Digital Business15.03.2022 Newsletter

E-sports and corporate law: structures and investment opportunities

E-sports competitions are booming: they reach millions of viewers worldwide and, as the prize money increases, so does the professionalism of the teams. This makes the rapidly growing market interesting for investors - there is already a lively battle for market shares and players. Below, we provide an overview of legal forms of organisation and the opportunities and limitations for investors.

Legal organisation of e-sports teams

Organisers of e-sports tournaments or leagues do not specify any requirements for the legal organisation of the teams (also called "e-sports organisations" or "clans"). These are therefore basically free in how they organise themselves. Depending on the goal of the respective e-sports organisation and the degree of professionalisation, however, their organisation under corporate law is not insignificant. In principle, therefore, all forms of corporate law provided by German law or the law of other countries are conceivable for e-sports organisations.

One option is the organisation as an association/club (“Verein"). Unlike traditional sports clubs, however, this is not stipulated for e-sports on the basis of association structures. Furthermore, economic considerations often play a role in e-sports, which means that organisation as a non-commercial association in the sense of Sec. 21 German Civil Code [Bürgerliches Gesetzbuch - BGB] often does not come into consideration. For associations that want to include e-sports as a division, there is also the risk of the frequently awarded non-profit status being revoked, which can have a negative impact on taxes.

GbR may unwittingly be created

A civil law partnership (Gesellschaft bürgerlichen Rechts - GbR) can be created when several players join forces to participate in e-sports tournaments or events together. This also applies if they do not explicitly organise themselves under corporate law.

Since a GbR can be formed verbally and by implication, there is a risk that such a GbR can also be created without the knowledge of the parties involved. The partners of a GbR are equally liable for the liabilities and losses of the partnership with their private assets. Another problem with the GbR is that all partners are jointly responsible for the partnership’s management, unless otherwise agreed (Sec. 709 (1) BGB). Depending on the size of the GbR, it can be paralysed by cumbersome decision-making processes.

Advantageous corporate forms

A possible form of organisation is that of a corporation (Kapitalgesellschaft) or limited partnership with a corporation as its general partner (Kapitalgesellschaft & Co. KG). As of a certain level of professionalisation, these forms are recommended. The legal forms of an entrepreneurial company (Unternehmergesellschaft - UG) or a limited partnership with a private limited company as general partner (GmbH & Co. KG) offer many advantages over a Verein and GbR: for example, the management can also be transferred to external persons, the liability of the partners is limited and the opening for investors is considerably facilitated.

In a GmbH & Co. KG, the liability for the limited partners is limited to the amount of the contribution, the general partner (the GmbH) is liable with its own assets. Since the GmbH only has to have a minimum share capital of 25,000 euros, liability can be limited in this way. Investors can participate, for example, by acquiring limited partner's interests in the GmbH & Co. KG. The liability is then limited to the amount of the contribution made. The limited partners participate in the profits of the partnership on a pro rata basis. The same applies to a UG: here, however, the nominal capital is not 25,000 euros, but just 1 euro.

Investment in e-sports organisations

Due to their structure, e-sports organisations are particularly attractive to investors if they are organised as corporations. There is no need for a prior spin-off of the professional teams, which is now a common feature in traditional sports. There is also no superordinate umbrella organisation like the FIFA in soccer, nor is there a separate (sports) jurisdiction like the International Court of Arbitration for Sport ("CAS"). However, this lack of regulation is both a curse and a blessing: precisely because of the freedom of investment, this has already led to conflicts of interest in competition and poses the risk of distortions of competition.

Multiple ownership arrangements in traditional sports

For several years now, we have seen in traditional sports like soccer that investors may be interested in investing in multiple teams. This allows synergy effects to be achieved, especially in the training and further training of soccer players. This becomes problematic when these teams have to compete against each other.

An evident example is certainly that of the Red Bull Group, which holds shares in the soccer clubs RB Leipzig, FC Red Bull Salzburg and New York Red Bulls, among others. The UEFA's regulations provide that no natural or legal person may have control or influence over more than one club that participates in a UEFA club competition. The participation of RB Leipzig and FC Red Bull Salzburg in the UEFA Champions League 2017/2018 was nevertheless permitted and ultimately also confirmed by CAS. It was assumed that the existing shareholdings did not convey the required level of influence.

Multiple ownership arrangements in e-sports

In e-sports, probably the most famous scandal to date occurred in 2014 regarding the game Counter Strike: Global Offensive, in short: CS:GO. The iBUYPOWER team, which was an extremely successful team at the time, intentionally lost a match against the NetCodeGuides team, which was considered to be clearly inferior. The team members had placed bets on this match result through an intermediary. One of the involved players of the iBUYPOWER team was also a co-owner of the opposing NetCodeGuides team. A consequence of the scandal was the lifetime suspension of the players involved.

There was also considerable criticism in the late 2010s regarding the involvement of the company RFRSH Entertainment. The company had already invested in several CS:GO teams, including the Danish team Astralis, which has been successfully participating for years in, among others, the professional Major League for CS:GO. However, the company did not confine itself to just supporting the teams, but simultaneously organised its own tournament series, in which Astralis, among others, competed by foregoing other tournaments.

Since there is still no association structure, individual game producers or competition organisers have taken it upon themselves to preserve sporting integrity and thus the attractiveness of e-sports. To this end, so-called multiple ownership arrangements are being introduced with increasing frequency. In principle, these rules are intended to prevent or make multiple participation more difficult for individual investors and players in order to avoid conflicts of interest in competitions.

The game publisher Riot Games, for example, has banned the possibility of multiple ownership for the official professional league of its own game League of Legends (LoL). Thus, the official LEC Rulebook (Lol European Championship) contains a far-reaching regulation: team managers of an LEC team are not entitled to hold an "interest" in more than one team at the highest level of the professional e-sports LoL game classes. Both the term "team manager" and "interest" are to be understood broadly - any direct or indirect interest of a team owner, co-owner, director or other manager counts. 

Similar regulations can be found for CS:GO at the Star Ladder Major 2019 tournament in Berlin. This required both players and teams to pledge that they have no business ties with any other participating player and/or team. The same regulation was also stipulated for the ESL One Rio Major 2020.
The consequence of violating the rules is regularly the exclusion of the team in question from the competition, which is tantamount to a total economic loss.

Watch out for sustainable investments

The organisation of e-sports teams under corporate law depends to a large extent on the objectives pursued. If external third parties are to be included as managing directors or investors, it is advisable to organise the team as a Kapitalgesellschaft or Kapitalgesellschaft & Co. KG. Vereine and GbR are more interesting for the amateur sector.

To ensure competitive integrity is observed, the hurdles for investment opportunities in e-sports teams are increasing. Investors should make forward-looking and sustainable investments. Because of the unusual structure of e-sports teams compared to traditional sports, this is difficult and must be handled with particular care, for the value of a team is determined solely by its marketing potential.

Unlike traditional sports clubs, e-sports teams do not have significant fixed assets such as stadiums or training facilities. Once again, the marketing opportunity crucially depends on the team's success and the e-sportsmen involved. This is true not only as far as their individual skills are concerned, but also regarding their prominence and social media presence. The risk of failing with an investment is increasing. To prevent already setting the stage for failure with the actual investment decision, the introduction and adaptation of multiple ownership arrangements needs to be constantly monitored.

 

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