it would be a good idea to have a worldwide draft. He thinks it would result in players being treated equally regardless of where they are from. He also believes it would result in better competition on the field. This is not to say that the draft itself is fair, but it would level the playing field for teams and the individual players.

What if we Did Not Have a Draft?
If a draft bad for the players, many argue we should get rid of it. After all, it suppresses competition for the player's services. The problem with getting rid of the draft is that it serves one very important legitimate purpose - it provides for competitive balance. For that reason alone, MLB will never give it up. The fact that they use it to keep salaries down and provide an orderly method of hiring players is merely a great side benefit.

Final Thoughts
Although MLB and the MLBPA has stated publicly since 2002 that they want a worldwide draft, there are no plans at this time to introduce one. I personally don't see anyone challenging baseball's draft because of the cost of a suit and the potentially deleterious affect it might have on the player filing the suit.

Tuesday, July 13, 2010

Passing of a Legend - George Steinbrenner

Regardless of whether you are a Yankees fan or not, we should all pause for a moment to reflect on the valuable contributions that Mr. Steinbrenner has give to baseball. He was a great promoter who heavily invested in his team. He single handedly reshaped the way owners thought about free agency and owning their own television rights. And, perhaps most importantly for other owners, he helped steer baseball into its greatest era of profitability.

George Steinbrenner, and minority partner E. Michael Burke, bought the New York Yankees (and some parking garages) from CBS in January of 1973 for $10 million. In 2009, the Yankees were valued at $1.5 billion by Forbes magazine. I am uncertain as to how much of the franchise Mr. Steinbrenner owned at his death, but according to the Forbes 400, he was worth $1.15 billion in 2009.

It is interesting to note that the Yankees franchise itself is very heavily leveraged, and that most of his wealth is tied up in the YES Network. I'm sure that this was done on purpose so that the franchise could be passed on to his children more easily.

It is a bit gruesome to think about, but by George - he passed away in the correct year as far as taxes go. This year, there is no federal estate tax (unless Congress tries to enact a retroactive tax). Moreover, since Mr. Steinbrenner passed away while he was domiciled in Florida, his estate does not owe a state Estate tax either.

What does this mean? Well - in almost any other year his estate would owe the federal government upwards of $500 million in estate taxes. Instead, his heirs merely have to pay a modified capital gains tax when and if they sell George's assets.

Proper estate planning is important, but sometimes it helps to be lucky too.

Tuesday, July 28, 2009

Should my child choose college or go pro?

Professional baseball scouts like to point out that of all the thousands of players who play baseball each year, only a few are chosen in the draft.

Ultimately, your high school graduate will have to decide one of three things: Does he go pro? Does he go to college? Does he quit and do something else?


Some of the reasons to go to college include:
a) the fact that a player drafted out of college has a higher chance of making it to the majors;
b) the college experience;
c) the professional team is not offering enough of a signing bonus to justify losing your amateur status;
d) your child is not confident enough in his own abilities to think he can make it to the pros and he wants a solid backup plan;
e) your child is a multisport athlete and is not sure which sport he wants to play yet; and
f) your child is not sure if he wants a career in professional baseball.

Some of the reasons to go professional include:
a) your child is not a good student, and is more likely to have a successful career in professional baseball;
b) your child receives a significant signing bonus;
c) your child cannot get a scholarship and does not have the resources to go to college;
d) your child has lost his amateur eligibility;
e) the coaches are generally better on the professional teams;
f) the professional team guarantees to pay for college for your child after his baseball career is over; and
g) baseball is a young man’s game and the sooner your son gets started the quicker he can develop and fulfill his dream.

A reason that can cut both ways is injuries. If a player has a bad injury while in school, he will need to do something other than baseball with his life. On the flip side, a scout once told me, “Injuries and age have never stopped anyone from getting an education but they have stopped a promising career in sports, so it is best to start early.” (I apologize, but I can no longer find the source for this quote.)

So what do the experts say?

Jack Cust & Keith Dilgard, of Jack Cust Baseball Academy, suggest that for most position players, it is best to go to college. However, for pitchers, due to the high risk for injury, going professional has additional advantages. They also cautioned that a player must be careful where he goes to college as some places expect you to leave by the end of your junior year.


George (Curvy) Ramos suggests that if a player is drafted in the top three rounds, it is best to sign with a professional team.

Joe Barth’s best advise is to “go where you are wanted.” You will be happier as a result, especially if you are choosing among colleges. He warns that a player’s scholarship can be pulled for a variety of reasons, so it is important to have a good relationship with the coaches.

In the end, your child should not make this decision until he has all the good offers on the table from the colleges and the professional team that has drafted your son. At a certain point, if the drafting team offers enough money, it will make sense to play professional ball rather than go to college. This number is different for everyone and I will discuss what draft picks are receiving in more detail in the next installment.

Next issue: Who is eligible to be drafted?

Special thanks to Jack Cust, Sr., Keith Dilgard, Joe Barth, and George (Curvy) Ramos for providing valuable time and resources in the preparation of this article.

Thursday, February 19, 2009

Follow up on Oliver v. NCAA

If the NCAA has to change their amateur eligibility rules in light of the Oliver ruling, here is an idea as to how they might do it:

My personal suggestion would be to change the definition of what it means to be an amateur so that student athletes lives aren’t ruined so easily by a mistake. A player shouldn't become professional the second he/she signs a professional contract, but the second he/she plays as a professional or receives money under the contract. (The NCAA can create a window such as before college and during the summer when the player may sign and/or negotiate a professional contract. If it is still in place when the college sport starts, then they lose their eligibility.)

I welcome your thoughts.

Tuesday, February 17, 2009

When does an Attorney become an Athlete Agent?

Many attorneys routinely provide legal counsel to athletes. So the question is, when does an attorney become an athlete agent subject to registration. The rules vary slightly by state, so let's start with the Uniform Athlete Agents Act (the "UAAA") which most states have adopted.

According to the comments under Section 5 in the UAAA:
"If an attorney's role is limited to providing legal services to a student-athlete, the attorney is not required to register as an athlete agent or comply with this act. An attorney's actions as an athlete agent, however, are outside the scope of legal services, there is no privilege and the attorney must comply with this act." (emphasis added)
An athlete agent is defined as:
"an individual who enters into an agency contract with a student-athlete or, directly or indirectly, recruits or solicits a student-athlete to enter into an agency contract. The term includes an individual who represents to the public that the individual is an athlete agent. The term does not include a spouse, parent, sibling, [or] grandparent[, or guardian] of the student-athlete or an individual acting solely on behalf of a professional sports team or professional sports organization."
This begs the question of what is an agency contract. An agency contract is defined as:
"an agreement in which a student-athlete authorizes a person to negotiate or solicit on behalf of the student-athlete a professional-sports-services contract or an endorsement contract."
A student athlete is:
"an individual who engages in, is eligible to engage in, or may be eligible in the future to engage in, any intercollegiate sport. If an individual is permanently ineligible to participate in a particular intercollegiate sport, the individual is not a student-athlete for purposes of that sport."
So it's pretty clear that soliciting clients, soliciting employment for a client and holding oneself out as an agent will require an attorney to register. The other item that is pretty clear is that the UAAA is not intended to apply to attorneys representing athletes who no longer have college eligibility, providing that they are not otherwise holding themselves out as agents.

However, let's focus a little bit more on the phrase "negotiate... a professional sports-services contract or an endorsement contract."

As a starting point, the UAAA clearly states that when a person communicates with a student athlete such person is not required to register as an agent if that person is not recruiting or soliciting and only providing information to the student athlete. (This is the reason why so many athletes have advisers and handlers now.)

Next, I followed up with representatives from three of the states where I'm licensed to ask more. Florida's statute is slightly different and defines an agent contract as: "a contract or agreement in which a student athlete authorizes an athlete agent to represent the student in the marketing of the student's athletic ability or athletic reputation."

In a conversation with a representative from the Florida Department of Business & Professional Regulation, Robert (no last name given) stated that he does not believe the Florida Act requires an attorney to register if he/she is reviewing contracts and/or negotiating the professional sports contract because the Florida Act talks about marketing student athletes. Registration becomes a requirement when soliciting athletes and seeking employment for the athletes - NOT when negotiating contracts.

The New York Act more closely resembles the UAAA. In a conversation with a representative from the New York Division of Licensing, Jeff Stats stated that he does not believe the New York Act requires an attorney to register if he/she is merely reviewing contracts, but left open the possibility that anything more will result in an attorney having to register.

The Pennsylvania Athlete Agents Act also closely resembles the UAAA. In a conversation with the Executive Director of the Pennsylvania State Athletic Commission, Gregory Sirb stated that he does not believe the Pennsylvania Act requires an attorney to register if he/she is merely reviewing contracts, but was very clear that anything more will result in an attorney having to register. I asked what if a professional team calls about a client to discuss a provision in the contract, and he said that would be enough to trigger registration in his mind. (As an aside, it did not sound like he was 100% convinced that it would stand up if challenged, but he left no doubt as to how he interpreted the law.)

I also contacted Professor Scott Rosner, who is an Associate Director of the Wharton Sports Business Initiative. He noted that there are a lot of ways an attorney can represent an athlete. He did not think mere review will require registration, but was more cautious as to what would trigger registration.

To conclude my investigation into this, I contacted Richard C. Hite, of Hite, Fanning & Honeyman, who was the Chair Person of the Committee that created the UAAA. He stated that there were lengthy discussions about this particular issue. He graciously took the time to find his notes from his time on the Committee and advised me that the official comment in Section 5 of the UAAA was inserted to ensure that an attorney who only acts as an attorney is not subject to the registration requirements. Specifically, he stated that he disagrees with idea that an attorney cannot negotiate a contract without registering. Moreover, he mentioned that the word "negotiate" in the definition of "agency contract" was not designed to prevent an attorney from negotiating the terms of a contract on behalf of an athlete, but from negotiating employment for an athlete.

So, to sum up, an attorney who merely reviews contracts for athletes is not subject to any registration requirements; but one who negotiates a contract may or may not be required to register.

This leads to my big question, if the statute requires an attorney to register as an agent for merely negotiating the terms of a contract, did the legislature step beyond it's legal authority in regulating attorneys? (Almost all states have similar provisions in their State Constitution that declare the State Supreme Court has exclusive authority to regulate the lawyers in such State.)

Clearly when a lawyer is not acting in his/her capacity as an attorney, a state may regulate the person, but negotiating contracts is unequivocally in the job description of an attorney. So isn't the legislature overreaching?

The main penalty for a person failing to register as an agent is that the contract between the person and the athlete is void (meaning that the agent is not entitled to any fees). Additionally, some states have pretty hefty fines as well.

Additional note: In New Jersey, the legislature proposed a bill in December of 2008 that would require athlete agents to register with the State. It has not yet been signed into law.

Update: In a conversation with Alexis Antonacci, a spokesperson for the Florida Department of Business & Professional Development, she stated that she thought attorneys who negotiated contracts were required to register, but did not give me any authority for that assertion.

Friday, February 13, 2009

Humorous Note to Oliver v. NCAA

Clearly Judge Tone has a bit of a funny bone:

"For a student-athlete to be permitted to have an attorney and then to tell that student athlete that his attorney cannot be present during the discussion of an offer from a professional organization, is akin to a patient hiring a doctor but the doctor is told by the hospital board and the insurance company that he (the doctor) cannot be present when the patient meets with a surgeon because the conference may improve his patient's decision making power. Bylaw 12.3.2.1 is unreliable (capricious) and illogical (arbitrary) and indeed stifles what attorneys are trained and retained to do."