Big 12 Bylaws on Leaving Are Complicated, Weak
As Texas A&M's official notice of departure from the Big 12 grows closer talk has shifted to what exactly the exit fees may be for the Aggies. And the answer to that question is a Facebook-centric -- it's complicated. That's because the lawyers who drafted the exit provisions of the Big 12 bylaws should be summarily executed. It's incredibly difficult to figure out what is and is not owed under this framework and the payouts aren't very substantial. That's what OKTC has learned from a close examination of the Big 12 bylaws.
That's the reason that Nebraska and Colorado were able to escape the conference by paying pennies on the dollar.
It's possible these bylaw terms were drafted in such a way to be intentionally vague. That is, everyone who read this language recognized that it was impossible to know exactly what was expected of them in the event of dissolution. Hence every school entered into this agreement with the understanding that what they were agreeing to wasn't entirely certain. It's also possible that these bylaws once made sense and then when 12 schools pored over the document and inserted their own language that was supposed to clarify things it actually made it more complex.
Finally, it's possible that no one ever expected for a school to want to leave the Big 12. What isn't in dispute is that these bylaws are a mess.
Texas A&M President R. Bowen Loftin already referred to this bylaws as "confusing," and he wasn't lying. Read the language for yourself and then we'll discuss that language in greater detail after you're finished. But be prepared to read these provisions a dozen or more times to really understand what the heck is going on.
Here are the Big 12 bylaws in full.
Below is the provision that deals with dissolution. (Where it exists, I've added the bold. )
SECTION 3
DURATION
3.1 Membership.
Each Member Institution shall remain a member of the Conference until July 1, 2006 (the “Current Term”) and during any Additional Term (as defined below). Unless a Member Institution gives written notice that it will withdraw from the Conference at the end of the Current Term or the then-current Additional Term to all other Member Institutions and the Conference (a “Notice”) not less than two (2) years before the end of the Current Term or the then-current Additional Term, as the case may be, each Member Institution shall remain a member of the Conference for an additional five-year period after the end of the Current Term or the then-current Additional Term, as the case may be (each, an “Additional Term”) unless such member is a Breaching Member. Each Member Institution agrees that in the event such Member desires to withdraw from the Conference, that it will in good faith give Notice not less than two (2) years before the end of the Current Term or any Additional Term, as the case may be. No Member Institution shall be entitled to distribution of the then-current revenues from the Conference after the effective date of its withdrawal, resignation, or the cessation of its participation in the Conference (the “Effective Date”).
3.2 Effect of Giving Notice.
If a Member Institution gives proper Notice pursuant to Section 3.1 (a “Withdrawing Member”), then the Members agree that such withdrawal would cause financial hardship to the remaining Member Institutions of the Conference, and that the financial consequences cannot be measured or estimated with certainty at this time. Therefore, in recognition of the obligations and responsibilities of each Member Institution to all other Member Institutions of the Conference, each Member Institution agrees that the amount of revenue that would have been otherwise distributable to a Withdrawing Member pursuant to Section 2 herein for the final two (2) years of the Current Term or the then current Additional Term, as the case may be, shall be reduced by fifty percent (50%), with the remainder to be distributed to the other Member Institutions who are not Withdrawing Members or Breaching Members (as defined below) as additional Conference revenues in accordance with Section 2 herein. The Member Institutions agree that such reduction in the amount of revenues distributed to a Withdrawing Member is reasonable and shall be in the form of liquidated damages and not be construed as a penalty.
3.3 Effect of Withdrawal From Conference Other Than by Giving Proper Notice.
If, other than by giving a proper Notice pursuant to Section 3.1, a Member Institution (a “Breaching Member”) withdraws, resigns, or otherwise ceases to participate as a full Member Institution in full compliance with these Rules, or gives notice or otherwise states its intent to so withdraw, resign, or cease to participate in the future (a “Breach”), then the Member Institutions agree that such Breach would cause financial hardship to the remaining Member Institutions of the Conference, and that the financial consequences cannot be measured or estimated with certainty at this time. Therefore, in recognition of the obligations and responsibilities of each Member Institution to all other Member Institutions of the Conference, each Member Institution agrees that after such Breach, the amount of Conference revenue that would otherwise have been distributed or distributable to the Breaching Member during the two (2) years prior to the end of the Current Term or the then-current Additional Term, as the case may be, shall be reduced by an amount that equals the sum of the aggregate of such revenues times the following percentages (such sum being the “Aggregate Reduction”); if Notice is received less than two years but on or before eighteen months prior to the Effective Date, 70%; if Notice is received less than eighteen months but on or before twelve months prior to the Effective Date, 80%; if Notice is received less than twelve months but on or before six months prior to the Effective Date, 90%; or if Notice is received less than six months prior to the Effective Date, 100%.
After such Breach, none of the revenues that otherwise would be distributable to a Breaching Member shall be paid to the Breaching Member until the aggregate amount so withheld (the “Withheld Amounts”) equals the Aggregate Reduction; thereafter, all revenues that would otherwise have been distributable to the Breaching Member shall be so distributed. If the Withheld Amounts are less than the Aggregate Reduction, then the Member Institutions acknowledge and agree that the Conference shall assess such Breaching Member an amount that equals the difference of the Aggregate Reduction less the Withheld Amounts, and the Breaching Member agrees that on or prior to the Effective Date it shall repay to the Conference such amount from revenue that previously had been distributed to such Breaching Member. The Withheld Amounts and any such repayment of the difference of the Aggregate Reduction less the Withheld Amounts shall be distributed to the other Member Institutions who are not Withdrawing Members or Breaching Members as additional Conference revenues in accordance with Section 2 herein. The Member Institutions agree that such reduction in the distribution of revenues to a Breaching Member is reasonable.
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Okay, what do we know?
1. You're supposed to give two years notice on withdrawal.
Clearly that isn't happening with Texas A&M. It also didn't happen with Nebraska and Colorado. My guess is that one reason Nebraska and Colorado got out cheaply was because they provided notice they were leaving prior to July 1, 2011 when a new five-year window opened. Could there be an argument that no payment is owed at all because of the requirement of a new five-year contract beginning in conjunction with the fact that the contract language in the additional term is predicated on the final two years when a team wouldn't be there to receive any money? (Read on to the end for why that legal theory could apply). I think so. So, in fact, did Nebraska's chancellor who said this upon settling his school's claim with the Big 12:
"Nebraska chancellor Harvey Perlman said he still believes he had a strong argument against giving up any money.
'I'm also cognizant of the risks associated with litigation. What I think is the law may not turn out to be the law,' he said. 'I'm disappointed, as an academic, that my curiosity about the legal claims won't be resolved. But when you look at everything, I think it made sense in this setting to get this behind us and avoid the risks of litigation.'"
Certainly the Big 12 believes that as well, it's why the league ultimately settled with Nebraska for $9.25 million and with Colorado for $6.86 million.
2. For some reason the Big 12 bylaws require a rolling five-year committment instead of a consistent committment to the league.
It would be interesting to know why this was decided. As is, the five-year additions make a clunky deal that much clunkier. Why? Because why do you need a five-year contract to begin anew each five years unless you also have the ability to choose against entering a new five-year agreement? That's what Nebraska and Colorado both argued.
Again, what's the benefit of five-year extensions as opposed to an existing term? The only reason I can think of is that some of these schools aren't allowed to bind themselves contractually for longer than five years. That seems incredibly stupid, but that's the only reason I can see for the added complexity of the bylaws.
If that was the only issue, you'd have a bad section of the deal, but you could live with it. The bigger issue comes when the payouts are spelled out.
3. No school is paying the full penalties for leaving because these bylaws are worded so poorly.
Again, maybe this was the intention. Maybe all 12 schools looked at this language and said, "Hell, we really won't pay much of a penalty to leave so we're not binding ourselves that much, anyway. Let's sign."
Or maybe no one actually did the math and realized the ticking time bomb in this deal that is explained in number five.
I'm far from an expert in math, but this year the Big 12 distributed $145 million to its member institutions. That's around $14.5 million per school. So the way I'm reading this contract the most the Big 12 could withhold from a member institution is around $14.5 million a year. (This number will grow, but not excessively).
But here's the rub, look at how this penalty provision is drafted, it requires a payment for a period when the school's are going to be gone already. (Again if I'm wrong in this let me know, but I don't think I am).
"if a member gives proper notice of two years, 50% of two year revenue" = $14.5 million (that's 50% of two year revenues)
"if Notice is received less than two years but on or before eighteen months prior to the Effective Date, 70%;" = $20.3 million
"if Notice is received less than eighteen months but on or before twelve months prior to the Effective Date, 80%;" = $23.2 million
"if Notice is received less than twelve months but on or before six months prior to the Effective Date, 90%"; = $26.1 million
"or if Notice is received less than six months prior to the Effective Date, 100%" = $29 million
Are you starting to see why Nebraska and Colorado got out of the Big 12 a year in advance of when most initially expected? The reality is that under the Big 12's bylaws the penalty for leaving doesn't really change very much based on when you provide notice once you miss the two-year window.
And it's never enough money to prevent someone from leaving.
This should be ominous indeed for whoever comes into the Big 12 next.
4. What will Texas A&M pay then?
Given that A&M has yet to provide notice and doubtless would like to be a part of the SEC for the 2012 season, it's clear that A&M would fall under this provision of the agreement: "if Notice is received less than twelve months but on or before six months prior to the Effective Date, 90%;"
So A&M is facing a penalty in the neighborhood of $26.1 million. Given that Nebraska and Colorado ultimately settled for much less than they would have been expected to pay, A&M could negotiate its way down even further. Trust me, there are even more aggressive negotiating positions A&M could take under these bylaws. I think they'll settle for something in the neighborhood of $12 million.
How do I get to this number? Nebraska and Colorado paid 47.6% of their contractual payout. If A&M did the same with its projected $26.1 million that would come to $12.4 million.
5. But if A&M really wanted to play legal hardball, it could argue that it owes nothing, not one dime.
How?
Look back at the liquidated damages provision of the bylaw for the true ticking time bomb: "each Member Institution agrees that the amount of revenue that would have been otherwise distributable to a Withdrawing Member pursuant to Section 2 herein for the final two (2) years of the Current Term or the then current Additional Term, as the case may be, shall be reduced by fifty percent (50%)."
Okay, that means the payment amount is actually going to come from 2015 and 2016, the final two years of the "Additional Term."
Only, you guessed it, A&M will be gone by then so it won't receive a dime of revenue from the Big 12 in 2015 or 2016.
So if you apply the above language, 90% x 0 = 0.
Uh oh.
Now, I don't think the legal argument would win -- most judges would probably apply the intended liquidated damages clause holding that the purpose of a liquidated damages clause is actually to have a liquidated damages clause -- but it's definitely yet another flaw in a tremendously flawed Big 12 agreement. And could a judge not be willing to give the benefit of the doubt to a huge entity that made this drafting mistake? Of course. That's a massive flaw in drafting.
A flaw that's so gigantic the Big 12 might not want to sue under the contract for fear of losing and providing notice to all members that the exit fee for the next couple of years is $0.
Regardless of the legal position adopted by A&M the money is not going to be very significant to the long range future of the Aggie program.
While these figures may not be exactly correct -- again, I'm far from an expert in math and already had to correct them once -- they're illustrative of a larger problem in the bylaws, namely, there isn't very much that keeps any Big 12 school in the conference.
If Texas or Oklahoma wants out, there's absolutely nothing that can keep either school in place. The buyout is a pittance. And if either school wanted to follow the Nebraska/Colorado argument come 2016, they could opt out of the agreement completely and argue they didn't owe any penalty at all. If you're a potential tenth school coming into the conference, that's worth knowing, no by law is currently in place that restricts anyone's movement.
So in summation, the Big 12 is still a dead conference walking. Only this dead conference can't even extract much of a penalty when the next member decides to follow Texas A&M and bolt for greener pastures.
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Read more of OKTC's expansion coverage here:
SEC expansion candidates and discussion of why league won't expand in existing markets.
Why ESPN Is Dead Wrong: FSU and Clemson have no shot at the SEC.
How ESPN is Complicating Texas A&M to SEC
North Carolina and Duke, the SEC's expansion homerun
ESPN's contract issues complicate all realignment