The”Advance” To Jackson And Sony/ATV Operating Agreement Conditions
DO YOU REMEMBER WHEN THERE WAS ALL OVER THE PRESS THE DISPUTE OF SONY TELLING THAT MICHAEL JACKSON USED THE ENTIRE ADVANCES FOR PRODUCING THE INVINCIBLE ALBUM AND THAT’S WAS ONE OF THE REASONS WHY THE COMPANY DID NOT SUPPORT HIM, ADDING HE WAS OWNING THEM 200 MILLION?
Many people think that record companies loan money to artists to record their album. Well, there is a big difference between an “advance” and a loan.
An “advance” is a pre-payment of royalties and is also sometimes called a “minimum guarantee”. Advances in the music industry do not earn interest and are not loans. It is a popular misconception that artists are “in debt” to their record companies or writers concerning their publishing. The advance is NOT a “debt”, and it doesn’t have to be repaid. The advance is only “recoupable”, meaning that it is applied against earned royalties.
The artist funds his own album using his own royalties. That means paying for recording cost, the recording studios, paying producers, arrangers, and engineers. The only way the record company can recoup the investment is to sell more records in order to increase the volume of the artist royalties. If the artist doesn’t generate enough in royalties to pay that back, then the record company has to live with that. They can’t pursue the artist personally for un-recouped royalties.
And a good lawyer knows that it’s important for the artist to get as big of an advance on royalties as possible because if he doesn’t get the maximum advance up front, unfortunately, it’s unlikely that he’s going to be in a position of recouping all of the costs.
In addition to the album fund advances to produce the album, over the course of the last 20 or 30 years record companies have added other costs that they consider to advance against the artist royalties. One is video cost. The cost of producing videos are considered advances against the artist royalties. If a contract is well negotiated by your attorney, only 50% of video costs will be recoupable from your artist royalties. Companies try to recoup 100%, but if you strongly negotiate with them chances are great that they agree to only recoup 50% of video costs.
Those who have read the blogs already understand that the amount of disgusting bullshits given by the press since 2002 were highly implausible! And I say this because journalists don’t dream up bullshit in particular, neither do they invent something out of thin air but more than likely receive instructions from someone else: we know very well that kind of news go hand in hand with the winning backed up formula of “a good friend of mine” or ” an insider that does not want to be mentioned” and so on.
As a matter of fact, these well-established formulas represent the unique true info in the whole article. And this “anonymous” tabloid “donor” in question spills the so-called “breaking news” just to follow purposely a certain plot that needs to be spread to invoke public opinion.
Michael Jackson‘s press misrepresentation has been created by word of mouth (and maybe a nice check) and never went deeper! But we know that good news does not sell.
Tabloids sold millions of copies launching headlines telling a story that MJ put up a $2 million diamond watch in order to borrow money from a bank, as well as he used the Beatles songs catalogue to borrow $200 million from Sony Music specifying that the record label did not seek “to buy” ATV Music Publishing from Jackson, having the usual “insider” confirming that “foreclose” would have been the appropriate word since Sony technically already owned the songs! There wasn’t the slightest possibility of “foreclose” in 2002. Anyone half-awake can see WHO whispered those lies to the tabloids at that time!
The documents already presented on this site show that MJ had a loan for $200 million with Bank of America, not with Sony. It has also been confirmed by his Estate during the IRS legal procedure that he didn’t have a loan with Sony. It was a corporate debt within Sony/ATV alone.
Nevertheless, tabloids continued to disseminate the story told by the”insider” buddies, having Michael Jackson’s public persona ridiculed and degraded.
The few columnists who attempted to explain to the public that Sony’s unique interest was the whole possession of MJ/ATV and that they had been pressuring MJ got methodically brushed under the rug by the news that told the story the other way around.
The release of the album Invincible was preceded by a whole dispute between MJ and his record label. That’s why Sony refused to release any commercial singles from Invincible. The record company made no effort to promote the album. With all intents and purposes, all the single releases, video shootings, and promotions concerning the Invincible album were suspended. In spite of the events preceding its release, Invincible came out in October 2001 and proved to be a hit, debuting atop the charts in 13 countries and going on to sell approximately 13 million copies worldwide.
It received double-platinum certification in the US. The album sale was held back/obstructed by Sony, due to the increasing tensions between its executives and Michael Jackson, for Sony/ATV.
Coming back to the “advances funds” – in order to recoup the royalties advance record companies need the album to sell more records – so then why did Sony decided to perform a “Harakiri” and kill the “Invincible” album by stopping all promotions and further release of singles after the album came out and had already sold 6 million copies in 5 months! No record company would do something like that unless there’s so much more at stake. Actually, there was.
But before explaining it, I have to take you into a difficult and maybe boring issue. I need the reader to understand what Michael Jackson meant when he was using the word “conspiracy“.
The issue is the infamous Sony/ATV, of which a whole copy of its Operating Agreement you can find here: SONY ATV Operating Agreement
Sony/ATV operating agreement is a chain of conditions subordinate to each other. I’m are going to give a glimpse of two main articles relating to this matter, hoping to be as clear and simple as I can. The articles in question are no. 3 and 5.
- Article 3 explains the payments executed to capitalize the company.
- Article 5 explains the revenues distribution coming from the licensing of the catalog library while development and expansion the company is taking place.
Both articles dramatically changed over the years due to various amendments.
At the beginning of the company’s constitution, Sony made most of the cash capitalization. The reason was that their catalogs ownership was limited and generated by co-publishing or administration deals, not by 100% ownership of the libraries.
While on the other hand, Michael Jackson was the sole 100% owner of most of the publishing rights and copyrights – including all of the Beatles’ titles – owned by ATV.
MJ had to receive at least $ 115,683,325 just to allow Sony to reach the shares parity. However, the total of the above amount was paid in different installments and subordinated to the company’s priorities to the point that it’s not even clear if actually Sony ever paid in total MJ ATV shares.
In January 1996, MJ had to make a cash contribution to Sony/ATV in the amount of 1’500’000 USD and the same contribution was for 1997 and 1998 due to the EMI administration of the ATV Catalogues. These amounts were released from an escrow account with NationsBank (then Bank of America) probably the same account where ATV royalties were credited.
Sony as well made a cash contribution to Sony/ATV in January of 1996, for $11’500’000 first and then other $67,183,325 million in order to set the percentage into the company. During the first year, they had to make additional contributions at “Interim” not exceeding 10’000’000 Usd, at MJ notice and request. The amount partially served to repay an outstanding amount of $632,000 to Epic Records, for the “teaser” and the short film “Childhood” of the album “History”.
Considering MJ leverage in the music business and the small outstanding amount, Epic should have recouped this money from his royalties. What is clear is that Sony was messing up with the accounting, paying MJ in order to allow his company to repay services of a Sony-affiliated which normally had to recognize to MJ royalties for his products. However, that’s was agreed so it had to be cool for everybody.Sony Music Publishing Members made a further contribution to Sony/ATV of $18’500’000, less the“Interim Capital Contribution”, – in the case MJ used it-.
A year later MJ had to receive an installment of 18.5 million and certain adjustments related some foreign catalogs owned by him. But already the cash contributions to MJ were linked to the article no. 5 that describe the revenue distributions.
In October of 1995, Sony Music Publishing had to pay an advance to the newly born Sony/ATV of $6,500,000. The amount to be disbursed to MJ as the advance on the revenues distribution of the first year.
The agreement foresaw a minimum guaranteed distribution, divided into 3 periods.
- The first was in October 1995 and ended in September 2002.
- The second in October 2002 and ended in September 2005.
- The third up to 2010.
Clearly here we are talking about a projection of guaranteed distribution. These dates, have been amended, delayed and the amounts mostly disappeared due to another clause called “equalized” distribution.
Sony Music Publishing was committed to supporting Sony/ATV at the operational level (the company was managed by Sony) and to fund any acquisitions of new catalogs. The source of these Operating Advances was coming from bank loans, carrying an annual interest rate (LIBOR + 100 basis points, calculated quarterly) from the date of disbursement up to the return of the funds.
As far as the excess of cash flow is concerned – if any – once all taxes burden and expenses were paid, it would have been divided into the following priorities:
- To Michael Jackson in the proportion of its 50% and to the various companies affiliated with Sony for the other 50% in each Year of Guaranteed Distribution.
- To repay any outstanding guaranteed advances to Sony Music Publishing.
The financial forecast was $13 million for each guaranteed distribution year, but subject to a reduction of the same amount – as for Clause IV of Article 5, which envisaged a reimbursement of any operating advances as a priority, as well as the interests related to Sony Music Publishing, advances since the end of the second guaranteed distribution.
While the agreement states that all residual cash flow had to be distributed to Members according to their Percentage of Interest, the same amounts under this clause (V) are applied to reduce the basic projection amounts that are described above as per Section 5.3 (a) (1). In addition, the distributions of any cash flow excess were determined by the Manager of the Company at his sole discretion.
“The above is an excerpt deposition of one Managing Director of Fortress Inv.”
- On July 1996, with a first amendment, a number of conditions changed regarding the entry of new shareholders, unpaid capital, and foreign catalogs relevant acquisition delays.
- On January 1997 with the Second Amendment, there was the first adjustment of the revenues distributed to the members: bank interest rates were applied also to the excess guarantee advances during first distribution period, and payment of operating expenses remained the main priority. Other conditions related to other articles of the operating agreement also changed.
- On December 1998, with the amendment no. 3 the terms of the guaranteed distributions were changed again decreasing, subjected to the usual clauses between the articles and the priorities, and the guaranteed first distribution period was extended to 10 years (1995-2005). The “put option” was added, as MJ had taken a loan with Bank Of America – to help Sony/ATV expansion and have the available working capital for his activities. The bank contract conditions required Sony – being the other shareholder in SonyATV- a guarantee equivalent to the face amount of the principal of the loan. The cost of such guarantee – about 9 million USD – was for MJ account.
Actually, the “put option” clause, opened officially the door to a possible “buy out” between the shareholders of Sony/ATV.
- On December 2000, the amendment No. 4 there is an increase of the “put option” amount (MJ extended and took a further loan with BOA) under the condition that the latest album of MJ would be delivered by June of 2001. The is also a relieve of the foreign entities interest rates based on the gross revenues out of any company asset.
- On August 2001 the amendment No. 5 postpone the date of Amendment 4 from June to October 2001, when finally the album Invincible was released.
In the testimony of IRS lawsuit, while talking of Sony/ATV, Mr. Branca stated that the joint venture was a sort of forced saving for Michael Jackson.
Obviously, the documents don’t give the details that Mr. Branca surely has in his records; however, after having read the conditions of the Operating Agreement, I feel like nobody explained to Michael Jackson the kind of economic impact this forced “saving” concept would have had on his business companies.
It is so evident that it turned out to be the greatest disaster for him. Michael Jackson was a Corporation with at least 300 employees. And Neverland was NOT just the luxurious isolated sanctuary of a capricious star, but a huge compound that was giving a job to almost 100 people, served as a place for public relations and for many charitable activities. And everything was free for visitors.
Just think of how dramatically his cash flow situation changed: from an average of $70 million income per year from ATV under EMI administration, artist royalties and MJIAC Publishing, to a hypothetical $6.6 plus maybe $13 million – if and when every operating cost had been paid -.
Then the advances, yes… and the maturing interests… on and on. No to mention of the royalties artist miscalculated of Sony Music, and MIJAC on hold because any further new catalog acquisition was to be developed for Sony/ATV.
The implementation of the company was a great project, and “yes” it had grown in value over the time, but didn’t guarantee the cash flow he needed to keep his business and his lifestyle going on properly.
At the beginning of the millennium music industry changed very fast and the best solution for Michael Jackson should have led him to become an independent artist. With an investment loan, there was also the possibility to re-purchase the ATV shares from Sony and open the procedure to buyout just before the expiring date of the Bank of America Loan.
Sony was in financial bad shape but despite this, the interest to become one of the bigger publishing catalogs in the world was greatest and it couldn’t let that happen. If MJ would have found a way to execute the buyout clause, Sony would have had to give him back all ATV and the plus value of the joint&venture.
Actually, the sabotage of MJ’s finances started much earlier the release of the album Invincible. And there are plenty of examples of Sony’s mismanagement during the production of the album.
- Recording studios and dozens of hotel rooms left empty and booked for months with no one caring about it.
- Pressure to use new and young producers, convincing him he needed them when actually it was the contrary.
- Refuse to give to the artist the creative control of the project. Waste of time and money in producing wrong videos. Disagreements over Sony/ATV management and so on. All for Michael Jackson “advance royalties” account!
Everything paid with his own money and unfortunately, having a back catalog still going great in the market, Sony would “recoup” without problems. He knew very well how things worked in the music industry and that’s why he became so angry with them.
So now here we are ready to go back to 2002.
All the above situations brought MJ into a shortage of liquidity even if he was still on top of his life. Surely all the “shady” corporations maneuvers became his wake-up call.
The Invincible issue was the icing on the cake! Sony put Michael Jackson’s royalties at risk regarding this album.
Poor sales would have meant little royalties incomes, which would have meant not be able to recover the album production costs. This “hole” would have allowed Sony to recoup the investment of the production of the album on MJ’s back catalogue sales, and if necessary “help themselves” directly on MJ revenues related to his 50% in Sony/ATV and MIJAC, leaving him high and dry struggling with a major loan with high interest rates to be paid quarterly. Unfortunately, their plan succeeded.
Sony/ATV was a private company restricted to its members and its affiliates and after 10 years from its constitution had a provision called “trigger clause” in order to open a complicated procedure to allow members to buy out each other starting from October 2005. Even if, since 1998, the “put option” could have theoretically ended up in a buyout between them, at that time, Michael Jackson’s financial situation wasn’t insecure to the extent that Sony could put some hopes on it.
Sony had to pay MJ $115 million to merge as a 50% partner because MJ’s ATV catalog was more profitable than Sony’s Publishing. For this reasons, they had to pay him for any losses while the two companies started making money together.
So at that stage, MJ owned 50% of the Sony Publishing Catalogue just like Sony owned half of MJ/ATV. But Michael Jackson 50% ATV Catalog had higher incomes compared with the half of Sony Publishing Catalog. That’s why they had to pay him losses and various reimbursements. Did they comply with its obligations? I strongly doubt it and if listening to MJ words I’m more than sure they didn’t pay the due.
Revealing was a journalist that surely was on to something when he published an article back in the summer of 2002 writing that Sony would make Michael relive 1993 all over again.
- One is allowed to wonder why all of sudden, almost a year after MJ lashed out at Tommy Mottola that the new allegations came about.
- One is allowed to wonder why the very same day that Neverland was raided “Number One” was released.
- One is allowed to wonder why in October of 2004 while Michael facing child molestation charges in Los Angeles, news was spread that MJ was agreeing to sell his 50% catalogue to Sony, stating that general discussions between Sony and Jackson’s representatives, John Branca and Charles Koppelman, were in place to discuss already the post-merger direction of the partnership.
We know for sure by the Court papers of the Prescient Lawsuit that the above possibility was far from MJ’s mind. Actually, Mr. Branca and Mr. Koppelman just backed up Goldman Sachs that was looking to purchase the 50% of Sony/ATV owned by MJ’s. Contrary to what was written during that period MJ was active in analyzing financial solutions to purchase his ATV shares back from Sony’s.
Sony wanted MJ out of the picture before expanding the business because MJ had certain rights that allowed him to block acquisitions and Sony wanted to operate the business without interference.
In fact, the official papers (IRS and public material) tell us that from 1999 up to 2004 Sony/ATV’s value had not officially grown and it was still at the same evaluation of $930 million done in 1999, according to an estimate valuation of Desmond, Marcello & Amster.
But, as per testimonies of few Fortress directors, we know that Sony/ATV had already grown dramatically and they specified that the devaluation of the company was due to a persistent corporate debt due to a third party and to the huge administration costs, (the double compared the other publishing company).
Very few “remember” what came out in March 2005, when attorney Tom Mesereau cross-examined Ms. Kite: actually she told that a spy has been placed in the Jackson Camp by his own record label, Sony Music, by the name of RONALD KONITZER, who had been working behind the scenes in an attempt to allow Sony to take ownership of the SONY/ATV music catalogue. “Michael was going to get skewered on national TV and there was no plan of action to protect his interests from scurrilous allegations,” she said.
Invincible sabotage was real and intentional and it wasn’t the first time MJ was subjected to this kind of treatment. Fans in 2002 shouted this out. The community was very much aware that the problem was linked to Sony/ATV, not to his master recordings.
And we don’t have to forget the way Sony played his dirty cards in 2002 when MJ got public against them: here an excerpt of nydailynews.com/2002-07-09:
Stay with me…
All You Need to Know About the Music Business – D.S Passman
Court documents: deposition D. Groppel – Deposition B. Pride (Prescient lawsuit)