Today, music catalogue data and ownership information matter more than ever, especially with the prevalence of catalogue acquisitions. However, maintaining or acquiring a catalogue can go horribly wrong if the information is not properly maintained.
Here are four key areas to focus on in order to avoid catalogue mistakes that will cause future legal and financial issues:
1. Keep it Clean (or Clean it Up)
Mistakes in registration data cause multiple problems: incorrectly held rights, frozen royalties, non-collection of royalties, another party collecting royalties in error, counterclaims, and more. Clean registrations are a major factor for writers or catalogue owners wanting to maximize collections on the works they own, because if any registration data is incorrect, the payments will not flow through to the writer or owner because it will either be held by a society, lost in a black box, or simply unpaid.
“Clean registrations are a major factor for writers or catalogue owners wanting to maximize collections on the works they own, because if any registration data is incorrect, the payments will not flow through to the writer or owner because it will either be held by a society, lost in a black box, or simply unpaid.”
Acquiring a catalogue with mistakes will require both time and financial investment to correct. In some cases, a buyer will take on the risk of some mistakes in a catalogue either knowing it can be corrected later or that the mistakes are such that they won’t affect the value of the catalogue. In other cases, a seller may warrant a clean catalogue that is in fact rife with mistakes, with the buyer relying on the seller’s records instead of conducting a thorough due diligence analysis (discussed below). This scenario places the seller in breach of an agreement, and, as a result, the buyer will incur substantial burdens in the forms of time and financial cost to try to correct both the breach and the catalogue mistakes. The buyer also may fully or partially lose the funds invested in the purchase price if the buyer is unable to claim or collect on compositions purchased.
As a note for sellers, no experienced buyer will want to buy a catalogue riddled with problems, precisely to avoid the issues just described. A clean catalogue can often yield higher purchase offers due to maximized collections on exploitations as well as decreased time and expense required for due diligence by the buyer.
2. Know the Asset
As a note for buyers, know what you are buying. Don’t just look at the numbers. Know the music, and if the music can be exploited and how.
Another consideration is whether the music is by a writer or artist-writer, and if by an artist-writer, whether that artist-writer is deceased, living but no longer performing, or still touring. If the music is by a writer who is not a performing artist, or an artist that is deceased or no longer performs, the buyer will have to rely more on passive royalties and sync fees, as well as be more creative with exploitation ideas. If the music is by a writer-artist who still performs, there remains a more consistently active market as the artist is able to continually promote the music by performing it.
“Another factor to consider when purchasing compositions is who owns the masters. In the case of masters where the owner is known, one should consider ease of working with that party because a difficult party may block exploitation opportunities, which means lost income.”
Yet another factor to consider when purchasing compositions is who owns the masters and whether the masters are easily accessible. In the case of masters where the owner is known, one should consider ease of working with that party because a difficult party may block exploitation opportunities, which means lost income. (The same goes for buyers of master recordings in working with the owner of the compositions.) For older songs, many masters are out of print, which makes it more difficult to earn mechanical income due to low or no sales and streaming, as well as more difficult to license if one cannot obtain a quality version of the recording. Also, many older labels are out of business and the master owner is unclear, again making licensing of the original version difficult or impossible. This then forces the composition owner to rely on covers, which may or may not be desirable in the marketplace.
3. Legal Due Diligence
This is an extremely important phase of a catalogue assessment or acquisition. This phase is an examination of registration data, chain of title, past contracts, royalty obligations, restrictions, and potential pitfalls like pending terminations. This research will uncover if the seller actually owns the rights being sold, rights in territories around the world, restrictions on rights based on the contracts, and more.
“Companies have often acquired rights over time without a clean chain of title or with existing registration or collection issues.”
Companies have often acquired rights over time without a clean chain of title or with existing registration or collection issues. These problems are exacerbated when acquired by yet another company that will assert additional counter claims, and an acquiring company may have a harder time correcting older mistakes where information, documents, and parties are not always available. Further encumbrances could be existing contracts that: (1) might place restrictions on the buyer regarding how the music can be used; (2) might places restrictions on or for what territories the music can be licensed; and (3) indicate payment obligations to writers or musicians (whether via unions or not), which often place more accounting obligations on the buyer than desired, requiring the buyer to pay staff or find and pay an administrator to handle these obligations.
“Buyers also need to understand that the money spent upfront in the due diligence phase is money well spent because the costs to correct a breach later will surely exceed what would have been spent on due diligence.”
Therefore, it is important to proceed with caution because a buyer would not want to purchase assets only to find out those assets cannot be exploited as planned, and a buyer would not want to face liability for violating existing agreements. Further, as mentioned in section 1, sellers are often unaware of mistakes in their catalogue(s), so a thorough due diligence analysis is always recommended. Buyers also need to understand that the money spent upfront in the due diligence phase is money well spent because the costs to correct a breach later will surely exceed what would have been spent on due diligence. Further, spending the money upfront on due diligence may actually save the buyer money by either adjusting the purchase price to compensate for catalogue problems found during due diligence or save the buyer from entering into a bad investment altogether.
4. Financial Due Diligence
Along with the payment obligations mentioned above, sometimes a seller has not properly met its payment obligations to writers or other third parties, or has not earned as much money as it represented. A thorough analysis of a seller’s finances and/or the earnings of the catalogue can prevent a buyer from a disappointing investment by unknowingly purchasing assets with inflated earnings or with unforeseen financial liabilities.
“To sum up, sellers should have their catalogues assessed and cleaned up, and buyers should conduct due diligence to avoid surprises.”
To sum up, sellers should have their catalogues assessed and cleaned up, and buyers should conduct due diligence to avoid surprises. I can often discern registration and chain of title problems with one glance, knowing immediately if there are larger issues that need to be examined. The last thing most buyers and sellers want are legal problems due to a breach, and buyers certainly don’t want to lose the substantial funds invested in acquiring a catalogue. Although the due diligence process takes a bit more time and expense upfront, it is infinitely worthwhile to avoid what could happen without it.
Note: This article does not constitute legal advice.
Erin M. Jacobson, known as “The Music Industry Lawyer”, represents and protects independent, established, and legacy songwriters and artists (including their heirs and estates), distinguished legacy catalogues, independent music publishers, Grammy and Emmy Award winners, and other music professionals at her law practice based in Beverly Hills, CA. For more information, visit www.themusicindustrylawyer.com.
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