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March 22, 2010

Future Shock

Why Players Can't Be Owners

by Kevin Goldstein

Author's Note: The piece was written on Saturday, more than 24 hours before Mauer signed his eight-year extension with the Twins. Nonetheless, it remains a fun bit of research, and at some point in the next 12-24 months, the article will still apply, with a quick search-and-replace of "Pujols" for "Mauer" and "Cardinals" for "Twins."

My favorite part of this job is talking. Every day, be it via the phone, instant message, text messages, or even Skype, for those stationed internationally, I'm talking baseball with people who are seeing baseball, and I still feel like I'm learning something new every day. What I learned last week, though, required a little research.

I was on the phone with a team official, and after going through the actual work stuff (players he'd seen in spring, some 2010 draft notes), we just started talking, casually and off the record, about general baseball news, and Joe Mauer's potential contract extension with the Twins came up. We both agreed that Minnesota might not have the pure resources monetarily to match potential offers from big spenders like the Yankees, Mets, and Red Sox, so staying with the Twins was really more a personal choice of Mauer's than anything else.

"What if the Twins got a little creative, though?" asked the official.

"What do you have in mind?" I asked.

"I don't know, offer him $18 million a year and three percent of the team," he said.

That was followed by a long pause. "Can you even do that?" I asked. "Honestly," said the official, starting to laugh, "I have no idea."

Luckily, that's where rules come in, and for whatever reason, as people know from my coverage of the Pedro Alvarez draft debacle, I like going through rules and talking to lawyers. The first thing to look at is Schedule A of the current collective bargaining agreement, the "Uniform Player's Contract." This is the building block for any player's deal, and all contracts are subject to the rules therein. Rule 4(c) makes things fairly clear regarding this matter.

Interest in Club

4.(c) The Player represents that he does not, directly or indirectly, own stock or have any financial interest in the ownership or earnings of any Major League Club, except as hereinafter expressly set forth, and covenants that he will not hereafter, while connected with any Major League Club, acquire or hold any such stock or interest except in accordance with Major League Rule 20(e). 

Fairly cut and dry really. A player can't have interest in a team. But what about the exception at the end regarding Major League Rule 20(e)? This is where things get difficult. The official, public major-league rules really only cover the game itself, but unfortunately, the game's inner-working rules are not made public. Luckily, another team official, who was interested in the hypothetical situation once I shared it with him, came through in the clutch.

Rule 20(e). WITHIN CLUB. No manager or player on a Club shall, directly or indirectly, own stock or any other proprietary interest or have any financial interest in the Club by which the manager or player is employed except under an agreement approved by the Commissioner, which agreement shall provide for the immediate sale (and the terms there of) of such stock or other proprietary interest or financial interest in the event of the manager or player's transfer (if a player or playing manager) to or joining another Club. A manager or player having any such interest in the Club by which the manager or player is employed shall be ineligible to play for or manage any other Club in that League while, in the opinion of the Commissioner, such interest is retained by or for the manager or player, directly or indirectly.

According to our historical expert, Steven Goldman, these rules were originated in the late 1920s, all because of Hall of Famer Rogers Hornsby. As a player manager with the Cardinals, Hornsby was given some shares in the organization. At a point later in the contract, Hornsby had worn out his welcome with the Cardinals and was traded to the Giants. At that point, Commissioner Kenesaw Mountain Landis stepped it and forced Hornsby to divest himself from the Cardinals, as playing for one team while owning interest in another was a clear conflict of interest. Hornsby quickly agreed to sell his interest back to the Cardinals, but St. Louis offered him well below the actual value of the shares while insisting it was cash poor. The situation then forced all of the National League to contribute in buying out Hornsby, and in reaction to that less than ideal situation, these rules were born.

 Still, Rule 20(e) provides a significant amount of gray area here. Players can't own an interest in the team, unless they get special approval from the Commissioner, while also requiring the deal to have mechanics in place where the player's ownership is sold should he play for another team. Even in the case of Mauer, this would be a highly unlikely scenario, but nonetheless it was a fun trip through the rulebooks.  

Kevin Goldstein is an author of Baseball Prospectus. 
Click here to see Kevin's other articles. You can contact Kevin by clicking here

26 comments have been left for this article. (Click to hide comments)

BP Comment Quick Links

khaulotte

My thought. As a CPA, I am infinitely interested in whether something could be "structured" here. For example, if I were to offer Pujols a contract I would offer him the following:

$15M Cash/Year + $10M deferred (with payout starting in say 2025 or so). Then, for the deferral I would provide the option for Pujols (only available starting in 2025 or when Pujols is no longer a "player") to convert his deferred money based on a 2010 club valuation (say the Cards are worth 500M with 500M shares outstanding at 2010 so shares are worth $1/share). Pujols would then benefit from any ownership appreciation which one would expect would fully offset any time value of money concerns and would allign interests without breaking the MLB code)... and the Cards could avoid the cash drag related to Pujols contract...

Mar 22, 2010 08:55 AM
rating: 3
 
ostrowj1

I think the main point of the rule is the conflict of interest that arises when a player with an owner's share (actual or implied) gets traded. If Pujols were traded, he could conceivably be in a position where his actions can strongly affect the value of the Cardinals. Maybe, as an aging Red Sock, he pulls a Bill Bucker, allowing for the Cardinals to win the World Series? The value of the Cardinals franchise increases, allowing him to cash in on the "stock options" when he retires.

Mar 22, 2010 10:54 AM
rating: 0
 
khaulotte

Understood - The work around for that though is a full no-trade clause along with a requirement that the option is only open if Pujols is a Cardinal - at the date of any trade the option ceases and Pujols must take the deferred money....

Mar 22, 2010 11:08 AM
rating: 0
 
ostrowj1

Yes, but I imagine that would be a big pain... all the contingencies to work around. Imagine how hard it would be to trade him.

Mar 22, 2010 11:14 AM
rating: 0
 
khaulotte

Agreed - I think it just comes down to whether the cash flow from an owners perspective mitigates the legal pain. Essentially Pujols wants to earn a return on his performance commensurate with what he provides on the field. The Cards don't want to invest $25M/year in a guy who could go Eric Chavez on them (god forbid) and ruin them for a decade. At some point you would think some form of ownership equity (bastardized as it may be) would connect the two parties...

Mar 22, 2010 12:36 PM
rating: 0
 
Richard Bergstrom

In a similar vein, I remember some argument over Curt Schilling's Red Sox contract because of a clause that gave him money if the Red Sox went to the World Series. Apparently, contracts can only be tied to personal performance not team performance. Similarly, if a player was given a contract that somehow exchanged deferred money for an ownership stake, that might affect how they perform on the field. Then, considering how often baseball franchises change ownership and players change team, it would probably complicate things even more. Interestingly, none of these factors seem to be a concern when attendance clauses are in players contracts.

I'm sure there would be some way around it. I wonder if there's a way to write a contract that would give players the option of an after-baseball career as a coach or manager or special assistant or something. Then, as a separate contract for that later position, work in the ownership clause. It'd be a nifty way to play a payroll game too.

Mar 22, 2010 11:58 AM
rating: 0
 
Schere

That would be an awfully valuable conversion option! And fair valuations of ballclubs are not easy to come by.

Mar 22, 2010 16:56 PM
rating: 0
 
marjinwalker

Hmmmm. So Managers and coaches are covered by the CBA? Are they allowed to pay dues in and get to vote on MLBPA matters? I always thought they were not unionized, but the language of Rule 20(e) seems to suggest otherwise.... Or is Rule 20(e) not part of the CBA?

Mar 22, 2010 09:06 AM
rating: 0
 
Scherer

It is Major League Rule 20(e), i.e. part of the rules governing MLB itself and not part of the CBA.

Mar 22, 2010 10:39 AM
rating: 3
 
Brian Kopec

Does anything prevent a team from doing business with a company owned by a player? Why couldn't Pujols own a food vending company or something like that, and then negotiate his playing contract in combination with some kind of interest for his company?

So, you sign Pujols to a $300 million deal and give a $100 million contract to his company to provide vending services at the stadium. Just an admittedly poor example, but one worth considering.

Mar 22, 2010 09:07 AM
rating: 0
 
Jack G

I'm sure this is addressed in the CBA, otherwise the Yankees would be well below the luxury tax threshold--because Derek Jeter would be making the veteran minimum and doing commentary on YES for $20M a year

Mar 22, 2010 09:17 AM
rating: 10
 
Sparky's Pitch Fork

Why don't the Cardinals set up a Special Purpose Vehicle ("SPV"), that will be transferred to Pujols upon the filing of his retirement papers, that houses outstanding options/warrants on the Cardinals organization?

There are other issues that need to be addressed. Just an idea.

Mar 22, 2010 09:45 AM
rating: 0
 
Bob

See the 1890 Players' League, a league in which the best players in baseball partially owned their own teams. It should have, and would have, lasted a lot longer had Albert Spalding not duped them into thinking that his far inferior National League was making more money that year.

Mar 22, 2010 09:18 AM
rating: 0
 
Softy Electric

I believe this rule was used in reverse in the late 70's / early 80's on Ted Turner when he, fed up with the Braves' performance, took over as manager briefly. After some pretty short period of time, someone in the NL president's office pointed out 20(e) prevented Turner from appointing himself manager.

Mar 22, 2010 09:50 AM
rating: 5
 
ScottyB

I was going to ask about Turner, as well. KG, any thoughts?

Mar 22, 2010 12:36 PM
rating: 0
 
Richard Bergstrom

Back when that rule was written, it would've been a lot easier for a player who owned stock in the club to get managers fired and teammates traded.

I also wonder if there might be an aspect tied into the ban on gambling. It's still a conflict of interest ('I own the team, so I better play!' kinds of arguments.

Mar 22, 2010 10:44 AM
rating: 1
 
Michael
(736)

I thought (but this is not my expertise) that federal labor law prohibits an employee covered by a collective bargaining agreement to also have an ownership interest.

Mar 22, 2010 12:20 PM
rating: 1
 
ostrowj1

Excellent point... Even if it is not a law, is seems like something that should be frowned on.

Mar 22, 2010 13:14 PM
rating: 0
 
Schere

like shares of company stock? Seems unlikely, doesn't it?

Mar 22, 2010 16:59 PM
rating: 0
 
Michael
(736)

Holding publicly-traded company stock is often a minority, passive interest. That's different.

I don't know the answer but 2 minutes of Google searching led me to http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?court=US&vol=469&invol=490. In 1984, the U.S. Supreme Court upheld the NLRB's determination that close relatives of owners should be excluded from the collective bargaining unit.

What the current position of the NLRB and the courts is, I don't know. I wouldn't assume that a 1984 decision is still good law. I'm just saying that it is a worthy issue to raise, whether federal labor law would prohibit someone in the collective bargaining unit from becoming an owner. Maybe if that happened, the employee's vote would just be excluded from any union elections.

Mar 23, 2010 06:17 AM
rating: 0
 
ofMontreal

I guess we just figured Connie Mack would manage until he died? He was the owner and manager as well as GM of the Philly A's right? And this lasted into the 30's.

Mar 22, 2010 12:24 PM
rating: 0
 
BrettG

If I am not mistaken, there is also a rule that bars owning shares in more than one team. That did not keep the other 29 teams from owning the Florida Marlins. Nor did it keep the other 29 teams from owning the Montreal Expos when Jeffrey Loria wanted a similar deal to John Henry's deal in buying the Red Sox and dumping the Marlins.

Mar 23, 2010 07:59 AM
rating: 0
 
PeterBNYC

A problem we are not considering is- Agents. Their interest is in being paid on the basis of the player's bargained-for compensation. The valuation of the non-cash transfer to a player of an economic interest in a ball club would raise difficult valuation issues for purposes of the agent's compensation, and could lead (anyone believe Boras wouldn't do this?) to a demand for a "transparent" valuation process, which would cause many clubs to spit up. It's very much more complicated than the comments suggest. Also, a player given a partnership interest would receive annually a lot of data in his partnership K-1 that MLB would prefer not be made available, in effect, to the MLBPA. Lastly, have no illusions, in the old phrase, "There's nothing so limited as a limited partner of George Steinbrenner". Likely a source of friction with player and agent, because the general partner has no obligation, other than the law of fiduciary duty, to run the partnership's affairs to the benefit of the limited partners, which a player would be. This puts this discussion in the realm of "To every complex problem, there is a simple answer, which is usually wrong."

Mar 23, 2010 09:34 AM
rating: 2
 
Paul Gardner

Thanks for this article, Kevin.
This is something I've been wondering about since the the Tom Hicks signed ARod for 250M. The entire franchise was probably worth less than that at the time.
However, my curiosity was aimed at a more basic element of this discussion: namely that athletes are not workers in the ordinary sense. A worker has an employer who directs the worker to make a product or deliver a service. The MLB player is in many ways the product/service. The owner/employer is largely superfluous.
PeterBNYC correctly points out that agents would be adversely affected by any nontraditional form of compensation - imagine if the MLBPA owned MLB. Then there'd be no use for agents at all.

Mar 23, 2010 18:03 PM
rating: 0
 
Agent007

I don't think the National Hockey League forbids players from owning part of their own team. Mario Lemieux owned part of the Penguins while he played for them (and still owns a part of the team). It would be a great incentive for a franchise player...

Mar 24, 2010 10:23 AM
rating: 0
 
Brian Cartwright

Lemieux's situation was different in that the Penguins gave him a long term contract worth a ton of money. He then retired due to health issues (cancer, bad back), but the team still owed him most of that money. Then the team went bankrupt, and Lemieux was their largest creditor giving him the ability to take over the team as the managing partner. Then he decided to play again.

Mar 26, 2010 03:40 AM
rating: 1
 
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