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Great Contract Negotiations – Case Study #103

By August 18, 2004sports

One of the first classes you take in law school is ‘Contracts.’ The legendary Professor Kingsfield is sort of the unoffical Patron Saint of this discipline. In law school contracts is much harder than it is in real life. In real life, the thorny problems aren’t mind-bending theoretical problems, but basic problems of gamesmanship and mock warfare.

How can I create a transaction that creates a lot of value for me, but doesn’t require me to do too much? This is the quintessential thought-process of one who is contemplating entering into a binding agreement. Sometimes you can spend too much time thinking about tactics. Sometimes it pays to be just plain lucky. Like Ozzie and Dan Silna, the former owners of the St. Louis Spirits (an ABA basketball team). Remember them?

Probably not, unless you are old like my friend Steve Copley who is from St. Louis and told me the story of how these former ABA team owners struck a brilliant deal that has netted them $100 million dollars over the past 25 years. Here’s the scoop:

After it became apparent that the NBA would only allow four ABA teams to join the NBA, St. Louis owners Ozzie and Dan Silna reached a famous agreement with the other remaining ABA owners. In return for folding their team, the Spirits’ owners obtained the right to 1/7 of any future television money received by the surviving ABA teams (Denver, Indiana, New York and San Antonio) — in perpetuity. In the late 1970’s, the NBA’s contract with CBS was modest in scope. But as the NBA’s popularity exploded in the 1980’s and 1990’s, the league’s television rights were sold to CBS (and then NBC), plus the TNT and TBS cable networks, for hundreds of millions of dollars. Over the past 25 years, the Silnas have collected approximately $100 million from the NBA, despite the fact that the Spirits never played an NBA game. The Silnas continue to receive checks from the NBA on a yearly basis, representing a 4/7 share of the television money that would normally go to any NBA franchise.

Now, that’s a contract worth studying. You know, I don’t know if you are all aware of this, but ‘perpetuity’ is a really long time.


P.S. If you appreciate these kinds of observations, you might want to read this as well.
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