After a decade of financial misery, it appears that Valencia CF’s problems are finally over. The foreign takeover by Singaporean billionaire Peter Lim will be concluded in the upcoming weeks, and the construction on the new stadium will resume after five years on hold due to a lack of money. On 3 June Bankia, the Spanish bank that “saved” Valencia CF in 2009 by providing a loan of €81 million, gave the green light for the takeover. However, appearances can be deceiving. Indeed, Valencia CF has been the subject of numerous Spanish Court decisions since March 2013, the latest dating from 22 May 2014. The cases concern a guarantee given by the local authorities and whether this guarantee should be relied upon since Valencia CF is incapable of repaying its debt. Meanwhile, the European Commission announced that it will soon reach a final decision regarding the formal investigations into alleged State aid measures granted to the club. Strangely enough, the Spanish Courts are showing little interest in the pending Commission Decision and Mr Lim seems to be ignoring it as well. True, EU institutions have so far never sanctioned public authorities of Member States for granting aid to football clubs, but the evidence in this case is so damning that it will be difficult to overlook. Our aim in this blog-post is to disentangle the legal complexity of a case fought both at the national and the European level.  

Saving Valencia CF with public money

The aid measure has its origins in 2009, when Valencia CF, aiming to reduce the clubs total debt of €596 million and continue the construction works on a new stadium, decided to sell new shares for a total capital injection of €92 million. Unfortunately, club members only subscribed €18 million in shares. The majority of the shares were acquired by La Fundación del Valencia Club de Fútbol, (a foundation especially created by the club for this purpose) becoming majority shareholder of the club (70%) for the sum of €75 million. The money was loaned by BANCAJA, the largest financial institution of the autonomous region of Valencia. The loan was later increased to €81 million in November 2010. The Fundación and BANCAJA also agreed that the revenues for the old “Mestalla” stadium, which was for sale, would go to the bank. Furthermore, on 26 August 2009, the Instituto Valenciano de Finanzas (hereafter: IVF[1]) had issued a guarantee on the controversial loan.[2] In case of a default by the Fundación, the IVF was to pay back to the bank the outstanding amount. In return, the IVF would receive an annual premium of 0.5% and the Fundación is prevented to selling shares without the previous consent by the IVF.[3]

In September 2012, Bankia (the new name of the bank following a merger in 2010) was forced to restructure the deal it had with the Fundación. Bankia was suffering heavily from the financial crisis and, after being rescued by the Spanish Government, was forced to decrease its financial debt by increasing its liquidity and reducing its real estate portfolio. Thus, Valencia CF was to negotiate the refinancing of its debt, given that the Fundación was unable to repay the loan to Bankia.

By February 2013 the total of Valencia’s debts reached €387 million owed to different creditors, including the €81 million it owed to Bankia. In light of the guarantee issued, the Consell de la Generalitat de la Comunidad Autónoma de Valencia (the local government of the autonomous region of Valencia, also known as the Generalitat) was asked to transfer €4.8 million to Bankia to cover interest payments. Even worse, the Generalitat might have to bear the full debt of €81 million the Fundación owed to Bankia. As a result, the Generalitat would hold 70% of the shares in Valencia CF, thereby making the football club state-owned.[4]

Claiming that the guarantee breached both Spanish and EU law and should therefore be declared void, two club shareholders lodged a complaint against the local government of Valencia.[5] In its judgment, dating from 8 March 2013, the Administrative Court of Valencia annulled the guarantee, arguing inter alia that the operation would not generate benefits for the IVF and that the restrictions placed by the public authorities on the selling of shares by Valencia CF will distort competition.^[6] Finally, the duty to evaluate whether the operation was subject to EU State aid rules had not been complied with.^[7]

This last argument by the Administrative Court is no surprise, in light of the blatant State aid. Indeed, both the press and Members of the European Parliament quickly jumped onto the allegations that State aid in the form of loan guarantees was granted by Spanish public authorities. The European Commission forced by this judgment, press reports and a flood of information sent by Spanish citizens officially asked Spain to comment on these reports on 8 April 2013.[8] After analysing all the information the Commission decided to initiate the procedure laid down in Article 108(2) TFEU on alleged illegal State aid on 18 December 2013. Now that the Commission has announced in its Management Plan 2014 that the final decision will be published in 2014, one can reasonably expect the case to draw to its close.

The strategy of the Spanish Courts: Let’s ignore State aid rules and the Commission

The judgment by the Administrative Court of Valencia was only the first in a whole string of judgments by the Spanish Courts. The most important ones date from 15 November 2013, 19 December 2013, and 22 May 2014. 

Bankia appealed the judgment of 8 March 2013, claiming it should have been invited as a party at the trial. At first, the Administrative Court of Valencia upheld the previous decision annulling the guarantee, but Bankia’s second appeal, this time in front of the Tribunal Superior de Justicia de la Comunidad Valenciana, sala de lo Contencioso (the High Administrative Court of the autonomous region of Valencia) was successful. On 15 November 2013, the High Court, found the judgments by the Administrative Court to be void due to a procedural deficiency. Indeed, as Bankia was not provided the opportunity to present its views at the first trial, the tribunal violated Bankia’s right to be heard. More precisely the High Court considered that the IVF had not informed Bankia adequately when, as a public authority, it had the obligation to do so; Bankia’s own financial troubles and instability were too important for it to be left out of the procedure; and the fate of the football club would be at stake if the guarantee is revoked.[9] Hence, the guarantee provided by the local authorities on the loan was considered legally valid and Valencia CF’s bankruptcy risk dismissed. That the guarantee probably is in breach of EU State aid rules was irrelevant to the High Court.

In response to this latest judgment the same shareholders demanded an injunction that consisted in suspending the execution of the guarantee since it could constitute illegal State aid. Once again the demanding parties won the day and the execution of the guarantee was suspended in a decision dating from 19 December 2013. The timing by the Administrative Court to suspend the execution could not have been better. Indeed, the decision occurred only 24 hours after the Commission announced a formal investigation into the Valencia F.C case, thus, the alleged state aid could have been used as a fitting legal justification to suspend the guarantee. However, strangely enough, the Administrative Court did not refer to the State aid constellation. In the fourth paragraph of its judgment, the Court did recognize that procedural rules were breached including the European procedural rules on State aid[10], but the reasoning used to freeze the guarantee was based on national law. 

Peter Lim appears on stage: the end of all the trouble?

By January of this year, the IVF received a formal offer from Mr Lim to invest €210 million in the club. Mr Lim would, thus, take over IVF’s debt with Bankia. The Valencian government must have hoped for the end of their troubles. Indeed, it appeared that it was only the Commission decision it had to worry about.

But, Bankia, on the other hand, still believed it had a right to compensation by the Valencian government for refusing to execute the guarantee and launched a new civil procedure. In a ruling dating from 22 May 2014, the high Civil Court in Valencia sided with the bank and upheld the validity of the guarantee (yet again). Furthermore, the judge ordered the local government to pay €4.2 million as a compensation for loss of opportunities.[11] To make the legal uncertainty certain, the Valencian government quickly reaffirmed its refusal to pay any compensation to Bankia since it considered the execution of the guarantee as suspended by the Administrative Court.[12]

The ball in the Commission’s Court

From a substantive perspective, the Valencia State aid case seems quite straightforward. Valencia CF is a professional football club engaged in economic activities and should therefore be considered an undertaking under EU State aid rules. The guarantee provided by the local government constitutes an economic advantage for the football club over its competitors, as it is technically shield from the possibility of going bankrupt. The measure is selective, distorts competition towards clubs not enjoying a similar guarantee and is funded by State (more precisely the regional governments) resources. In other words, the criteria of article 107(1) TFEU can be considered as fulfilled. Finally, the measure does not appear to fall under any of the exemptions of articles 107(2) and 107(3) nor under any provisions of the General Block Exemption Regulation. 

It remains to be seen, however, whether the Commission will take an unprecedented action and sanction the local authorities of a Member State for supporting financially a professional football club. The Valencia case certainly provides an outstanding opportunity to do so. First of all, the facts of the case cast little doubt as to whether or not the measure breached EU State aid law. Second, even though the Commission cannot decide the matter in place of the Spanish Courts, any decision will create a guiding precedent hopefully putting a final point to the prevailing legal uncertainty of a long-lasting and protracted legal saga.

[1] The IVF is the Public Entity that  performs the public credit policy of the government of the autonomous region of Valencia

[2] Memoria de Actividades: Institut Valencià de Finances, Informe Anual 2009, page 48

[3] Sentencia N° 103/2013, N° de Recurso 239/2010, 8 March 2013, §5

[4] Ibid

[5] J. M. Bortvalencia, “Creo que Bankia no puede recurrir esta sentencia”, Levante – EMV, 21 March 2013

[6] Supra Nº3, §7

[7] Ibid

[8] Commission Decision State aid SA.36387 – Spain: Alleged aid in favour of three Valencia football clubs

[9] Las Provincias, El Valencia gana tranquilidad al decretar el TSJ que la Generalitat vuelve a ser avalista, 16 November 213

[10] Auto N° 239/2010,  19 December 2013, §4

[11] Iusport, Bankia levanta el hacha de guerra y ejecuta parte del aval del Valencia, 27 May 2014

[12] Las Provincias, La Generalitat «no se plantea pagar nada» por el aval a la Fundación del Valencia CF, 27 May 2014

Editor's Note: Ryan is Assistant Professor at Thompson Rivers University, he defended his PhD at Erasmus University Rotterdam in December 2015. His dissertation examined human rights violations caused by international sporting events, and how international sporting organisations may be held accountable for these violations. 

“Serious sport…is war minus the shooting.” – George Orwell

In May 2016, the Union of European Football Associations (UEFA) admitted the Football Federation of Kosovo (Kosovo) as a member. The voting was close, with 28 member federations in favour, 24 opposed, and 2 whose votes were declared invalid. The practical outcome of this decision is that Kosovo would be able participate in the UEFA Euro championship, and that Kosovo teams could qualify for the UEFA Champions’ League or Europa League.

A few days later, Kosovo, along with Gibraltar, were admitted into the Fédération Internationale de Football (FIFA) as members. This marked the increasing recognition of Kosovo as an independent entity for sporting purposes, with Kosovo’s National Olympic Committee receiving recognition from the International Olympic Committee (IOC) in December 2014.

The admission of Kosovo as an independent competitor in the sporting world has touched off controversy, particularly in Serbia. Kosovo has attempted to assert its independence from Serbia for more than two decades, with a formal declaration of independence in 2008 – a declaration that was referred to the International Court of Justice who found that the declaration was not a violation of international law (I.C.J. Reports 2010, p. 403). The Football Federation of Serbia (Serbia) sought review of UEFA’s decision, and took its case to the Court of Arbitration for Sport (CAS). CAS upheld UEFA’s decision in January 2017 (CAS 2016/A/4602).

The CAS Decision

Serbia’s argument to the CAS was that UEFA violated its own regulations by admitting Kosovo as a member. Other grounds, namely procedural grounds, and an alleged violation of Serbia’s freedom of association rights, were raised. However, the CAS denied Serbia relief on those grounds, and I’ll leave a discussion of those aside in order to get to the decision on the substance of UEFA’s regulations.

The main point of contention in the complaint was the interpretation of the UEFA Statutes Art. 5(1), which deals with the admission of new members:

Membership of UEFA is open to national football associations situated in the continent of Europe, based in a country which is recognised by the United Nations as an independent state, and which are responsible for the organisation and implementation of football-related matters in the territory of their country.

The CAS panel found this provision to be ambiguous based on the reality that the United Nations does not recognise states. Instead, an entity must be a state to become a member of the United Nations (UN Charter, Art. 4(1)). Since the part of the provision at issue, whether or not Kosovo could be admitted since it was not “recognised by the United Nations as an independent state”, was void, how was the provision to be interpreted?

The CAS turned to four principles of statutory interpretation, based on the Swiss Civil Code: the genesis of the law, a systematic interpretation, common practice and understanding, and the ratio (purpose) of the provision. The CAS found the first three principles to be unhelpful, as these principles ultimately uncovered elements that only led to the ambiguity in the first place.

The CAS finally turned to the ratio of the provision. It found that the purpose of the provision was to have one football federation per country, and to limit secessions of football federations only to instances where the secession was supported in a broader political sense. The CAS stated that: “the attempt to mirror the solutions and realities of the political map onto the sporting world makes a lot of sense” (para. 123). The panel also noted that the Olympic Charter and FIFA Statutes defined a “country” as “an independent state recognised by the international community”, and pointed out that Kosovo’s sports bodies had been recognised by the IOC and other international sporting federations under this definition. As a result, the CAS found that the definition of “country” had a common understanding in the sporting community, and it was one that did not require UN membership.

The Gibraltar Decision

Both UEFA’s decision, and the CAS case, have their roots in the late 1990s, but in regards to a territory on the other side of Europe – Gibraltar. Gibraltar is not an independent state, but is a territory of the United Kingdom. It is also a source of diplomatic conflict between the United Kingdom, and Gibraltar’s neighbour – Spain. Gibraltar applied for UEFA membership in 1997. Having had its own football association since 1895, and with the UEFA requirements then only requiring that a UEFA member have its own football association that oversees football in the territory, Gibraltar’s application looked to be a lock. Indeed, the application was initially positively received by UEFA, and looked to be a done deal by the year 2000.

However, UEFA repeatedly delayed making a final determination, in part because of Spanish opposition to Gibraltar’s membership (the English Football Association, for its part, was supportive of Gibraltar). After more than two years, UEFA still had not made a determination on Gibraltar’s membership. Yet, they had received, processed, and approved an application by Kazakhstan to join UEFA after it had left the Asian Football Confederation in 2001. UEFA remained pretty busy during this time, as they changed their rules regarding the admission of new members to UEFA. The new change was the language that was at issue in the Kosovo case – that a new member be recognised as an independent state by the United Nations.

The case was brought before the CAS (2002/O/410), where Gibraltar sought a declaration that its application be considered under the pre-2001 rules that it had initially applied under, and that its application be accepted by UEFA. The CAS agreed with Gibraltar that UEFA could not change its rules mid-stream, finding that upholding such a change would violate a presumption against retrospectivity in regards to substantive laws, and principles of good faith. The CAS ordered UEFA to decide on Gibraltar’s membership based on the pre-2001 rules. After two more arbitrations heard by the CAS in 2006 and 2013, Gibraltar was admitted as a UEFA member in 2013. Gibraltar’s status as a FIFA member was similarly accomplished through CAS decisions.

Sport as a Playground for International Law

With all apologies to this blog’s Editor-in-Chief Antoine Duval, sport is not just a playground for transnational law, but also for international law. Scholars of international relations and international law are frequently surprised with the complexity and the depth of sports’ legal system. But perhaps more surprising is the consistent surprise that sports is more than simply “low politics”, and something that can be safely ignored in light of other areas such as military force, international trade, and the like.

I suggest that a case such as Kosovo’s quest for recognition by sporting bodies does matter for international law and international relations more generally. On the merits, these cases are administrative law exercises, whereby the CAS is merely ensuring that UEFA has complied with its own procedures, and the Kosovo case is a statutory interpretation exercise. However, I think that these cases – particularly the Kosovo case, should help shape our understanding of establishing a state.

There is a debate in international law over when a political entity becomes a “state” – with the attendant rights and obligations. The “constitutive” theory argues that an entity can only become a state when other states recognize it. The “declaratory” theory argues that so long as certain “facts on the ground” are established (usually the Montevideo Convention requirements of territory, population, government, and the capacity to enter into foreign relations), recognition is merely a declaration of what is already the case.

Kosovo is in the midst of attempting to establish its statehood. Currently, 110 UN member states recognise Kosovo. However, Serbia, Russia, and China, amongst others, do not. In establishing its statehood, Kosovo is unlikely to obtain UN membership anytime soon, with two of the permanent members of the Security Council likely to veto any attempt by Kosovo to join.

However, Kosovo appears to be taking a page from the playbook of states that went through de-colonization – not only obtain a seat at the UN, but obtain recognition from the IOC (and other sporting bodies). Next to having a seat at the UN, participation in the Olympic Games is one of the most visible signifiers of statehood. What could a more powerful signal of independence than having one’s athletes march in the opening ceremonies of an Olympic Games, waving the state’s flag, and having its anthem play upon winning a gold medal in front of thousands of people live and billions of people watching from home?

Source: http://www.nbcolympics.com/news/judo-day-2-preview-majlinda-kelmendi-eyes-olympic-history.

If you are skeptical that states care about who participates in international sporting events, Taiwan remains a prime example. Taiwan does not compete as “Taiwan”, or as the “Republic of China” along with its national flag – but instead its athletes compete under “Chinese Taipei”, using a different flag with the Olympic Rings on it. This was as a result of a deal brokered by the IOC and the People’s Republic of China in 1979 to get the People’s Republic of China to participate in the Olympic Games – a deal eventually accepted by Taiwan in 1981.

What cases like Chinese Taipei and Kosovo suggest is that although recognition is important in establishing statehood, it may not be limited to state recognition. While states may be the only organisations that have international legal personality, there are cracks forming in that monolithic conceptualization of international law. It is clear that sporting organizations such as the IOC, FIFA, and UEFA do not have international legal personality. However, they act as global administrative bodies, responsible for the organization of much of global sport. As such, these bodies have the reach and arguably, influence of the UN bodies – creatures of states that have international legal personality.

A real concern over constructing statehood through, inter alia sporting competition is that it may create a “slippery slope”. After all, if Gibraltar – certainly not a state – and Kosovo – questionably a state – can join UEFA, FIFA, or have a National Olympic Committee recognized, what is to stop other entities from doing the same? “Alternative” competitions involving entities that are not recognized as states, such Northern Cyprus, or ethnic groups such as the Sami of Scandinavia or the Romani of Europe, have taken place. Could one of these entities apply to join the international sporting community? The line-drawing by international sporting organisations has thus far proven to be problematic. However, this is a question perhaps best left for future research.

So, in the end, does the UEFA admission and CAS decision make Kosovo a state? Legally-speaking, probably not. Becoming a state entails not only rights at international law, but also obligations. It seems perhaps a stretch to say that a decision by a private arbitral body that oversees a specialized area would be determinative of a highly-contentious issue. However, one step below that is the political question of whether recognition by these sporting bodies helps Kosovo’s claims to statehood. I think the answer is as follows: If you ask the “man on the street” whether Kosovo was a state as Majlinda Kelmendi (the flag-bearer in the photo above) stood on the podium after winning a gold medal in judo at the 2016 Summer Games, or while that man watches the Kosovo team participate in the UEFA Euro and FIFA World Cups – that answer is more and more likely to be “yes”.