Professional Interpretation

Abstract:

Sponsorship is a major source of fund for sports events, but in the meantime it could generate certain risks. Research on risks of sports event sponsorship may provide basis for assessment of sponsors and propose solutions for sponsorship risk protection and management during the events. The Corporate Law Team of Docvit Law Firm hereby presents a brief introduction of sports event sponsorship, analysis six perils therein and offer suggestions for relevant risk aversion.

Interpretation of Sports Event Sponsorship

After years of rapid global development, the scope of sports event sponsorship has expanded from funding for few clubs in popular sports and large-scale mega sports events to supporting more clubs and organizations in individual competitive sports as well as small-scale sports events. Sports event sponsorship is a marketing technique for both the party that offer funds, material objects or services (the “sponsor”) and the sports entity that receives the offerings and rewards with relevant interests ( the “sponsee”) to collaborate on equal terms and encourage the mutual gains. By definition, sports event sponsorship is a special business conduct for the parties involved to achieve respective objectives through the exchange of financial support and reward by means of sports related matters. Such matters include athletes, teams, sports organizations and sports events.

Risks in Sports Event Sponsorship

During the sports events, companies aim to offer sponsorship to raise the profile and reputation, while sports event organizers seek to obtain sufficient funds to bid for, prepare and hold the event through such sponsorship. Sponsorship has become an indispensable component in modern sports events, however, it may carry risks when offering financial support. For instance, the credibility of sponsors may affect the image of associated sports events.

Even so, sports event sponsorship remains heated despite that the amount required for the sponsorship keeps rising. In 2013, the 12^th National Games of China attracted 25 companies to sign up sponsor agreements, reaching a total amount of over RMB 930 million.

In the selection of potential sponsors for sports event organizers, besides the amount of funds offered, the following risks that could be brought by sponsors should also be considered:

1. Financial Risks

The core of sports event sponsorship is the transfer of funds. Thus, the risks related to funds involved should be paid most attention. Financial risks are those existing in activities related to or quantifiable in monetary

terms, mostly caused by the high threshold in assessing the sponsored party.

There are normally two types of financial risks in sponsoring sports events, withdrawal of sponsor and breach of sponsorship contract.

Firstly, withdrawal of sponsor. Sponsors may choose to withdraw from the sponsorship when expected returns are not received in short term due to the lack of strategic planning and risk awareness; or when the funds

could no longer be incurred due to excessive amount beyond the capacity or own financial difficulties of sponsors.

Secondly, breach of sponsorship contract. Sponsors may fail to fulfill sponsorship contracts or only partially fulfill to perform after committing to sponsorship contracts, resulting in that the events could not be carried out

as scheduled.

2. Reputation Risks

Reputation risks are referring to negative impact on sports events due to deterioration in the image of sponsors caused by product quality or brand image scandals in business operation.

The public is believed to be more concerned about the negative impact on the sponsors caused by scandals in sports events rather than the other way around, but in fact it may not be the case. In 2008, Beijing

Organizing Committee for the Olympic Games took every long-term factor in the selection of sponsors on the grounds that the image of Olympics could be harmed if sponsors went bankrupt in recent years. It shows

that sports event hosts may be closely associated with sponsors in public view once sponsorship agreement is signed.

3. Personnel Risks

Personnel risks include the inadequate execution ability of event organizers and ethical issues of relevant personnel. Since sports intermediary market in China is underdeveloped in all aspects compared to its counterpart

in advanced regions, risks may arise in the implementation owing to lack of experience and ethics in relevant personnel.

4. Legal Risks

Breach of contracts has been rather frequent in certain fields related to large-scale sports events in China due to lagged legislative status and insufficient legal protection, which has led to great economic loss of relevant

participating parties in aspects of intellectual property infringement, personality rights violation etc.

Meanwhile, as the organization of large-scale sports events may be slightly different from the generally applied laws and regulations, the gap in the pre-existing understanding of the public could pose potential risks.

5. Competition Risks

Competition risks are comprised of vicious competition and unfair competition between the sponsoring companies.

Sponsors may engage in competition in two ways that may generate certain risks. Firstly, sponsorship management disorder. For example, Ding Junhui, silver medalist of 2010 China Open Snooker Tournament, wore a

waistcoat bearing the marks of Mengiu and Sanyuan (both major dairy manufacturers in China), which was a severely violation of the rights of the sponsor of the event, Sanyuan, and breached the exclusivity principle in

sports event sponsorship.

Secondly, ambush marketing. Companies that have not paid for sponsorship may associate themselves with the actual sponsor for exposure and mislead the target consumers for illegitimate interests.

6. Contractual Risks

In sports event sponsorship, the sponsors may not receive due benefits or returns because of misfeasance or breach of contract of the sponsored parties in the form of subjective or objective non-performance or

contract default.

The inexperience of sponsored party in signing the contract or monitoring the performance of contract could also be detrimental. For instance, in 2006 the British company IPHOX signed a sponsorship contract of 5

years with the Chinese Super League and paid for over € 6 million for the naming right for the first year. But after the season ended, IPHOX hesitated about continuing the sponsorship and failed to incur the funds,

leaving the Chinese Football Association having to access to legal remedies in the end.

Suggestions for Risk Aversion in Sports Event Sponsorship

Regarding the risks stated above, we suggest the following solutions to avoiding them:

1. Improve legislative system and strengthen governmental support

Relevant authority should enhance the legal system and strengthen the enforcement of existing laws and regulations to give necessary elaboration on rights and liabilities of all parties concerned. Sports event organizers could sign separate contracts with each participating party (sponsors, suppliers, etc.) to make clear the respective responsibilities to reduce the its own burden on avoiding risks caused by relevant parties or any other third parties. Government may encourage more individuals and companies to engage in the sports event sponsorship market with preferential policies.

2. Utilize the roles of intermediaries and media

On account of the availability of resource and information asymmetry, intermediaries and media should play a greater role in assisting the communication of the industry. Sports intermediary agencies could utilize the advantages of familiarity in the market and coordinate among athletes, sports organizations, sports event hosts and companies intending to offer sponsorship. The media may maximize the publicity of sports events and cooperate with the hosts and intermediary agencies to effectively eliminate the risks by optimizing resources and monitoring management process.

3. Integrate and establish supplementary marketing strategy

Sports event sponsors should integrate the sports event sponsorship into the entire corporate development strategy and form an overall marketing strategy in advertising, promotion and publicity with a long-term, continuous and suitable approach. Certain risks might be properly managed by careful selection and use of sponsorship means and celebrity effect upon thorough research and appropriate strategy.

4. Reduce the “ambush marketing” in sports event sponsorship

Considering lucrative financial advantages of ambush marketing, companies may be inclined to adopt such approach during sports events. Hence, sports event organizers should pay special attention to ambush marketing and exert pressure on those using such approach by resorting to legal means.

5. Set up sponsorship efficiency assessment system

Assessment system for sponsorship efficiency should be set up to evaluate whether the sponsorship results in expected returns in terms of brand exposure, reach, remembrance, image evaluation as well as sales promotion evaluation in advance, during and in hindsight to timely correct the missteps and eliminate possible loss.

Conclusion

Sports event sponsorship is currently one of the most vibrant fields in China, but has been underdeveloped owing to legislative, policy and technological factors. Overall, sports event sponsorship still bears high risks with lucrative returns, thus companies intending to engage in such activities should conduct prudent preparatory work. The Corporate Law Team of Docvit Law Firm may provide you with suggestions on the risks that may occur in sports event sponsorship and possible solutions through legal research and actual experience gained in a diligent manner.