The Florida Marlins recently made news when a profit-sharing deal with Miami-Dade County resulted in zero profits to the county, even though Jeffrey Loria sold his baseball team for about $1 billion more than what he paid for in 2002. In 2009, Loria signed a profit-sharing deal with Miami and Miami-Dade, which gave the Marlins public funds to build the stadium. Under that profit participation arrangement, Miami-Dade had the right to receive a portion of the net proceeds from the future sale of the team. However, when the team was sold last year, the county got nothing, in part because of the particular wording of the net proceeds calculation in the parties’ agreement.
This recent controversy should serve as a cautionary tale for anyone who is advising any company, employee, governmental agency or other participant who is negotiating the terms of a profit participation arrangement in a business transaction (whether participating in the target company’s operating profits or proceeds from a sale event). Of critical importance is how the formula for determining the participant’s percentage share of profits is structured. Profit participation formulas typically provide that the participant has the right to a certain percentage of “net profits” or “net sale proceeds” (or some variation thereof). Herein lies the fundamental difficulty, as a company has lots of flexibility in how it chooses to define what “net” means.
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