ON JANUARY 17th shareholders of Liberty Media Corporation, an American firm controlled by John Malone, a billionaire, are expected to approve a transaction that many hail as the sports deal of the decade. In September 2016 Liberty agreed to buy the Formula One (F1) motor-racing franchise from CVC, a private-equity group, for $8bn. F1, which generates annual revenue of $1.8bn, is now central to Liberty’s global plans: in a sign of the importance he attaches to the deal, Mr Malone has installed Chase Carey, a former president of Rupert Murdoch’s 21st Century Fox, as F1 chairman. The main Liberty subsidiary is to be renamed Formula One Group.

The deal has lots of attractions. For F1 it offers a potential solution to the problem of who will take over from Bernie Ecclestone, its 86-year-old impresario. There was no credible succession plan for the man whose wheeling and dealing has long held together the sport and its fractious collection of racing teams. With Mr Carey leading the search, there could be.

As for Liberty, F1 offers the sort of live, exclusive content it needs to lock in audiences that are peeling off to on-demand streaming services such as Amazon and Netflix. The American firm has big plans for F1, including selling race-naming rights, turning each event into “the equivalent of the Super Bowl” and helping F1 overcome its two big challenges: its weak presence in America and its lack of almost any online presence. Liberty will use digital platforms to deepen viewers’ engagement with the sport. The virtual-reality possibilities look particularly enticing.

But F1 may bring Liberty grief as well as glamour. The day after its own shareholders’ vote, the Fédération Internationale de l’Automobile (FIA), the racing sport’s governing body, is expected to give its approval to the deal. That is perhaps unsurprising: Liberty is a reputable buyer. But even if it were not, the FIA has an incentive to give the transaction the green light because of a cut-price share transfer signed in 2013, which gave it a 1% stake in F1 that can only be monetised if F1 is sold.

The transfer all but guaranteed the governing body a big payout in the event of a sale of F1. It puts the FIA at risk of a conflict of interest. And its timing raises questions about whether it was used by F1’s owners as an inducement for the governing body to approve a change of ownership, regardless of who emerged as a buyer. Formula One Management (FOM), F1’s commercial-rights holder, denies any impropriety. The FIA denies any conflict of interest. Liberty refused to comment.

The stake appears to breach an agreement with Brussels that was struck in 2001 when the European Commission closed a two-year antitrust probe into F1. In return for the file being closed, the FIA, whose grand headquarters are on Paris’s Place de la Concorde, undertook to “modify its rules to bring them into line with EU law”. These changes included limiting its role to that of a regulator, “with no commercial conflicts of interest”. To prevent such conflicts, the FIA sold all its rights in the Formula One world championship.

Max Mosley, who ran the FIA from 1993 to 2009, said last year he had queried its purchase of the 1% stake, which he described as “problematic” and “arguably contrary” to the 2001 undertaking. He said the FIA argued the stake was in keeping with the agreement because it was too small to be considered material. He said he was surprised by that argument, because the stake’s value was equivalent to a year’s turnover when he ran the FIA, “and I didn’t see that as ‘de minimis’.”

The transaction is already attracting official attention. Anneliese Dodds, a member of the European Parliament for south-east England (home to several F1-related businesses) has written to the commission several times to air concerns about the sport’s structure and arrangements. Her latest letter, sent last September, called for closer scrutiny of the sale to Liberty in light of the FIA’s stake.

In the rear-view mirror

Some insiders reckon that Liberty has paid a lot for F1 without really understanding it. Greg Maffei, Liberty’s CEO, has admitted he didn’t know F1’s business at all until they started negotiating. The acquisition could cause legal headaches down the road. “They definitely don’t understand the legal and reputational risks,” says one seasoned observer.

CVC—which had itself taken over F1 in 2006—had originally wanted to exit via a stockmarket flotation of Delta Topco, F1’s Jersey-based parent company. But that plan came unstuck thanks to market turmoil following the global financial crisis. The final nail in the coffin was the disclosure in July 2013 that Mr Ecclestone had been indicted by a German court on charges of paying part of a bribe to steer the sale of a 47% stake in F1 to CVC. (Mr Ecclestone settled the case in 2014 for $100m, with no ruling on guilt or innocence.)

It is hard to imagine a successful flotation of a company whose boss faces possible imprisonment. The indictment therefore left CVC with the prospect of having to divest F1 through a sale. This, unlike a flotation, would have required the FIA’s consent. The approval process involves, among other things, performing “fit-and-proper” tests on the suitor.

A document seen by The Economist shows that on July 22nd 2013—just a few days after the IPO-killing indictment of Mr Ecclestone was announced—F1 signed a deal to grant the FIA options on a 1% stake in Delta Topco. These were duly exercised towards the end of that year. A striking feature of this transaction—apart from the timing—was its price. The FIA was being offered a stake with a value of $72m for a mere $458,197.

Crucially, this attractive offer came with a catch: the FIA could only monetise its stake in the event of CVC selling its controlling stake. For the governing body to get its money, a buyer would have to be found, and the FIA would have to approve it. (Liberty plans to buy out all existing shareholders.) This gave the FIA a clear financial incentive to wave through any takeover it was tasked with vetting—and in the process also unlock $3bn for CVC through the sale of its controlling stake. The FIA’s own code of ethics requires all of its “Parties” (including the FIA itself) to “endeavour to avoid any conflict of interest”.

The combination of the timing of the 1% sale and the stipulation that the FIA can only cash out in the event of a takeover requiring its approval also raises questions for CVC and Delta Topco. To some it could look like inducement. Liberty, as a reputable international media firm, was always likely to pass a fit-and-proper test with flying colours. But it wasn’t in the picture in July 2013; it didn’t contact the sellers until later that year. At the time, it wasn’t clear who would emerge as a possible buyer. What if it was a borderline case when it came to vetting—say, an oligarch with a chequered past? Might F1’s owners have seen giving away a 1% option grant for just $458,197 as a price worth paying to increase the odds of approval?

They deny this. In response to questions sent to CVC, FOM confirmed that the share transfer was completed on the terms stated in the document we have seen. However, it says the transfer was “not a deal to ‘sell’ a stake to the FIA at market value, but rather part of a wider deal to obtain the FIA’s commitment to deliver and implement its Concorde obligations through to 2030 in return for a package of financial measures to help the FIA with its overheads, which had increased significantly. The shares awarded to it were from a pool of unissued shares that had been reserved for this kind of transaction, and they were issued to the FIA at the same price as had been paid by other parties awarded shares from this pool, including the executives that are members of Delta Topco’s management equity plan.” (“Concorde” refers to a tripartite agreement—between the FIA, F1 and the teams—setting out the basis for participation in the championship.)

As for the suggestion that the transfer was an inducement to the FIA to approve a sale to a corporate buyer, FOM says “there can be no inference” that this was the case; “no such transaction was contemplated” at the time because Delta Topco was still “contemplating and preparing for an IPO”. It says that the timing of the July 2013 options grant was unconnected to the indictment of Mr Ecclestone. Rather, the deal was “the result of a 12-month negotiation” over renewing the Concorde Agreement.

The FIA said in a statement that there is no conflict of interest on its part with regard to the potential change of control at F1, that it “would naturally be happy to demonstrate this to any competent authority that may so request”, and that its sole concern is the “best interests” of the sport.

Nonetheless, the risk of a conflict of interest at the FIA is something that might concern competition authorities and other regulators. The Liberty takeover was reviewed by a number of national authorities, but was not notified to the European Commission, apparently because it fell below EU merger-review thresholds.

The commission says it is assessing a complaint about alleged breaches of competition law brought by two F1 teams, though this is not specifically related to the takeover. It won’t comment on the undertakings made in 2001 by F1 and the FIA, but it is believed to consider them “unilateral” and the agreement not legally binding—even though it had earlier identified practices it believed to be out of line with EU law. It has noted that a number of sports governing bodies hold stakes in competitions or manage them and that this is not necessarily “problematic from a competition point of view”.

Tussles with Brussels

But there are differences between the typical sport and governing body set-up and the FIA’s relationship with F1. For one thing, the combination of the FIA’s required consent and its potential payoff leave it particularly at risk of bias. Furthermore, it oversees not only F1 but other motorsport competitions too—and it is supposed to treat them neutrally. A commercial interest in F1 gives it an incentive to favour the sport over rival race series, including proposed new competitions that could take business away from F1. This was one of the issues the agreement with Brussels was supposed to deal with.

The commission’s shrugging of shoulders over the FIA’s apparent flouting of its rules stands in contrast to its generally tough stance on such agreements. One possible explanation is that its earlier tangles with F1 in the late 1990s were scarring, evolving into the sort of bruising encounter it may be loth to repeat. At one point the commission was forced to apologise publicly after the FIA’s indefatigable lawyers exposed it as having leaked warning letters to the press. The commission now argues that “governance issues” involving the FIA are best delegated to arbitration bodies and national courts—which have no reason to care about breaches of EU law.

It remains to be seen how much any of this will trouble Liberty, which is zooming ahead with its takeover of a sports franchise it calls “iconic” and “unique”. The media firm has repeatedly disclosed that its takeover needs FIA approval, but has not highlighted the fact that the FIA has a stake in the sport it regulates. An investor presentation listing F1’s shareholders lumps all those holding less than management, with 6.1%, in the “Other” category. It is unclear whether the Nasdaq-listed firm had an obligation to disclose this. (Liberty declined to comment.) Its shareholders will have no reason to kick up a fuss if the takeover goes well. But they will surely start asking more questions if it spins off the track.