The Athlete Stock Exchange Part II: The Duties of Athletes to Shareholders

by Kyle Ohlenschlaeger

Nima Tahmassebi recently wrote on this blog an interesting post on a recent deal between Houston Texan’s running back Arian Foster and Fantex Brokerage Services, in which Fantex will be selling a 20% equity share in Mr. Foster’s future income. This was an excellent post that highlights some of the risks and rewards that are associated with an investment in Mr. Foster. It gave me pause, however, to consider the ramifications this deal may have on Mr. Foster’s future life and business decisions.

First, the initial public offering of these shares are undoubtedly the purchase and sale of a security, as shareholders will be making an investment of money in a common enterprise with an expectation of profits arising solely from the efforts of others, namely Mr. Foster. In general, corporate officers and directors owe both a duty of loyalty and a duty of care to their shareholders. Mr. Foster would undoubtedly fall under the broad scope of these requirements, as he will most likely be viewed as a corporate officer because of his discretion in determining his future earnings. The main concern going forward then, would be Mr. Foster’s duty to act in the best interests of the corporation.

Generally, decisions by corporate officers fall under the business judgment rule, a safe harbor for decision-makers that takes into account the fact that corporate officers know what is best for a corporation. As a result of this rule, corporate officers are not always required to take the best financial deal available at a certain time if there are other factors that could make the deal better in the long run. However, another principle rule is that officers cannot take a deal solely for the reason that it benefits them in a personal capacity while causing detriment to the shareholders.

This is the problem I see with Mr. Foster’s contract with Fantex. For those of us who pay attention to professional sports contracts, we know that money is not always the deciding factor for a player and whether or not they will sign with a particular team. For example, in July of 2010, basketball phenom Lebron James decided to sign with the Miami Heat despite the fact that the Cleveland Cavaliers were offering him significantly more money. This is because he felt the prospects of winning championships with Miami were higher than with Cleveland. This decision would probably fall under the business judgment rule because Lebron could foresee higher future earning potential if he won a championship based on larger endorsement deals.

However, another recent example is more troublesome. In December of 2003, baseball pitcher Andy Pettitte signed with the Houston Astros despite leaving about $7.5 million on the table by way of an offer by the New York Yankees. This decision came down to the fact that Mr. Pettitte’s home and family were located in Houston, and he wanted to be closer to them. This decision is much harder to justify under the business judgment rule, as there were lower prospects of winning a championship, as well as lower prospects of gaining new endorsement contract, as Houston is a much smaller market than New York.

Arian Foster currently lives in Houston with his wife, Romina, 4-year old daughter Zeniah, and 4-month old son Khyro. He is currently signed with the Texans through 2016, and will become a free agent following that season. It is safe to say that by that time he will have pretty strong ties to the Houston area. What happens however, if the Texans at that time offer him a significantly lower contract than another team, say the New England Patriots, located in Boston, Massachusetts. If Mr. Foster wants to take the contract with the Texans to stay close to his home, will he be violating his duties to his shareholders? To take this a step further, what if Mr. Foster wants to retire from the game and spend time with his children? Is that option taken away because he is required to maximize value for his shareholders?

These are all interesting questions as we enter the world of players being treated as assets. Further, I am sure there are things that can be done within the prospectus offering shares in Mr. Foster that will mitigate some of these future risks. But it still begs the question, is Arian Foster allowed to make decisions that benefit him personally but may have a detrimental effect on his shareholders?