THE SONY ADVANCES LIE 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 does not 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.

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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 our blogs already understand the amount of disgusting bullshit given by the press since 2002 were highly implausible! And we say this because journalists do not 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. That, as a matter of fact, represent the unique true info in the whole article. And this “anonymous” donor of the tabloid 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.

But 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 song catalogue to borrow $200 million from Sony Music specifying that the record label did not seek “to buy” ATV Music Publishing from Jackson, but the usual “insider” confirmed that a “foreclose” would have been the appropriate word since Sony technically already owned the songs! There was NO “foreclose” in 2002 in favour of Sony. 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 in the documents regarding the IRS procedure that he did not have a loan with Sony and neither a debt with them, but there was a corporate debt against Sony/ATV alone.   

Nevertheless, tabloids continued to disseminate the story told by “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, and also refused to release Michael Jackson’s planned charity single, “What More Can I Give”. 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, because of increasing tensions between SONY and Michael Jackson, for Sony/ATV.

So, 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 decide to perform a “Harakiri” on themselves 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 was something more important behind the scene. And actually, there was. But before explaining it, we have to take you into a difficult and maybe boring issue. Because we want you to open your mind and understand for yourself what Michael Jackson meant when he was using the word “conspiracy”.

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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. We are going to resume the 2 main articles relating to this matter, hoping to be as clear and simple as we can.

The articles in question are no. 3 and 5. Article 3 explains the payments executed to capitalise the company while Article 5 explains the distribution of revenues coming from licensing of the catalogue library during the various phases of the company development and expansion. 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 due to the fact that his catalogues ownership was limited and generated by co-publishing or administration deals, not by 100% ownership of real 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 in order to allow Sony to reach the shares parity. However, the total of the above amount was paid in different instalments and subordinated to the company’s priorities to the point that it’s not even clear if actually Sony – charging the company with huge expenses of operating costs and amazing manager’s salaries – actually ever paid in total MJ ATV shares.

In October of 1995, $11.5 million was paid to MJ but partially served to repay an outstanding amount of $632,000 USD to Epic Records, for the “teaser” and the short film “childhood” of the album “History”.
This is a sign that his contract with Sony Music was not negotiated very well by his lawyer because considering his leverage in the music business and the small outstanding amount, Epic should have recouped this money from his royalties.

In January of 1996, Sony ATV paid MJ the amount of $67,183,325 million, which this amount had to be applied, at MJ’s option, either to fund an escrow account with Nations Bank for an amount of $1.5 million, representing a calculation of 3 years of EMI administration costs and services, or to repay in full an outstanding amount of the EMI Advance on ATV royalty statement for the period ending September 30, 1995, (it was about $16 million). Even this sounds “strange”. EMI’s administration would carry on up to 1998 anyway, so – even with 50% sold – the outstanding amount could have been recouped in the next years to come.
Sony Music Publishing Members had to make a further payment to Sony/ATV as “Interim Capital Contribution” to pay MJ or one of his company’s $28.5 million.

A year later MJ had to receive another instalment of 18.5 million and certain adjustments related some foreign catalogues owned by MJ.

The advances in Sony/ATV agreement represented sums injected into the company by their respective members in cash or as catalogues, to support their management costs – if the proceeds were not sufficient to maintain operating costs.

And here’s the really funky part…

In October of 1995, Sony Music Publishing had to pay an advance to the newly born Sony/ATV of  $6,500,000, that the Company had to disburse to MJ as an advance on the distribution of revenues for 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 because the company had no budgets on which to make a more profitable profit and during the years those dates, have been amended, delayed and the amount mostly disappeared because of the “equalised” distribution.
Sony Music Publishing was committed to supporting Sony/ATV at the operational level (the company was managed by Sony itself) and to fund any acquisitions of new catalogues. But 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 with 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 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.

This is what Branca said in his deposition for the IRS: in fact, he says that MJ was getting Equalising amount distribution…We swear this is a joke!

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 we have described above and which are in Section 5.3 (a) (1). In addition, be aware that these distributions were determined by the Manager of the Company and the amount of any cash flow excess distributions were determined at his sole discretion.

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Already in July 1996, with the first amendment, a number of conditions were changed regarding the entry of new shareholders, unpaid capital and some delays related to foreign catalogues.
In January 1997 with the Amendment No. 2, there is a first adjustment on the revenues distribution to the members: bank interest rates were applied also to the excess guarantee advances during first distribution period, and payment of operating expenses remain the main priority. Other conditions related to other articles of the operating agreement also changed.
In December 1998, the terms of the guaranteed distribution were changed again and decreased, subject 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 inserted,  following the loan that MJ was forced to borrow with Bank Of America – to help Sony/ATV expansion and have the available working capital for his activities. The bank contract conditions had an obligation which involved Sony with a guarantee to purchase the loan amount in case of default of the same. We want to remind you that the “put option” clause, opened officially the door to a possible “buy out” between the shareholders of Sony/ATV.

In December of 2000, the amendment No. 4 increased the amount of the “put option” (meaning that MJ extended his loan with BOA) on condition that MJ delivers his latest album by June of 2001 and relieve the interest rates of the foreign entities gross revenues out of any company asset.
In August 2001 the amendment No. 5 brings the date of Amendment 4 from June to October 2001, when finally the album Invincible was released.

So, having read the condition of the Operating Agreement, what Mr Branca said in his deposition of the IRS lawsuit – that the joint venture with Sony was a sort of forced saving for MJ – it does not feet!

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It is so evident that it turned out to be the greatest disaster that it has actually been for Michael Jackson.

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 a lot of 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 EMI/ATV plus artist royalties and MJIAC publishing, to have found himself receiving a hypothetical $6.6 plus maybe $13 million…if and when every operating costs has been paid… Then the advances, yes… but …well the interests to give back and on and on.  No mention of his royalties artist miscalculated by Sony Music, and MIJAC on hold because any further new acquisition was to develop Sony ATV.

The implementation of the company was a great project, and “yes” it gained value over the time, but it did not guarantee the cash flow he needed to keep his business and his lifestyle going on properly. Once again we cannot understand how and why his entourage did not proceed with a detailed business plan before throwing him into this dangerous venture. Not to mention that the more we dig into Sony/ATV issues, more is evident that Sony’s plan was to have the ATV catalogue and MJ out of it!

At the beginning of the millennium music industry started to change very fast and the best solution for Michael Jackson would lead to becoming an independent artist. With an investment loan, there was also the possibility to re-purchase the ATV shares of Sony and open the procedure to buyout just before the expiring date of the Bank of America Loan.

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Sony was in financial bad shape but despite this, the interest to become one of the bigger publishing catalogues 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 given him back all ATV and the plus value of the joint&venture. 

Actually, the sabotage of MJ’s finances started much earlier before the release of the album Invincible. We have plenty of examples of Sony’s mismanagement during the production of the album that started in 1997! 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. 

Refusal to give the artist deserved control of the project in terms of releasing songs and videos. Waste of time and money in producing wrong videos. Disagreements over Sony/ATV management and so on. All for Michael Jackson “advance royalties” account!!! 

Do you understand now the tricky game??? MJ did not have any sort of debts with Sony. Everything was paid with his own money and unfortunately, having a back catalogue 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.

In practice, all the above situations brought MJ into a shortage of liquidity but he was still on top of his life. Surely what happened behind the scene with all the “shady” Sony manoeuvres became his wake-up call.
The Invincible issue was the icing on the cake! Sony put Michael Jackson’s royalties at risk regarding the album. Having little royalties coming from poor sales would have meant losing money for MJ companies and allowing Sony to recoup the investment of the production of the album on MJ’s back catalogue sales, leaving him high and dry.
We should always keep in mind that the Sony/ATV joint venture was a private company restricted to its members and its affiliates; and that after 10 years from its constitution had a provision called “trigger clause” in order to open a complicated procedure allowing the members to buy out each other starting from October 2005. And even if, since 1998, the “put option” could theoretically end in a buyout between them, MJ’s financial situation was not 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 catalogue 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. Sony/ATV comprised MJ/ATV and Sony catalogue.
So at that stage, MJ owned 50% of the Sony Publishing Catalogue just like Sony owned half of MJ/ATV. But the 50% belonging to Michael Jackson had more revenue than Sony 50%. Michael Jackson ATV Catalogue had high incomes if compared with the half of Sony Publishing Catalogue. That’s why they had to pay him losses and various reimbursements. Did they comply with its obligations? After reading many legal documents we strongly doubt it and listening to MJ words we are more than sure they did not pay the due. 

But, surely a journalist was on to something when he published his article back in the summer of 2002 and said 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 and that these 2 vultures were not his consultants, but they just backed up Goldman Sachs looking to purchase MJ’s catalogue. Contrary to what was written during that period MJ was active in analysing financial solutions to purchase Sony’s 50%!

The reality is that Sony had financial problems and put the payment of the ATV shares into limbo and did not pay the losses of the lack of development to Michael Jackson, using the company’s money to merge its recorded-music division with Bertelsmann’s BMG. 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 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 third party and to the huge administration costs, (the double compared the other publishing company).
And 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.

The sabotage of Invincible was real and intentional and it was not 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 do not 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: 

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What is recalling the above? To us, it reminds the same defence line the executors of his estate have taken during the IRS trial, in order to show that his “likeness” was worth 2150 dollars!

Stay with us…

Sources:

https://musictechpolicy.com

http://www.techdirt.com

http://www.teammichaeljackson.com

All You Need to Know About the Music Business – D.S Passman

https://music.asu.edu/

Court documents: deposition D. Groppel – Deposition B. Pride (Prescient lawsuit)

Special thanks to Marco Balletta for giving me the opportunity to analyze the documents in his possession.

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