Protecting Athletes and Performers in Deals with Nascent Companies

The recent Chapter 11 filing by LIV Golf underscores a risk that athletes, performers and their representatives should take seriously when negotiating with emerging leagues: the league itself may not survive. For clients considering opportunities with new or unproven ventures, careful deal structuring at the outset is the best defense against being left as an unsecured creditor in a bankruptcy proceeding, where creditors often face the prospect of receiving pennies on the dollar or being forced to renegotiate on less favorable economic terms.

Key Takeaways for Deal Structuring

• Secure Guaranteed Compensation. Although this point may seem obvious, it is arguably the most important: obtain as much compensation upfront as possible. Signing bonuses, guaranteed pre-paid base compensation and accelerated payment schedules, rather than back-loaded or performance-contingent payouts, can minimize bankruptcy risk. Importantly, any payment received before a filing, even if a portion of it is at risk of being clawed back by the bankruptcy estate, is far more valuable than an unsecured creditor claim.

   

• Require Escrow or Letter of Credit Protections. Consider requiring that a portion of guaranteed compensation be placed in escrow or backed by a standby letter of credit from a creditworthy financial institution. If structured properly, these mechanisms provide the athlete or performer with direct recourse, either by placing the funds outside the league’s bankruptcy estate or by making the financial institution responsible for payment notwithstanding the league’s bankruptcy.

   

• Obtain Guarantees Where Feasible. If the league is backed by a well-capitalized individual or parent entity (such as a sovereign wealth fund or a billionaire investor), seek a personal or corporate guarantee of the league's payment obligations. A guarantee from a solvent party provides a direct claim against the guarantor outside the bankruptcy case.

   

• Negotiate Robust Termination Rights. Contracts should include clear termination triggers tied to the league’s financial health, such as failure to make timely payments, loss of key sponsorship agreements or material adverse changes in the league’s operations or ownership.  While ipso facto clauses (provisions permitting termination solely because of a bankruptcy filing or the debtor’s financial condition) are generally unenforceable under Section 365(e) of the Bankruptcy Code, once a case is filed, well-drafted clauses tied to other indicators of financial distress can allow the athlete or performer to terminate the contract before a bankruptcy case is filed.

   

• Protect Intellectual Property and NIL Rights. Ensure that any grant of name, image and likeness rights is narrowly tailored, time-limited and reverts to the athlete or performer immediately upon termination. Avoid broad, irrevocable IP assignments that could become property of the estate. If the endorsement and NIL agreement is properly structured as a personal services contract, the athlete or performer may be able to prevent the league from assuming or assigning the agreement without his or her consent. This can provide significant leverage if the league attempts to sell assets or reorganize.

Looking Ahead

The LIV situation is a reminder that the allure of a lucrative offer from a new league must be weighed against counterparty risk. Not all risks can be mitigated by contract, but careful attention and planning can place an athlete or performer in the best possible position in the event of a bankruptcy.