Blackpool & The Oystons: Game Over, Surely
The court case between the Oyston Family and Valeri Belokon over Blackpool FC is over, and it was very bad news for the much-hated club owners. Here’s Gavin Saxton with a rundown of what’s been going on in court.
In a devastating judgement, issued on Monday, Owen and Karl Oyston, father and son, were ordered to pay £31.77 million to VB Football Assets – the company formed by Valeri Belokon to take a stake in Blackpool FC in 2006 – in order to buy out their involvement with the club. This followed an increasingly bitter dispute between Belokon and the Oystons, going back to 2011 when major disagreements arose as to the running of the club, particularly with regard to the use of its finances following the bonanza of a season in the Premier League. The rift thus generated also exposed a further dispute about the nature of Belokon’s investment.
Ultimately, all these points had to be decided this week by The Honourable Mr Justice Marcus Smith. And when it came to the crunch, his full 163 page judgement decided in favour of Belokon on almost all points of substance. Of the Oystons and their various advisors, and their cavalier approach to the use of Blackpool’s assets, he was politely damning in a way that sometimes only a judge can be.
Where that leaves the football club remains to be seen. The judgement acknowledged that this could have a serious effect on them, but ultimately decided this was not grounds to withhold justice from VB Football Assets. Meantime the Oystons – long accused of having asset-stripped the club – will come under even greater pressure from those trying to force a change of ownership.
Up until 2006, Blackpool was 95% owned by a company called Segesta, which was in turn 97% owned by Owen Oyston. The remaining shares were owned by small shareholders who played no part in the court case. (Note that, while Karl Oyston was Blackpool’s chairman throughout the period in question, the judge was clear that his father was the man with the financial muscle, and who called the shots. Reference to Oyston through the remainder of the article thus refers to Owen, unless otherwise specified.)
After suffering a loss during 2005/06, and in need of a fresh injection of funds, a deal was agreed with Belokon, a Latvian banker to whom Oyston had been introduced the previous year, to purchase newly issued shares – thus in June of that year Belokon, through VB Football Assets, paid £1.8 million for a 20% stake in the club. He also gave the club two loans – one at the time and another the following April – for a combined £2.7 million, giving a total investment of £4.5 million. Belokon’s contention was that he had an unwritten “gentleman’s agreement” with Owen Oyston that these loans would be converted into a further 30% shareholding in the fullness of time, giving him a 50% stake, and that in the meantime he would be treated equally as joint owner. This was disputed by both Oystons and by the various other lawyers and advisors who made up Team Oyston.
However, the arrangement seemed to work passably well until at least 2010, at which point Blackpool won the Championship play-offs and were accordingly promoted to the previously undreamt of riches of the Premier League. They spent a single season there, but the revenue this gained had a dramatic effect on the club, before the disputes as to how to use that money caused the major rift between the parties.
The full judgement is available here and makes for interesting reading, but I’ll attempt to summarise the major issues below.
The “gentleman’s agreement” and the disputed ownership
Oral agreements are notoriously difficult to prove, and since even by Belokon’s own account there was nothing put in writing, and no other witnesses to the conversation, it looked a long shot to prove his contention that his shareholding was to be increased to 50% in due course. However, the judge preferred the evidence of Belokon on this point, and in doing so he was meticulous in unpicking the trail of documentary evidence from the time.
It was clear, from various bits of contemporary correspondence, that the initial proposal was for Belokon to buy a 50% stake, for £4.5 million. Oyston was keen for this to go ahead, but there was a major sticking point – Blackpool’s accrued accounting losses, which amounted at that stage to a little over £10 million. Such losses can be carried forward, and thus offset against tax at some future point when the company should make a profit – indeed this is what eventually happened, a few years later, following the club’s season in the sun. But in 2006, the prospect of the club ever turning such a profit and being able to make use of these tax losses was remote.
More likely, from Oyston’s perspective, was that he might be able to make use of them at some point in one of the other companies within the Oyston group. This is potentially legitimate, such losses can indeed be transferred between companies within the same group – however, there are strict controls on the circumstances in which they would be able to do so. In particular, it would only be possible if Segesta were to retain at least a 75% stake in Blackpool. Nor are these rules so easy to bypass as to simply grant someone a future option in shares – if such an option, on being taken up, might ever drop Segesta below that 75% threshold, then its mere existence is already sufficient to prevent the transfer of the tax losses, even without that option ever being exercised.
Finding a way to get round this stumbling block caused some discussion between Oyston and his advisors, without reaching any obvious resolution. What happened instead, as noted above, was that Belokon’s £4.5 million investment was split between a 20% share purchase, and two loans. These loans, as the judgement notes, made no commercial sense in isolation, not only being interest free but it not being clear whether they actually need be repaid at all without certain conditions being met. If Oyston’s contention that Belokon had simply changed his mind about buying the larger stake were true, then he and his team were effectively left having to argue that he was then able to obtain the loans on such absurdly favourable terms through his brilliant skill as a negotiator. The judgement found this implausible and thus arrived at the conclusion that these loans only made sense as part of a wider agreement which existed over and beyond what had been put down in writing.
Furthermore, while nothing was put in writing at the time, Justice Smith noted that some years later, when Belokon on more than one occasion raised the issue of his shareholding, Oyston simply deferred or deflected the question, rather than respond with the surprise of someone who had no knowledge of any such arrangement.
For all these reasons, the judgement deems that such an arrangement existed, and goes on to treat Belokon (through VB Football Assets) as an equal shareholder.
The issue of “unfair prejudice”
As chance would have it, Blackpool’s promotion to the Premier League more or less coincided with an adverse judgement against Segesta in a tax tribunal pursued by HMRC, which was going to cost them a few million. The timing, thus, seemed perfectly fortuitous, and within days Oyston was suggesting to Belokon, during a meeting at the Dorchester Hotel, that they each take loans out of the football club. The minutes note that Belokon, and his other appointed director Normunds Malnacs, were “non-committal”. It quickly became clear to Oyston that, while his own correspondence shows barely disguised glee at the prospect of being able to use the club’s windfall, Belokon was not of the same mind, and was looking to leave the money in the club in the hope of consolidating their position in the Premier league.
The paper trail here becomes a little confusing as to the various amounts Oyston considered to be owed to or by his various companies (Segesta, Zabaxe, Protoplan), but one of the important points stressed in the judgement is that, from this point on, the Belokon / Malnacs axis were excluded from much of the critical correspondence related to Oyston’s plans to disburse the money. The efforts of some of Oyston’s associates to cover their backs and pass the buck on this fact led to some faintly comedic exchanges in court, such as Rod Dyer here being cross-examined by Fraser Campbell for VB Football Assets:
(Campbell): Isn’t it odd that an email which is about the interrelated transaction between [Blackpool FC], Segesta and Owen Oyston, isn’t copied to the man who the Respondents are keen to emphasise was at the time the club’s finance director [Malnacs]?
(Dyer): I think the point I was trying to make was that would be a matter for the Blackpool Football Club board, so that would have been a matter for the chairman to circulate it then on to the directors or discuss it with the directors.
(Campbell): You were the company secretary, Mr. Dyer, weren’t you?
(Dyer): I was.
Karl Oyston, for his part, had noted to his father at the time:
I agree on the whole and think we may overkill if we share too much information so would advise less is best. Don’t forget I currently have signatory control over [Blackpool FC] finances so can transfer money to Segesta for building work or whatever you require. Let’s for once not over egg the pudding?
Accordingly Malnacs – now effectively operating as Belokon’s man on the ground, and reporting back to him – was repeatedly frustrated in his efforts to object to various large payments that now proceeded to leave the football club’s account, or even to get any information about them, finding out about one multi-million pound payment to Segesta only after it had already been paid.
Ultimately, the judgement focuses on four payments made to Oyston’s companies Segesta or Zabaxe, between September 2010 and February 2012 – totalling over £24 million – which had either not been agreed, or had been actively objected to by Belokon and / or Malnacs. The status of some of these payments was not always clear, and a couple of them were at some stage reclassified. But even if they were to be treated as loans, there was little or no documentation to back them up and it was clear that the alleged terms of repayment – at Oyston’s “total discretion”, by his own evidence – could hardly be claimed to be commercially sensible for Blackpool FC, taken as an independent entity. The last of the four payments was for £11 million and was initially referred to as “director’s remuneration”, before being reclassified as a payment to Zabaxe in respect of past services – either way the judgement describes it as “essentially gratuitous”.
These four payments, along with further spending of £2.5 million which the judge was unable to conclude was used for the benefit of Blackpool FC, were judged to be “disguised dividends”, amounting to £26.77 million which Oyston had taken out of the club in such a way that he would avoid having to pay any similar dividends to other shareholders – most obviously, Valeri Belokon.
Unsurprisingly, in view of all this, the judgement deemed these payments to amount to unfair prejudice against other shareholders.
The question of relief.
Having decided in favour of Belokon on most points, the question of what to do about it was not straightforward. Justice Smith considered ordering the company to be reconstituted properly to reflect the correct shareholding balance, but there were several obstacles, the last and final of which was the revelation that Belokon had been convicted (in his absence) of money laundering in Kyrgzstan, which would preclude him from holding a directorship in English football henceforth. Instead, the Oystons were ordered to buy out Belokon’s interest. Even this was far from straightforward – football clubs are not like other businesses, and the valuation of it varied wildly according to what method was used and what point in time was considered. in the end, Justice Smith decided that Belokon should simply be repaid his initial £4.5 million stake – plus, in view of his adjudged 50% shareholding, an amount equivalent to the disguised dividends which had been paid out to Oyston or his companies, ie £26.77 million, giving the total of £31.77 million. (Plus costs, naturally.)
The Oystons were refused the right to appeal, though they can still apply to the higher court for that right, and may yet do so. Though I’m not a lawyer, I suspect that the first major part of the judgement – the conclusion that Belokon / VB Football Assets be treated as a 50% shareholder in view of the gentleman’s agreement – is more likely to be challengeable. Probably for this reason the judgement is very careful to stress, in the later discussion of unfair prejudice, that the subsequent payments and conduct of the Oystons would still amount to unfair prejudice regardless even if Belokon were only a minority shareholder, and thus regardless of the earlier part of the judgement (though it would presumably have a bearing on the level of compensation required).
Where this now leaves Blackpool is anyone’s guess. The Oystons have had their assets frozen pending such time as they can propose a payment plan, but Belokon has indicated he might yet be amenable to negotiation. Meantime, the Oystons’ credibility – such as they had – is entirely shot. While Belokon and Malnacs, in particular, had been found to be credible and reasonable witnesses, here’s Justice Smith’s view of Karl Oyston:
He was an argumentative witness, who gave speeches rather than answering questions. I found him generally incapable of answering a question straightforwardly. He had a marked tendency, not to give evidence, but to advocate. This was not aided by the fact that his actual recollection of events was extremely poor. Although, therefore, I consider that he sought to tell the truth as he saw it, he was an unimpressive witness, and I cannot place very much weight on his evidence.
And while his father may have been less pugnacious…
Like Mr. Karl Oyston, his evidence to me contained substantial elements of advocacy, and many of his answers to Mr. Green Q.C.’s questions were long and basically unresponsive to the question being posed. Mr. Oyston also showed a capacity for embellishing his evidence with detail which appeared nowhere in his witness statement. I am quite sceptical as to the evidential worth of such embellishment.
And the judgement is even more damning of some of the others involved with the club, as such auditor Ian Cherry, who is described as being “in the pocket” of the Oyston side. “No auditor, properly having regard to his responsibilities, should have placed himself in this position.”
But if this case, and the judgement, shines some light on the inner workings of Blackpool, and some insight into the grubby world of football finance in general, it should be borne in mind that this case arose only incidentally. Although the breakdown in relations between the parties involved arose because of the disputed payments after 2010, it was only because of the lack of clarity over the shareholding agreement that the case ever came to court.
But for that, Oyston / Segesta would presumably have had to be more careful. And if it weren’t for that need for funds in 2006, they might still have held full control of the club – in which case paying themselves such massive dividends from the club’s assets – without having to pretend the payments were for anything else – would have been perfectly legal and above board, whatever fans might think of it. There are of course instances at numerous other football clubs where exactly that has happened, without any such recourse to law as chanced to be available here. Oyston’s mistake was not to take heed of one illuminating piece of advice from one of his lawyers (in relation to a proposed change to the club’s Articles of Association – another bone of contention which I have not covered here):
Ideally, it would be preferable to have [VB Football Assets] in agreement on the changes to the articles – technically, the articles can be adopted without their consent. However, unlike the other minority shareholders, they may have the funds to look at a possible action for unfair prejudice (as previously advised).
A prescient warning, as it turned out. But the implication, presumably, is that a smaller or less well-resourced shareholder could have been stitched up with impunity.
Blackpool fans, eager to be rid of the Oystons, have welcomed this week’s verdict – and I can’t help but agree with that. But no one should forget that this case only came to court at all to protect the interests of one major and wealthy shareholder against another – and very much not because of any particular concern for those little people. Least of all, fans.