When a music band breaks up, the result can be as “messy” as a vicious marriage divorce. One way to smooth the process and avoid a lot of acrimony is to have the band members agree to a Band Break-Up or Band Divorce Agreement. Such agreements are becoming more and more popular. An experienced New York business attorney can help draft the agreement. A band break-up agreement should be negotiated and drafted early in the band’s existence, when the members are in good spirits and happy with each other.
Generally, a band break-up agreement should relate to ownership of the band’s corporate entity. We, here at Cordero Law, recommend that music bands create a corporation, limited liability company, or other corporate entity for conducting the band’s business and for holding title to the band’s intellectual and other property. Call us and we can quickly set up your New York corporate entity and ensure that it remains in good standing.
Setting up a corporation is important for several reasons. First, having a corporate entity signals to others in the music industry that the band is run by competent and knowledgeable individuals. Big business is operated through corporations and music is big business. Thus, bands should operate through a corporate entity. Second, the corporate entity will prevent a break-up from interfering with the flow of royalties during a potential split. Third, corporate entities shield the personal assets of the band members from creditors who may sue to collect on business/corporate debts and obligations.
A band break-up agreement is made by and between the band members as owners of their band’s corporate entity. For example, if there are five members each owning 20% of the shares in their corporation, the band break-up agreement would relate to the ownership of those shares. The general purpose of the agreement is to establish, in advance, the conditions and mechanisms for how a band member can be bought out by the others or how the assets are to be divided among the members if there is a dissolution of the band. A band break-up agreement is also important for other eventualities such as the death of a band member, a divorce where the spouse might end up having some voting power and similar circumstances.
Aside from identifying triggering events, here are few other “must-have” provisions that should be negotiated for your band break-up agreement:
- Price calculation formula — one key issue to negotiate is the price to be paid for the departing member’s percentage of ownership. Sometimes this can be a lump sum, but most often the price to be paid is a percentage of royalties. It is not always as simple as “I own 20% so I should be paid 20% of continuing royalties.” The band members should consider whether discounts or premiums should be included. For example, future royalties for previously recorded music often increase based on the increasing success of the band. A previous band member has no role in that increasing success and, thus, might legitimately be entitled to a smaller share of future royalties. By contrast, a lead guitarist or drummer or singer might legitimately be entitled to a larger share of future royalties.
- Dissolution or continuation — band members should consider whether complete dissolution of the band and corporate entity is better than having the band/corporation continue on with new members; there are pros and cons.
- Valuation methods — if there are specific assets owned or expected to be owned by the corporate entity, then likely a professional neutral appraisal will be needed if there is a break up. The band members should agree on the appraisal method and whether discounts or premiums should apply.
- Payment methods — often, bands are “cash poor” when a break up occurs. Indeed, lack of revenue can be the final “stresser” that leads to the break up. Consequently, the members should consider payment methods and schedules. The members also might consider exploring and buying insurance products that might cover pay-out obligations.
- Dispute resolution mechanisms — the band break-up agreement is intended to avoid disputes and disagreements, but that is not always possible. Thus, members should agree to a dispute resolution mechanism if there is a disagreement about price or valuation. One option is agreeing to mandatory arbitration. Arbitration has the advantage of being confidential which reduces the chances of the band’s dispute being publicized.
Contact an Experienced New York Business Lawyer Today
For more information, contact the business, entertainment and IP lawyers at Cordero Law. We can help draft your band’s break-up agreement and can get your New York corporation established. Our approach is to provide top-tier legal services by working with our clients rather than simply working for them. Our entertainment law practice focuses on the music industry. Contact us via our online Contact Page or by calling (212) 960-8890.