The David Moyes Sacking – the Financial Fallout for Manchester United

April 24, 2014

Zane Shihab, a Partner in our Sport team, was interviewed by Sky news on the 22nd April regarding the recent sacking of David Moyes and its potential financial impact on the club.  Zane sets out his views on the subject below.

From purely a performance perspective, it is hard to feel surprised that Manchester United have opted to relieve David Moyes of his duties just 10 months into a six year contract. After all, they have broken a lot of unwanted records during Moyes’ time at the helm:

  • United will end this season with their lowest points total in Premier League history.
  • They have not qualified for the Champions League for the first time in almost two decades.
  • Their home record this season is the worst since 1978.
  • The manager has made some questionable and expensive signings (Fellaini at £27.5million being the obvious one).
  • There are reports in the media that he had lost the dressing room.

This despite Sir Alex Ferguson winning the League by 11 points last year with effectively the same squad of players.

And from a commercial perspective it also makes a lot of sense. The 2 – 0 loss to Everton highlighted that performances on the pitch were clearly not improving and the Manchester United Board may have concluded that it would be cheaper to dismiss Moyes now then run the risk of not qualifying for the Champions League for a second successive season (discussed further below).

Obviously, even in light of the terrible season endured by the red half of Manchester, it is still not a legal reason for dismissing the Scotsman without compensation.

Terminated by mutual consent?

In these situations the club usually releases a euphemistic press statement (agreed with the departing manager) that the manager’s contract has been terminated by “mutual consent” rather than that he has been “sacked”. It is worth pointing out that there is effectively no legal difference – in both situations a club is terminating the contract of its manager (which will likely be constructive dismissal) and will, in nearly all situations, have to pay compensation to the manager. The question is, how much.

How much Compensation is Moyes due to receive?

Usually in these circumstances, the pay-out due to Moyes is based upon whether, during pre-contract negotiations, it was agreed that a lump sum was payable in the event of termination or whether Man Utd would have to pay out the value of the remainder of Moyes’ contract.

In the latter case, that would obviously be a lot harder for Man Utd to stomach as the Glazers handed executive vice-chairman Ed Woodward the mandate to dismiss Moyes less than 12 months into his £4 million-a-year, six-year contract. This would mean that Man Utd would have to cover the loss that Moyes has suffered as a result of Man Utd terminating the contract early. In other words, Man Utd would have to pay £4 million for each of the remaining 5 years; a huge £20 million hit.

However, in these circumstances, Moyes would have a duty to mitigate his loss and look for other managerial jobs.  If Moyes was successful in obtaining another job it would reduce the value payable by Man Utd to Moyes. For example, when Chelsea sacked Andre Villas Boas he was due to receive £12 million from Chelsea but, by taking the Tottenham job shortly thereafter, he chose to forego £11 million of the £12 million compensation payment due from (the notoriously impatient) Abramovich (as Spurs were now effectively covering some of the losses that AVB suffered by virtue of the Chelsea sacking).

However, a number of recent newspapers  reports are suggesting that Moyes is likely to receive compensation of just one year’s salary rather than the remaining five years of his deal, with key performance targets having been missed in United’s worst ­campaign for almost a quarter of a century. The employment contract between Man Utd and the manager apparently contained, what is known in the trade as, an “ejector seat” clause which allowed Man Utd to dismiss Moyes and pay him compensation that equated to only one year of the remaining five years of the deal (i.e. approximately £4 million) if they failed to qualify for the Champions League. This may explain the timing of the dismissal, being so soon after Man Utd could not mathematically qualify for European club football’s biggest tournament. This is obviously much more beneficial to Man Utd and, if true, is the result of some intelligent pre-contractual negotiating by its Executives and lawyers.

It is worth noting that a provision in a contract which provides for a fixed or pre-determined amount to be payable on breach of contract may be recoverable as “liquidated damages”. However if the amount payable is not a genuine pre-estimate of loss, it will be a “penalty” and unenforceable. That is, if the contractual function of the clause is deterrent rather than compensatory. There is therefore a danger that a provision such as this “ejector seat” clause will constitute a penalty clause. To counter this, it is possible that the club’s lawyers drafted the clause in such a manner as to attempt to ensure that it was not triggered on breach and could not therefore be considered to be a penalty clause. For example, if it was simply a termination right that could be exercised by the club in the event of the club’s failure to obtain Champions League football.

These legal arguments may be the reason as to why the League Manager Association and Moyes are reportedly locked in negotiations with respect to the compensation he is due.

Additional Losses

Luckily for Man Utd, they did not have to pay any compensation to Everton when they appointed Moyes as his contract with The Toffees was up last summer.

However, upon Moyes’ demand, they did sack Sir Alex Ferguson’s backroom staff including Mike Phelan and Rene Meulensteen (which would have meant that Man Utd paid them compensation at that time). In addition, the backroom staff that Moyes appointed are also likely to be moved on (if they haven’t been already), with Steve Round, Jimmy Lumsden and Phil Neville (and possibly Chris Woods) facing the sack. This will also mean that the club will have to pay compensation to them.

Some interesting names have been thrown into the hat as to who is being lined up for one of the most prestigious jobs in football (Van Gaal, Simeone and Klopp being the early front runners). Clearly, should the incumbent manager’s contract with his existing club not have expired, compensation will be due from Manchester United to such club. This could amount to a significant payment.

In addition, some of the players that Moyes has signed – as mentioned above, Marouane Fellaini being the notable flop – may be moved on by the new manager if they’re not fancied by him. Therefore, Man Utd may have to cut their losses and sell such players at a reduced value (see Andy Carroll when Brendan Rodgers took over the Liverpool hot seat from Kenny Dalglish).

Clearly, we cannot ignore the cost to the club of failing to make the UEFA Champions League. Revenue for the 2012/2013 season from the Champions League can be summarised as follows:

  • Base fee for group stage: €8,600,000
  • Group match victory: €1,000,000
  • Group match draw: €500,000
  • Round of 16: €3,500,000
  • Quarter-finals: €3,900,000
  • Semi-finals: €4,900,000
  • Losing finalist: €6,500,000
  • Winning the Final: €10,500,000

A large part of the distributed revenue from the Champions League is linked to the “market pool”, the distribution of which is determined by the value of the television market in each country. For the 2012–13 season, Juventus, who were eliminated in the quarter-finals, earned nearly €65.3 million in total, of which €20.5 million was prize money, compared with the €55.0 million earned by Bayern Munich, who won the tournament and (of which  €35.9 million was prize money).

Then there is the sponsorship and merchandising deals. There are very few clubs in the World that benefit from Man Utds goodwill and status. They are one of the three biggest clubs in the World (along with Barca and Real Madrid) and, whilst lack of success this year (most notable being the failure to qualify for next year’s European competition) will undoubtedly have the short term effect of reducing the club’s exposure around the world, one bad season is not going to materially alter a sponsor’s desire to be associated with one of the most prestigious clubs around the World.

There is the possibility that existing sponsors were able to insert  Key-Performance Indicators (KPI’s) into their sponsorship deals with the club, which would act to reduce money payable by sponsors should the club fail to reach key performance targets (such as qualifying for the Champions League). This is more likely for the top tier partners who derive the most value from television exposure (such as Nike and other shirt/apparel sponsors).  However, considering Man Utd’s bargaining power, I would be surprised if this was the case for Man Utd’s lower tier sponsors who’s value derived from their association with the club being less contingent on their brand being seen during a Champions League campaign (for example, Aeroflot).

It was almost guaranteed that under Sir Alex Ferguson, United would be challenging for trophies on a yearly basis;  however, with respect to long term effects, one abysmal season may mean that prudent sponsors and other commercial partners will look to insert such KPI’s into their contracts.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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