There are four words that should be a reality check for every band that takes on the music industry: the Beatles broke up. Despite all efforts to maintain an “all for one, and one for all” approach when you are making music, the fact remains that at some point, your entertainment entity will be restructured, whether that involves a shuffle of personnel or the actual dissolution of the band. A number of business issues will arise when it comes time for you to break up the act.
This discussion could apply to a number of entertainment businesses. Production companies, songwriting teams, and studios are all similarly affected when personnel, art, and ego shake-ups occur. Throughout this column, I'll refer to all of these entities collectively as an act, so fill in your particular business structure where necessary.
IS IT REALLY OVER?
The first issue to address is determining if the members of an act really intend to break up. Taking apart a business entity is tricky stuff, and the decision to do so should be objectively thought through rather than be based purely on emotion.
Decide among yourselves whether the occurrence of certain actions — such as skipping rehearsals, meetings, recording sessions, or gigs — is enough to be interpreted as a desire to break up the act or whether those actions merely signal the need for better and increased communication. The phrase “I quit!” shouted out by a bass player during a particularly frustrating recording session doesn't quite have the finality of a letter signed by all parties stating that they wish to break up the act.
Many legal battles have been fought over whether a member of an act voluntarily resigned or was forced out against his or her will. The terms of a member's separation from a band help determine whether that person is entitled to a buyout of the business (sometimes worth hundreds of thousands or even millions of dollars) or is left out in the cold with no piece of the action in present or future earnings. Once it is agreed that breaking up is indeed the best course of action, then a variety of issues should be carefully reviewed.
Breaking up an act is much like divorce. From beginners to multi-Platinum-selling superstars, one of the major issues of a breakup is the property settlement. Deciding what to include in a property settlement, what the value of each asset and liability may be, and how to split it all up can range from being very simple to very complicated.
First of all, it is a good idea to separate real and personal property from intellectual property. Real property and personal property can be identified and have their value determined relatively quickly. Intellectual property's potential value, on the other hand, is trickier, because intellectual property usually does not have a dollar figure attached to it until it generates royalties.
Real property is real estate and any rights attached to real estate (such as a lease or a lien). Personal property includes the hard assets owned by an act such as money, equipment, and vehicles. Identifying cash in the bank is a pretty straightforward matter, provided there are no questions regarding accounting methods, loans made to members of the act, or unpaid bills. Issues may arise when it comes to equipment, because many acts comingle their gear when putting together a band or a studio. I've seen individual members of some acts each “take back” what they originally brought into the act and then split up the equipment that's left; others will treat the gear they brought in as being of equal value and then split up all the equipment. This can be done by all members agreeing on dollar figures for each piece of equipment and taking out their individual shares in pieces or by selling all of the equipment and splitting up the money.
Take into account that the price of real estate, audio, and studio equipment can fluctuate. A rehearsal or recording warehouse that is co-owned or leased at a long-term rate may be worth more or less after an act breaks up because of market rates or rental to another business. A recording console or vintage amp may be one of those rarities that has increased in value over the years or, conversely, ends up worth much less at current street rates than the original purchase price. For this reason, enlisting the aid and appraisal of an expert is advised when splitting up hard assets.
Potentially more valuable than real property and personal property rights are intellectual property rights. Trademarks, copyrights in songs and masters, clients lists, who owns or administers these rights, and the future earnings generated from these various forms of intellectual property should all be considered when breaking up an act.
The name of an act is a trademark and is the act's most valuable asset. When an act breaks up or restructures, a major issue to consider is whether the act's name should be extinguished completely, should not be used by anyone, or should continue to be used by any of the individual or collective members. Alternatively, the issue of how a member who leaves the fold may use the act's name is sometimes hotly contested. I recently spoke to a promoter who almost had to cancel a concert because it featured an artist who left a big-time act, promising not to use the band's name in any manner. It turned out to be a legal no-no to advertise the artist using the phrase “formerly a member of —.” Many of the “reunion” or “revival” acts that tour around the world today contain only one or two members of the act that made the name famous, but those are the members who were able to obtain ownership of the name and the right to use it as performers.
Ownership of master recordings and musical compositions is another major issue when it comes to breaking up an act. With the millions of dollars made in the licensing of masters and songs, it is important to establish which of the various shares of these valuable assets, if any, belong to the members of the act, particularly those members who are leaving an act. Along with the ownership rights (thus the right to participate in future fees and royalties), it is important to consider which parties are allowed administration rights, meaning the right to seek uses, make deals, and collect money in connection with the masters and songs.
As with real estate or equipment, the valuation of intellectual property rights can sometimes require an expert. Obviously, the bigger and potentially more valuable the name and the intellectual property, the more this is an issue. For example, an unreleased song or master written by U2 is likely to be more valuable than an unreleased song or master by the corner band.
Even after an act has broken up, contracts that the members have entered into may still have value and need to be factored into the breakup proceedings. Say, for example, that a guitarist leaves his or her band, but the band has gigs that have already been contracted. Should the guitarist come back for the gigs? Should he or she compensate the rest of the band for lost wages if the gig is canceled because the act is no longer the same as when contracted?
Additionally, if a band with a recording contract breaks up, royalties will still be earned, even though the band is no longer in existence. It is wise for the members of the act to have a mechanism in place to collect and disperse those royalties.
Members of an act can't be concerned with only themselves when breaking up; they need to take into account contracts that they have made with third parties, as well. Many times an act will make a contract with a third party “individually and collectively,” so even though an act might break up, the individuals may continue to have obligations with third parties. Recording contracts and management contracts often use these individual and collective provisions as an incentive for an act to remain together even though the members want to split up.
Liabilities that the act may have with third parties need to be factored into a breakup, too. Liabilities including existing debts, long-term contracts such as leases, and promises to perform or deliver product are all taken into account when determining what an act is worth when it breaks up.
THE GOLDEN PARACHUTE
After the total value of an act is determined, if the act is completely dissolving, the parties involved must split up their assets and create a method to collect and disperse any future earnings. Sometimes acts designate a member or a third party as a trustee to carry on the business affairs of the act as long as there is business to be conducted. If members remain that will carry on the business, they will need to craft a cash buyout or “cash plus future earnings” buyout of the individuals leaving the act.
Whether you are in a local garage band or a superstar act with years behind you, many of the potential sticky issues of a breakup can be avoided if a partnership or similar agreement between all members of your act can be crafted early into the relationship, anticipating and addressing as many of these issues as possible. Provisions such as determining when and how individual members can be added or leave, how to value property, and procedures to dissolve the act are all important factors and are likely to be more objectively dealt with well before tempers and frustrations leading to a breakup flare.
Even though it is a very real business issue packed with emotion, the blow of breaking up an act can be softened somewhat with some planning and communication between the parties. Hopefully, you won't be singing the breaking-up blues when it is time to move on.
Michael A. Aczonpractices entertainment law and is a member of the music-business faculties of San Francisco State University and Diablo Valley College in Northern California. He is still crying over the breakup of the Beatles.