Intellectual Property & Music Business

THE INAPPROPRIATE EXPLOITATION OF MJ’S CATALOG IN THE NINETIES

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When MJ and his brothers left Motown Records, they signed with CBS Records in 1975.

After the Off The Wall album, attorney John Branca negotiated for Michael Jackson a separated contract and new agreement with BMI, a company that collects artists’ royalties from songs public performance. Meanwhile, Thriller became the biggest selling album of music history. And with such success, MJ invested in Northern Songs Catalog (ATV was one of them). But as record Labels began to consolidate, this precious investment became a severe problem. And this is how it manifested itself.

MJ record contract was negotiated several times, and one of the benefits he had was to obtain the ownership of his all masters recording. CBS reverted the master’s recording, and by setting up a joint-venture with MJ had the exclusivity to license them.

MJ, at the peak of his career, became increasingly influenced by David Geffen, which was the principal reason for John Branca’s replacement in 1990 with three specialist attorneys of Geffen camp. Reports of that time tell that MJ was unhappy with his CBS contract, which John Branca had been trying to renegotiate. You can read some stories here: http://articles.latimes.com/1990-11-15/business/fi-6098_1_cbs-records.

In March 1991, news announced that MJ renewed the contract with Sony and inside sources revealed he was guaranteed an advance payment of 5 million per record plus a 25% royalties from each album based on retail sales. The contract bridged recordings, movies, and video software. http://articles.latimes.com/1991-03-21/news/mn-654_1_michael-jackson.
Then MJ got an 18 Million dollar advance for the album Dangerous. Great deal, right? Well…NO. That’s when the games started. 

Here a short recap of the events where you will find few names resorting pretty often in the music world and MJ professional life: 

  • 1985 – MJ bought  Northen Song Catalogs
  • 1986 – SBK purchases CBS publishing interests. The acronym of this company means Stephen Swid, Martin Bandier, Charles Koppelman.
  • 1987 – Sony bought CBS Records with a host of subsidiaries, including Epic Records, MJ’s label.
  • 1988 – CBS was renamed Sony Music Entertainment. 

As  Lynton Guest penned in his book, “Michael Jackson became entangled with the Sony Corporation almost by accident.”

From there, MJ was submerged by any kind of controversy. His mental state was questioned, and he was embroiled in legal issues.  Gossip’s headlines regarding his expensive lifestyle and the various lawsuits he was subjected to, speculating he had cash flow problems. When his ATV Music Publishing Company merged with Sony Music Publishing did not help his cause.

As well, David Bowie was looking for solutions to the financial issues that caught up with him by the turn of the century. His expensive lifestyle in New York had led him to migrate to Berlin for a while, but financial freedom became a priority. In 1997 David Bowie found himself in need to immediately get a large amount of cash to buy from his ex-manager Tony De Fries 50% of copyright on his albums from 1972 to 1976.

His business manager William Zysblat investigated other financing options. Zysblat discussed an asset-backed bond issuance with David Pullman, the managing director of New York’s Fahnestock & Company’s structured asset sales group, and attorney Richard Rudder, head of the securitization practice at New York’s Willkie, Farr & Gallagher. The three managers determined that an asset-backed bond issuance would be more beneficial to Bowie’s interests than a traditional distribution agreement because it would afford him more significant financial gains. As a result of this deal, Bowie received $55 million.

It’s interesting to note that Michael Jackson struck a more dominant deal merging half ATV for 115 million and getting a place on the company’s board. And considering he purchased 100% of ATV for 47 million just ten years before the financial result was terrific. Still, the difference between Bowie and Michael Jackson headlines are pretty stunning:

The Bowie bonds were issued at a fixed rate of 7 .9 percent and had an average life of ten years, reaching maturity at fifteen years. The bonds were sold privately to Prudential Insurance Company.  Selling the bonds privately eliminated many cumbersome reporting requirements. Upon the maturity date of the bonds, the copyrights reverted to Bowie.

The possession of the musical compositions’ copyrights was the key to structuring the Bowie bonds deal because the royalty income generated by the copyrights and received from music publishing licenses and record sales were the assets that support the bonds. Bowie gained tax advantages and a higher present value of the royalty payments by receiving the cash before the periodic royalty payments. Furthermore, the lumpsum acquisition enabled him to diversify his income, and he could make investments that would generate revenue beyond the music industry. EMI’s fifteen years licensing deal for Bowie’s back catalog was used as credit enhancement. After fifteen years, the ownership of the master tapes reverted to Bowie. 

Pullman, who organized the deal, viewed such asset-backed transactions as an alternative to traditional bank loans because they generated more capital and may either had a fixed or a floating interest rate. Additionally, banks usually require personal guarantees to loan money based on the liquid assets of a borrower.

Michael Jackson already retained the masters and copyrights ownership of his back catalog of music and owned the publishing right of all his catalog. Therefore MJ theoretically had a situation much more viable than Bowie, having only an agreement with Sony for the distribution rights and the exploitation of his intellectual property.

After the Bowie bonds came into the spotlight, rumors of a possible bonds deal on MJ intellectual property emerged in the Newsweek of November 1998. The magazine claimed that Jackson was about to sign a bond deal.

 Two years later, in May 2001, there was an article on the Mail on Sunday describing a deal that could raise  500 million dollars by issuing bonds backed by the copyrights of his songs and those of the Beatles in what was described as the Holy Grail of showbiz bond deals. The story was later denied.

However, every time good news came out, there was 10’000 bad news against him. For example: on January 6,  2002,  The Sunday Times published an article asserting Michael Jackson turned to his record company for a loan, borrowing 200 million dollars using the Beatles’ catalog as collateral, to fund his Neverland Ranch in California and make the album Invincible, released in September 2001.  It was even suggested that he might face bankruptcy. The bullshit was so big that Sony had to deny it publicly.

In reality, the effects of a possible bankruptcy were considered unappealing and reduced a bond deal’s attractiveness to potential investors sharply. That’s what does it mean the use of BAD PRESS. David Pullman also pointed out that such transactions take many months to arrange and that Jackson’s need was probably more immediate.

So, while The Bowie Bonds earned a triple-A bond rating from Moody’s, on September 29, 1999, Michael Jackson Publishing Trust opened a credit line initially of 30 million with the usual Bank of America: a traditional financial instrument loaded with massive interest and management costs. Surely it happened because he was entangled with too many intricate agreements with Sony and the bank. And his business management did not care to look for valid alternatives.

But who had an interest in setting up this multiple news? Not MJ for sure. Was it a case of intense verbal diarrhea coming from some executives’ mouths in charge of disclosing messed up stories against him?  The timeline was suspicious because reports used to come out just after or before some update in the financial transactions documents. And it was clear since 1995 that his 50% of Sony/ATV was pledged totally to BOA.

The Sony/ATV loan went under consolidation and reinstated many times. Sony was co-guarantor – being the other company shareholder but never loaned directly under the BOA facility. So the options are only two: messed up revelations were distributed on purpose, or media is populated by a bunch of people not able and deliver a decent job. Saying that info was not verified is a euphemism. 
Eager to airing MJ dirty laundry, they filled pages and pages of their rags passing off like a jumbo loan nothing but an inter-creditor agreement related advances that generally record companies give to artists. It was a few million advances against the royalties over the merchandising. Usually, there is an advance over a royalty rate of X percent, if enough merchandising would be sold, it recoups the advance to pay themselves the advance and then begin to get royalties. In this case, Sony Signatures claimed not to have recovered the advance, so they put themselves in a queue as a junior creditor with BOA.  The next blogs show it might be all these kinds of invoices that generated a debt toward Sony.

In May 2003, there was more speculation about Jackson’s finances in the media, and again it was suggested that he might face bankruptcy. And actually, something was up for him.

Goldman Sash‘s made an offer through Jackson’s adviser of that time, Charles Koppelman, to purchase MJ catalogs just around April 2003. All of them. They asked the consultancy of John Branca. The proposal was that MJ had to put all his interests in Sony-ATV and MIJAC to a newly created vehicle such as “Music LLC” in partnership with Goldman Sachs Capital Partners. Goldman would have provided 135 million in cash, which MJ could have used to repay part of his Sony/ATV liabilities to Bank Of America and 35 million to pay off the whole MJIAC credit line. They proposed to secure the difference of Sony/ATV loan with MIJAC to reduce the 200 million balance but still with 132 million balance to be paid to them. MJ would receive 3.5 million per year for five years apart for the first year, where he would have received 12 million due to 9 million proceeds from Goldman.  And an initial 50% common equity stake in Music LLC in partnership with GSCP for future wealth creation opportunity.

There’s no surprise why Michael Jackson flat out the offer, right?  At that time, Mr. Branca was not working for MJ, being dismissed previously in February 2003. But knowing his former client very well, sent a letter to the Goldman people advising that they might receive a refusal.

MICHAEL JACKSON PUBLISHING TRUST LOAN

The credit line with Bank of America initially bore an annual interest rate equal to one month LIBOR + 3.00% at the beginning.

The security collateral of MJPT Loan was:

  • All his musical compositions, MJIAC Music, Miran Publishing Inc, Miran Publishing Corp, and Mystical Light music, including all music, musical compositions, lyric versions,  arrangements of music and translations including air vocal lyric versions or adaptation of lyrics, and all properties and things of value pertaining and all replacements and substitutions, and products end proceeds, acquired or produced.
  • All copyrights, rights in copyrights, interests in copyrights and renewals, extensions, application and registration of copyrights, domestic and foreign, and the right ( but not the obligation) to make publication thereof for copyright purposes, to register claims under copyrights throughout the universe and perpetuity, end the right (but not the obligation) to register, renew and extend each copyright, and the right (but not the obligation) to site for past, present and future infringement of copyright. Most of these rights were included and governed by Warner with the Stewart Agreement dated June 30, 1983,  between Michael Jackson and Warner/Chappel Music. Inc. and  The Warner Agreement dated as of June 12, 1990.
  • A personal guarantee

As usual, the bank did not fall short on anything regarding the guarantees department—Overcollateralized to excess.

On September 29, 1999, Bank of America made an initial loan to MJPT of 30 million dollars.
Through some subsequent agreements, the loan’s principal amount was increased, and the due date extended.  Ultimately, under an agreement dated March 25, 2004, BOA wound up lending an aggregate principal amount of $72,500,000.

The Third Amended and Restated Loan Agreement between BOA and MJPT, dated March 25, 2004, bore interest at an annual rate equal to one month LIBOR + 3.00%.

  • Upon an Event of Default, the MJPT Loan bored default interest rate of Prime + 4.00% per annum. 
  • The MJPT Loan was due and payable in full, together with all accrued and unpaid interest thereon, on December 20, 2005.
  • MJPT Trust Agreement provided that MJPT’s principal assets consisted of music publishing catalog MIJAC formed by Michael Jackson in 1976, Miran Publishing Inc, Miran Publishing Corp, established in 1978 with his brother Randy, Mystical Light music, and the right to receive payments under the administration agreements between MJPT and third parties.
  • BOA’s remedies upon an Event of Default included its right to resort to all of the collateral and to exercise the rights of a secured party according to applicable law. Further,  MJPT  would be obligated to pay to BOA a default fee of $1O million, and BOA could, at its discretion, publicly or privately sell the MIJAC Catalog and the Administrative Agreements upon such terms as BOA deemed commercially reasonable.

On February 24, 2004, the New York Daily News reported that Michael Jackson, beset with legal problems, was again considering securitizing his song catalog. But still, the rumor was false. What happened in that period was one of the usual extensions, which increased the principal amount from 70 million up to 72. But Bank of America’s conditions became more and more impossible, as well as the shortages into the accounts and withdrawals of too high bank costs.

Michael Jackson was not a newbie, neither naive nor ignorant. He knew the business very well as he grew up in the music industry and saw the music industry growing up with him. Sadly be aware of what surrounded him was not enough.

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