Donald Sterling and the Big Bad Cash-Out

News of Donald Sterling’s racist rant to his ex-girlfriend spread through the news, inspiring a wide range of reactions as well as speculation over what would happen next.  NBA Commissioner, Adam Silver, put some of the speculation to bed when he announced on April 29, 2014 that Donald Sterling was to be banned for life from the NBA for his comments which constituted “conduct prejudicial or detrimental to the Association.”  Silver additionally announced that he personally urged the NBA Board of Governors to force the sale of the Clippers.  So how does this all work?

Every owner of an NBA team agrees to be bound by the Constitution and By-Laws of the NBA.  In an unexpected move, the NBA released its Constitution and By-laws to the public and is visible here: http://mediacentral.nba.com/media/mediacentral/NBA-Constitution-and-By-Laws.pdf.  Articles 13, 14, 14A, and 35A of the Constitution are the main ones at play in this issue.  Articles 13, 14, and 14A all deal with termination of an owner’s interest in a team and article 35A describes additional prohibited conduct.  Under Article 13, an owner can have his interest in a team terminated if he willfully violates any of the provisions of the constitution, including Article 35A, which prohibits conduct that is prejudicial or detrimental to the NBA.

Charging and Hearing

Under Article 14, the Commissioner or a member may charge an owner with violating the constitution.  If the Commissioner or a member alleges a charge, the Board of Governors will hold a hearing to determine if it will sustain the charge.  At that hearing, the charged owner has the right to counsel but the constitution is clear that the rules of evidence used in court do not apply.  In addition, the Board can consider ANY evidence relevant to the charged conduct.  In Mr. Sterling’s case, his statements were caught on a recording made by his girlfriend, without his consent.  Many ill-informed people have spoken out declaring that because the recording was obtained without his permission, it cannot be used against him.  However, the NBA constitution clearly states that the Board of Governors can consider any evidence, including the phone call.

At the conclusion of the hearing, the Board will conduct a vote on whether to sustain the charge.  If the 3/4 of the Board votes to sustain the charge, the owner’s interest is automatically terminated unless 2/3 of the Board votes to instead issue a fine to the owner under Article 15.

So what will happen to Mr. Sterling’s Clippers?

Cash-out for Bad Behavior?

Most likely, the Board will sustain the charge and Mr. Sterling will be forced to sell his team.  Under Article 14A, when an owner’s interest is terminated, the Commissioner takes control of the team and oversees the process of selling it.  Any sale needs to be approved by a 3/4 vote of the Board but the Commissioner has broad discretion to determine the selling price and the terms of the sale.  After the sale of the team, the proceeds will be used to fulfill any debts of the team and then the excess is returned to the terminated owner.

In many corporations and partnerships, there is a provision that governs mandatory buyouts of a partner’s interest.  This section will list “trigger events” that will automatically cause a company to buyout a partner’s interest, including involuntary events like death and disability, as well as intentional actions by partners such as fraud or breach of the by-laws.  This section will also specify a valuation mechanism that will set the price that the company will pay for the partner’s interest.  Depending on the type of trigger event, the valuation may be different.  For example, when a partner leaves on good terms, like if he dies, the company will determine the value of the deceased partner’s interest using a mechanism that yields a relatively higher amount.  By contrast, when a partner is kicked out of a company for doing something bad, the company will not want to reward a partner for committing a prohibited act, so it will pay him less for his interest than if he were leaving on good terms.

The NBA constitution does not contain such a section.

Under Article 14A, the price the Commissioner accepts only needs to be “reasonable and appropriate.”  However, as a check on the Commissioner’s power, the Board of Governors must approve any sale of a team.  While many NBA owners have spoken out against Mr. Sterling, the NBA will not agree on a low selling price just to stick it to Mr. Sterling.  Doing so could potentially hurt the valuation of all the other teams in the league as well as hurt the league itself.

Forbes lists the Clippers as the 13th most highly valued franchise with $128 million in yearly revenue and an overall valuation of $575 million.  As bids come in from buyers, the selling price may end up being much higher.  In case you missed it, Sterling bought the Clippers in 1981 for a mere $12 million.  This means that Mr. Sterling could possibly pocket several hundred million dollars as a result of his misconduct.  While getting banned from the league and booted from the NBA will undoubtedly knock Sterling’s ego, it won’t take long for him to find the silver lining.