The Court of Arbitration for Sport (CAS) has rejected Crystal Palace's appeal against their demotion from the Europa League to the Conference League over multi-club ownership (MCO) rules.
UEFA's Club Financial Control Body (CFCB) ruled last month that Palace were too closely linked to Lyon.
Palace's appeal had three strands: the CFCB's decision was unfair and unjust, against Forest being elevated to the Europa League, and against Lyon's participation. All three were rejected by CAS.
Nottingham Forest are the beneficiaries, promoted from the Conference League to play in the Europa League. Palace must enter the Conference League in the playoff round later this month, when they will play the losers of the Europa League tie between Fredrikstad and FC Midtjylland -- the second leg is being played on Thursday.
Palace qualified for the Europa League by beating Manchester City in the FA Cup final in May, but seven days later Paris Saint-Germain's victory in the Coupe de France final meant Lyon moved up from the Conference League to the Europa League.
If two clubs are in violation of the MCO regulation, the team that finishes higher in the league will play in the European competition. Even though Palace (12th) won the FA Cup and Lyon (sixth) only qualified on a technicality, the league placing alone determined the right to play.
It all came down to the shareholding of John Textor, through Eagle Football Holdings Limited, who had a controlling interest in Lyon and 43.9% of Palace. The Premier League club argued that Textor had no say in the running of Palace, but regulations relating to decisive influence forbid any party from holding more than 30% of the total shareholding in more than one club in the same competition.
Textor last month completed the sale of his Palace stake to New York Jets owner Woody Johnson, but UEFA's rules are determined by a club's situation as of March 1.
A CAS statement said: "After considering the evidence, the Panel found that John Textor, founder of Eagle Football Holdings, had shares in CPFC and OL and was a board member with decisive influence over both clubs at the time of UEFA's assessment date.
"The Panel also dismissed the argument by CPFC that they received unfair treatment in comparison to Nottingham Forest and OL. The Panel considered that the UEFA Regulations are clear and do not provide flexibility to clubs that are non-compliant on the assessment date, as CPFC claimed."
Before this summer, no club had been removed from European competition due to MCO rules, but Palace became the third to be affected by the new stricter application of the regulations which required clubs to be compliant by March 1, rather than June 3 as in recent seasons.
Irish club Drogheda United were scratched from the Conference League due to an ownership conflict with Danish club Silkeborg IF, and Hungary's Győri ETO will take part in the Conference League with FC DAC 1904 Dunajská Streda removed.
Drogheda won the FAI Cup in November, with the Irish league run on a calendar basis. It wasn't until June 1 that Silkeborg qualified for the Conference League -- three months after the new MCO deadline. Drogheda and FC DAC 1904 Dunajská Streda appealed to the CAS, but lost.
Drogheda's appeal was very similar to Palace's, with complaints about the March 1 deadline and "alleged unequal treatment by UEFA." As CAS had already ruled against the Irish side, creating precedent, Palace were always going to face a difficult struggle to come away with a favourable verdict.
Palace and Drogheda would both likely argue that it's unfair to place such restrictions on clubs that usually have no chance of qualifying for Europe.
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When the March 1 deadline approached, Palace had not played their fifth round tie in the FA Cup. For Drogheda, who finished ninth, they did already know they had European football, but Silkeborg (seventh) were not expected to do so and claimed a European playoff in Denmark only after finishing top of the relegation group.
Earlier this year, Liga MX's Club León were removed from the FIFA Club World Cup due to an ownership conflict with fellow Mexican club Pachuca, indicating a change in approach to MCO from football's regulatory bodies.
The decision from CAS comes after Palace triumphed over Liverpool to lift the Community Shield on Sunday.
With the scores locked at 2-2 after 90 minutes, Palace prevailed with a 3-1 win in the shootout to lift their second piece of silverware in the space of three months.
Palace chairman and co-owner Steve Parish, speaking after his team's win at Wembley, said the south London club would look for any alternative solutions should the verdict not go their way.
"If we don't get the right outcome, then we will have to look if there's any steps after that," Parish said.
Information from PA contributed to this report