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Mending broken Hearts

Much is made of how much money is invested within the football world, but when a club is faced with administration, things can go very wrong very quickly. Richard Obank, partner at DLA Piper, examines the recent administration of Scottish club Heart of Midlothian

Richard Obank
Partner, national restructuring team

The takeover of Hearts of Midlothian plc (in administration) was completed successfully on 9 May 2013 after months of speculation that Scottish businesswoman, Ann Budge (dubbed “The Queen of Hearts”) would step in and save the football club from liquidation and extinction. DLA Piper restructuring partners Richard Obank and Graeme Henry and corporate partner John Gallon acted for Bidco, the special purpose vehicle set up for the acquisition, alongside financial advisers, Deloitte LLP.

Hearts was placed into administration in June 2012, with Trevor Birch and Bryan Jackson of BDO LLP being appointed as joint administrators. The appointment was made by the secured creditor of Hearts, BAB Ukio Bankas (ABUB), itself subject to bankruptcy proceedings in Lithuania, following a notice of intention to appoint having been filed by the directors in breach of ABUB’s security arrangements.

In November 2012, a company voluntary arrangement (CVA) was proposed by the administrators. This was approved by the requisite majorities of Hearts’ creditors and members, enabling the takeover to proceed. Had this been rejected, Hearts would have ended up in liquidation and more than likely suffered a similar fate to Rangers Football Club plc. In the case of Rangers, HMRC’s opposition to its CVA led to a deal being transacted in a matter of days whereby the business and assets of the club were acquired by a newco established by Charles Green, while the “oldco” Rangers ended up in liquidation. As a consequence, Rangers were forced to enter the Third Division of the Scottish Football League in time for the 2012/13 season. This was a fate which Hearts was most anxious to avoid, and this meant that it was critical to preserve the existing club entity by means of a successful takeover.

The Hearts deal involved the acquisition of the 79% shareholding held by another bankrupt Lithuanian entity, BUAB Ukio Banko Investicine Grupe (UBIG). This was the only way open to Bidco to make the acquisition given that the remaining minority shareholdings were held by numerous individual fans and a Swiss-based entity. The shareholding situation was complicated by the fact that there had been a fundraising by way of subscription in 2012, prior to the administration, but no shares in Hearts were issued.

Successful completion of the deal involved the bringing together of several interlocking arrangements:

  • Bidco had to be established to provide the requisite funding to Hearts for the release of the existing security over Tynecastle Stadium held by ABUB, as well as to meet the costs and expenses of the administration. Ann Budge had always made clear that this funding was being provided as a form of bridging finance for Hearts with the ultimate aim of enabling the football club to be placed into fan ownership in due course. This meant that a deal had to be negotiated with ABUB and its’ Lithuanian advisers for the release of its secured interests.
  • A deal had to be agreed with Foundation of Hearts (Fanco), the fan organisation created by Ian Murray MP and others for the eventual acquisition of Hearts from Bidco, whereby fan contributions would be injected into Hearts on completion of the acquisition by Bidco. Over time, Fanco would have the opportunity to participate in Bidco’s loan arrangements with Hearts and, subject to satisfaction of various conditions, acquire a majority shareholding.
  • A deal had to be agreed regarding the acquisition by Bidco of the 79% shareholding owned by UBIG despite the fact that Hearts was heavily insolvent and the shares having no intrinsic value. Coupled to this was the fact that Hearts was subject to The Takeover Code and, once the acquisition was completed, Bidco would be required to make a mandatory offer to the remaining shareholders under Rule 9, that rule having been triggered as a result of Bidco holding more than 30% of the shares in Hearts.

Given the urgent need for decisions to be made regarding the playing and coaching staff, it was agreed that immediate appointments to the board of Hearts would be made on completion of the acquisition by Bidco notwithstanding the fact that the administrators would need to stay in office. Arrangements regarding the on-going management of football-related matters needed to be agreed to suit the requirements of all parties.

The outcome in the end was the best that could be achieved in the circumstances despite Hearts’ relegation from the top flight of Scottish football. The result means that the existing entity has been preserved and Hearts can look forward to starting the 2014/2015 season having emerged from administration and free from further sporting sanctions. Heart’s continued success, of course, now lies in the hands of its supporter base and the pragmatic stewardship of its enigmatic new owner, Ann Budge, who has ushered into Scottish football a new era of austerity, a move that has been mostly welcomed amongst fans and the Scottish football authorities since Hearts desperately needs a period of stability to rebuild for the future.

The deal was certainly challenging given the various dimensions and regulatory requirements. However, it should serve as a useful precedent for, very unusually it has to be said, any future takeover of an insolvent listed football club.

Posted on 9th June 2014 by



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