Sponsorship - lessons from Rugby: don't prepare to lose

Recent press reports suggest that the Rugby Football Union’s finances have been hit by a seven-figure blow as a result of the England Sevens sponsor, the somewhat inappropriately named Secure Trading, having gone into administration.

Once again this has highlighted the issues that can be faced by a recipient of sponsorship monies when its sponsor runs out of cash. However, there are various ways in which the sponsorship agreement can be negotiated and monitored to provide some protection to the sponsored party.

Get it right from the kick off

If a sponsor enters into insolvency, the rights of the sponsored party will largely depend on the terms of the sponsorship agreement.

The sponsorship agreement should  include a broadly worded right to terminate immediately as a result of the sponsored party becoming insolvent but where it doesn’t, and where no other obvious breach has occurred giving rise to a right to terminate (eg for non-payment of sponsorship sums which have already fallen due), the sponsored party will need to be very careful in deciding whether it is able to refuse to honour the terms of the agreement, for example on the basis of some anticipatory breach on the part of the sponsor.

In a case where the sponsor has gone into administration – which is designed as a rescue process – there is, of course, a possibility that the sponsor will return to financial fitness. The administrator may, for example, be able to sell the sponsor’s business or continue to trade out of insolvency. A premature attempt by the sponsored party to terminate in this situation could come back to bite it and result in an own-goal with a claim against the sponsored party.

Even the wording relating to sponsorship payments which have fallen due but have not been paid needs to be tight to ensure that a delay in payment of itself amounts to a material breach of contract on the part of the sponsor which entitles the sponsored party to terminate the agreement shortly after the breach. This sounds obvious but is not always the case.

As always, prevention is better than a cure and there are a number of specific ways in which a sponsorship agreement can be negotiated in order to provide some degree of protection to the sponsored party in challenging times.

• In an ideal world all sponsor fees would be paid over to the sponsored party at the outset of the sponsorship term to avoid any risk of non-payment but that is, of course, unlikely to be attractive to the sponsor. It is likely, therefore, that the agreement will have to provide for staged payments during the term of the agreement. Careful thought should be given to the timing and amounts of those payments so as to ensure, as far as possible, that payments are received in advance of benefits being received by the sponsor during the term. This may mean that annual fees are payable on monthly or quarterly basis in advance during the period, perhaps with a larger proportion being paid at the start of the period.

• An express right of termination where the sponsor becomes insolvent (and this should be phrased as the earliest point of financial concern) should always be included. It is of little comfort to the sponsored party if it can only terminate once the sponsor has gone into liquidation since, by that time, it may well have obtained substantial benefits under the agreement without having made payment for them, especially where the next sponsorship fee payment date does not fall due for some months. Without this right being included, the sponsored party’s only option is likely to be to await non-payment of the next instalment of the sponsorship fee and then to terminate for non-payment under any express provisions of the agreement – but that means the insolvent sponsor will continue enjoy the benefits under the agreement.

• Where the sponsor is a member of a larger group of companies it pays to request a parent company guarantee as an added protection for the sponsor although of course, as is the case with the RFU’s sponsor, that will be of no assistance if the entire group is insolvent.

• Even where an appropriate termination clause has been included in the sponsorship agreement it is important that the consequences of any such termination are clearly set out in the agreement. On the sponsor’s side, all sponsorship benefits should immediately cease and it should be required to cease using any marketing or other materials bearing any brands of the sponsored party or otherwise suggesting any sponsorship relationship. Ideally any such items should be delivered up to the sponsored party promptly after termination. There should be no sell-off periods in this situation which might permit the sponsor to continue the sale of merchandise relating to the sponsorship. Any social media activity in which the sponsor might suggest or imply that it is a sponsor should also be prohibited from the point of termination.

• The sponsored party should ensure that it has a right, but not an obligation, to remove all sponsor branding and all references to the sponsorship from any advertising sites or other materials on which the branding or references appear. This may include a right to remove the sponsor’s name and branding from any shirts or other clothing on which it appears. In order to ensure that the sponsored party does not have to incur additional expense in removing sponsor branding, it should be given the ability to continue to display such branding for a reasonable period after termination. It is not going to be practicable, for example, for a sponsor’s name to be removed from team shirts immediately after termination. The sponsored party should also be free to sell-off stocks of products, such as replica shirts, which may bear the sponsor’s name or branding.

• On a practical level, whilst the sponsor is unlikely to produce management accounts to the sponsored party, a constant monitor should be kept of sponsor’s finances to ensure, at the very least, that suitable contingency plans can be put in place in good time if the sponsor fails.

• Change of control and non-assignment provisions are also a consideration. It is not unusual for distressed companies to be sold along with its liabilities or £1.  Where that occurs to a sponsor, without protection, the sponsored party may be in the position of having to accept the new owner.  The new owner could also be financially weak or reputationally problematic for the sponsored party.

Dealing with the new referee – the administrator

Where there is a prospect that the sponsor may trade its way out of insolvency, the sponsored party may be happy to let the sponsorship agreement continue to run, rather than exercising any rights of termination in the hope that the sponsor returns to “match fitness”. A quick and open dialogue with the administrator and other stakeholders is therefore essential.  However, if it is in the best interests of creditors, the administrator could still direct that the sponsor does not comply with its obligations under the sponsorship agreement – which would just leave the sponsored party with a claim in the insolvency (which is not likely to yield a significant return, if any).

Post-match analysis

In these turbulent times even the most apparently secure companies can face unexpected financial difficulties, especially over the period of a long-term sponsorship. It is important, therefore, that any agreement entered into with a sponsor has one eye on the possibility that the financial health of the sponsor may suffer a game-ending blow. Ensuring that the terms of the sponsorship agreement adequately cater for this potential outcome will facilitate a smoother recovery process and save costs in dealing with the fall out of a sponsor insolvency.

Whilst dealing with the implications of a sponsor insolvency, the directors and stakeholders of the sponsored party also need to quickly assess the impact of the absent funds on its own business and its own solvency.  There is often a domino effect in insolvencies as the business food chain suffers – especially where the top of the chain falters. The directors of the sponsored party therefore also have to keep under constant consideration their own statutory duties (and potential personal liability). All in all, the process will start as a scrum but, with guidance, should be able to be managed into a set piece to minimise disruption.

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