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Exclusive: FIA to lose 'Don King' power in F1 flotation

NEWS STORY
19/05/2013

There are more than a few question marks over the planned flotation of Formula One. The most frequently discussed is the legal position of F1's chief executive Bernie Ecclestone who is being sued on both sides of the Atlantic. Then comes the economic climate, which last year nose-dived before the sport's rights-holder, the F1 Group, was originally due to float. Another point which is widely-believed to be a hurdle is that the FIA has a veto over a change of control of the sport. This would suggest that it could prevent the float from going ahead but in fact that is far from the case. As ever in F1, the devil is in the detail.

The veto right was agreed back in 2001 when the F1 Group paid the FIA 206.7m ($313.6m) for the commercial rights to the sport for 100 years. Former FIA president Max Mosley inserted into the contracts a condition which was named the 'Don King clause', after the controversial boxing promoter. The purpose of the clause was to allow the FIA to block anyone who it considered undesirable from taking over F1. It gave the FIA the power to ensure that F1 doesn't fall into the wrong hands even thought it had sold the commercial rights to the sport for an incredibly long time.

The clause is contained in the 100 year contract, which is known as the Umbrella Agreement as Pitpass' business editor Christian Sylt has previously reported. Crucially, the clause is not contained in the Concorde Agreement, the contract which commits the teams to race in F1, outlines their commercial terms and sets in stone the regulations as it is also signed by the FIA.

There is good reason why it is important to point out that the clause is not contained in the Concorde Agreement. The contract expired at the end of last year and instead, the F1 Group now has separate bilateral agreements with the teams committing them to race and outlining their financial entitlements.

If the Concorde Agreement had contained the 'Don King clause' then the FIA would have already lost the power that it grants. Bizarrely, this is exactly what one well-known sports website thought when it wrote an article in January entitled 'Why Formula 1 is hanging in limbo'. This claimed that a meeting had taken place between Ecclestone, Ferrari, Red Bull Racing, Mercedes and McLaren "with the main discussion point being the need for a Concorde Agreement; whether F1 without Concorde - and, by extension, without FIA involvement - is viable. Thus the FIA could effectively lose control of its own championship, which would in future be known not as the 'FIA Formula 1 World Championship', but simply as the 'Formula 1 Championship'."

As Pitpass pointed out at the time, the article failed to take into account the fact that the Concorde which expired at the end of last year was entered into on 5 August 2009 but the previous one expired at the end of 2007. F1 was therefore without a Concorde for all of 2008 and half of 2009 yet the FIA did not "effectively lose control of its own championship" and the sport did not lose the FIA from its title.

The circumstances under which F1 would lose the FIA from its title are explained in the prospectus for the flotation of F1. It reveals that F1 would have a lot more to worry about than just losing three letters from its official name.

First let's take a moment to review what we are talking about here. In a nutshell, the company which runs F1 and is led by Ecclestone, gets its rights from the FIA. As it states on page 145 of the prospectus, "the FIA owns the World Championship and has granted us the exclusive commercial rights to the World Championship until the end of 2110 under the 100-Year Agreements. Consequently, the full title of the World Championship is the 'FIA Formula One World Championship'" So under what circumstances would F1 lose the FIA's rights and what would happen then?

Page 37 of the prospectus states that "our rights under these agreements can be terminated by the FIA if we materially breach the relevant agreements (subject to certain cure rights), undergo an unpermitted change of control, interfere with certain of the FIA's rights under the 100-Year Agreements or experience certain insolvency events. If our licence under the 100-Year Agreements was terminated in accordance with its terms or the FIA or another person successfully challenged the validity of that licence (or the 100-Year Agreements as a whole), it could cause us to discontinue our operations."

So, if the F1 Group were to lose its rights it wouldn't just lose the FIA from its title but it may not be able to run F1. As the prospectus states, "it could cause us to discontinue our operations." So what could cause this to happen?

As the prospectus states, one circumstance could be if the F1 Group " breach the relevant agreements" which is no great surprise. The same goes with most contracts - if you don't stick to the clauses in them then you lose your entitlements. Another circumstance is if the F1 Group "interfere with certain of the FIA's rights under the 100-Year Agreements." Again, that needs little explanation - the FIA has entitlements under the contract and if the F1 Group obstructs them then it could lose its rights.

The third circumstance under which the F1 Group could lose its rights is if it experiences "certain insolvency events." In other words, if it goes bust the FIA can withdraw the rights because it would clearly be an unfit owner.

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