Wednesday, January 24, 2018

Steely Dan: Can't Buy/Sell a Thrill

In my last blog post, I wrote about the sad developments which led to Donald Everly being in litigation with the Estate of his late brother Phil Everly.  No less depressing is the recent California lawsuit:  Steely Dan, Inc. and Donald Fagen v. the Estate of Walter Becker.  This case filed in November 2017 is interesting because it shows the complex interworkings of corporate law, probate law and band dynamics. 

All musical groups function as a business entity and music lawyers are always trying to get their clients to recognize this and take steps to organize themselves properly, be it as a partnership, corporation or limited liability company.  Apparently the original members of Steely Dan recognized this back in 1972 when they signed their first record contract.  At that time they formed a corporation, Steely Dan, Inc. with five shareholders (Fagan, Becker, James Hodder, Dennis Dias and Jeff Baxter).  The individual shareholders also entered into a Buy/Sell agreement which provided that upon the death or termination of the corporation's employment of a shareholder, the corporation would be entitled to purchase that shareholder's shares of stock in the corporation at book value (as opposed to fair market value)/  The Buy/Sell agreement is a widely used tool in closely-held business corporations used to maintain control amongst the original shareholders and avoid outsiders becoming shareholders. It allows the original shareholders the ability to purchase the interests from the estate of a deceased or terminated shareholder so that the business can continue without having to necessarily deal with relatives of former members.  The Buy/Sell agreement is a widely used tool for musical groups because it lays out a procedure to follow when a band member quits the band.  Departures can be contentious and it is helpful to have a procedure in place to navigate the split.  Clearly the Steely Dan Buy/Sell agreement was fairly successful in that it stayed in place for 45 years and weathered all of the various personnel changes resulting in  Becker and Fagen being the only remaining original members.  But few groups become as successful as Steely Dan.  The graver issue (but one which will sadly become more commonplace) is that more and more band members of these iconic bands of the 1960s and 1970s will die – triggering various corporate mechanisms designed to protect the entities but not necessarily designed to deal with dead rock stars and their estates. 

Daniel Scott,  writing in Forbes pointed out the problems with using the traditional corporate devices to deal with the unique situations of musical groups and their "legacy plans".  He states: 

While this may work for more traditional businesses, Buy/Sell agreements do not work well in a band setting.  First there is the issue of value.  Ordinarily a Buy/Sell agreement applies a formula to determine the fair market value of the deceased owner's interests.  The problem is, valuing what a band is worth is hardly a science and has been the subject of much debate in recent years, particularly when it comes to the value of rights such as likeness and image (as opposed to just sound recordings and publishing.)  This could result in a significant undervaluing of the deceased member's interests. 

Purely as an equitable  matter,  it would seem that Becker’s estate  would be entitled to something for the 45 years of work he put into the band (that is, in addition to record royalties and publishing royalties which we assume are not part of this agreement. On the other  hand, there was and is a good reason to create these kind of documents to deal with the mercurial natures of rock and roll bands.

I doubt that this case will go all the way to trial but I bet that one major result of the dispute will be to cause those who advise musical groups, especially those with long track records, to reevaluate their governing documents. 

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