Royalties on divorce: cautionary tales for singer/songwriter and composer clients
For singer/songwriter or composer clients, royalties are a key part of the financial settlement should their marriage come to an end. Head of Family, Deborah Jeff examines this niche area of law, which can often be overlooked when creative clients divorce.
How these are dealt with on divorce will depend on each set of facts - largely the other assets available aside from the royalties and the volume of income they generate. These cases tend to be between public figures who want to keep their marriage breakdown out of the spotlight so there are few examples in caselaw to guide us.
First, what are royalties? These are payments relating to intellectual property and related rights, and they are made to rights-holders in return for the authorised use of their content. In the context of music, the rights-holders may be the songwriters and recording artists, for example. Those rights arise under the law of copyright and related rights.
For instance, there are two main types of music-related copyright works: compositions and sound recordings.
• Copyright in a composition is first owned by the writers whenever the work is committed to a medium, and writers often grant rights to a music publisher, which will then administer the work.
• Copyright in sound recordings is first owned by the person responsible for the production arrangements. That is generally a record label, which will have signed the recording artist.
• Copyright in a composition generally lasts until 70 years after the year of death of the last surviving writer, while copyright in a sound recording usually lasts until 70 years after the year of release.
• A writer/artist will receive royalties from their work for as long as their contract with the publisher/label continues. The contract term may well be shorter than the duration of copyright, meaning that reverting rights can then re-licensed by the writer/artist, in return for further royalties.”
Performers also have an entitlement to receive so-called “equitable remuneration,” which is a statutory entitlement to a share of income arising from the broadcast and public performance of sound recordings embodying their recorded performance.
Ideally, clients will have entered into a pre- or post-nuptial agreement determining the financial settlement, including how their royalty streams will be treated or shared. Both parties will ideally have had independent legal advice and made financial disclosures to each other. Provided there was no pressure or duress, the terms are fair and meet their needs and those of any minor children, they are likely to be kept to those negotiated heads of agreement. With pre-nuptial and post-nuptial agreements now being more acceptable and persuasive in our jurisdiction, more clients in the world of music and entertainment are choosing to take control in this way over what the financial settlement should be if their marriage ends rather than leaving it to be negotiated or adjudicated upon in the future. A pre-nuptial or post-nuptial agreement also assures greater privacy by keeping the case out of the public eye should the marriage end, something of great importance to high profile clients in protecting their family and reputation.
In the absence of a pre-nuptial or post-nuptial agreement, family law determines that assets generated during the marriage are divided equally unless there is a reason not to do so. In the capital settlement, the family law principles of ‘needs, compensation and sharing’ are applied. The court will apply s25 of the Matrimonial Causes Act 1973 and consider all the circumstances of the case including the ages of the parties, the length of the marriage, their financial needs and those of any children and the standard of living of the family. Income is treated differently, however, and of the family law principles, only ‘needs’ are generally applied; the financially weaker spouse is only entitled to such maintenance as required to meet their income needs, which will be informed by the standard of living enjoyed during the marriage.
Royalties are an unusual hybrid of asset class. Where the royalties flow from music created during the marriage, the court will seek to ascertain the capital value of that income stream from the royalties, and that value shared equally between the parties, compliant with the duty to achieve a complete financial clean break where possible. Otherwise, the royalties generate income against which the other spouse has a maintenance claim.
Historically, there has been no leading authority for family practitioners to rely on in such cases and the true value of royalties has often been overlooked. The case regarding The Clash in 2019 made headlines for the commercial arrangement rather than matrimonial law but highlighted the difficulties that can arise in sharing royalties when a marriage goes wrong. As part of their divorce in 2010, the bassist of the band Paul Simonon and wife Tricia Ronane agreed to share royalties equally and set up a limited company to receive such income, each being 50% shareholders. The court held in 2019 that despite the difficult relationship that continued between them, Tricia Ronane was prevented from selling her 50% of the company on the basis that it would be inconsistent with the divorce agreement in 2010 and would effectively force a new business owner on Mr Simonon.
Later in 2019, the High Court case of CB v KB, the divorce of the bass player of a well-known, highly successful band, gave valuable insight and welcome relief into how the family court can treat such royalties and avoid a ‘Clash’ situation where parties are locked into business agreements that don’t work from a human perspective.
The parties had been in a relationship for 19 years and married in 2003. There were 6 children of the marriage ranging in age from 7 to 20. Two of the children lived full time with W, one lived with H and the younger three shared their time between both parents’ homes.
The band comprised H, the lead singer (‘LS’) and drummer (‘BD’).
Aside from the value of H’s income streams, the asset base was agreed between the parties. W would retain her new home worth £2,958,500 purchased from the proceeds of sale of the family home and be responsible for her debts of £204,000. H had net assets of £3,015,113 comprising his new home, cash and business interests.
H received income from his music in five different ways:
Stream 1: Publishing or composition royalties regarding three songs written by him.
This generated modest income which, when capitalised, was worth around £55,500.
Stream 2: Equitable remuneration or ‘neighbouring rights’ in respect of broadcasts of the band’s songs on radio and TV
This right is set out in section 182D(1) of the Copyright, Designs and Patents Act 1988 which provides:
“The right to equitable remuneration under this section may not be assigned by the performer except to a collecting society for the purpose of enabling it to enforce the right on his behalf”.
All four expert witnesses agreed the appropriate method of valuing Streams 2 and 4 (see below) was the multiplicand-times-multiplier method. The multiplicand was largely agreed with little difference between them but the multiplier for each stream was widely varied.
H’s expert relied heavily on the non-assignability of Stream 2. However, the expert for W shared with the court that despite this legal position, he was aware of transactions where musicians have included in a sale of music income streams the equitable remuneration rights, giving an example of one his partners had only the day before where the multiplier for the income stream was 14. Mostyn J accepted such evidence. H’s remuneration rights after administrative costs and corporation tax amounted to £88,493 per annum, which with a multiplier of 14 gave a capital value to the income stream after costs of sale of £1,207,923.
Stream 3: By agreement between the band, H received 8.33% of LS’s publishing or composition royalties.
The court viewed this stream as having an element of gratuity to it as LS had no obligation to agree such terms and the band were to agree new terms shortly.
The experts were agreed that the appropriate method of calculation was the discounted cash flow method. Mostyn J held that a multiplier of 17.2 was appropriate, which gave a pre-dividend capital value of £1,793,146. However, the amount H received under this income stream would reduce significantly were he to leave the band. As that was considerably less likely than him remaining in the band, Mostyn J weighted the figure of £1,793,146 at a factor 2 as against the figure if he stayed at a factor 1, giving a figure of £1,320,952 for the capital value of this income stream.
However, the court found that as the lead songwriter was under no obligation to share his song-writing royalties with the other band-members, despite doing so, they should be treated differently, i.e. they weren’t entirely a product of the married couple’s endeavours. The value of £1,320,952 was therefore further discounted to reflect the ‘significant element of gratuity’, discounting the value by 25% to arrive at a final net value of £990,714.
H’s income streams 1, 2 and 3 were all paid to a company owned solely by him. For the cash to reach H’s hands a dividend tax of 38.1% would be payable, reducing the total of income streams 1, 2 and 3 to £1,395,348.
Stream 4: H received a one-third share of the recording royalties of the band
This income was paid through a company owned equally between all three band members.
The experts were agreed that the annual income for H from this stream was £1,500,000 and Mostyn J took a multiplier between two of the experts of 12.5. After corporation tax, costs of sale and dividend tax the capital value to H was £3,055,345.
Mostyn J then reflected on whether the total of income streams 1, 2, 3 and 4 of £4,450,693 should be discounted further to reflect the somewhat subjectivity of the exercise he was carrying out but concluded this would be double counting and he had already captured the risks within his robust multipliers.
Stream 5: Income from his share of ticketing and merchandising income generated by touring
The fifth income stream was argued by W as also being matrimonial in nature on the basis that H would be performing songs created during the marriage.
Mostyn J was clear that this income stream was excluded altogether from the capital calculations. If H goes on tour after the marriage, then the income from such efforts is from post-marital efforts:
“The fans are coming to see the band performing, not to listen to songs being played by a machine and pumped out of loudspeakers”.
Mostyn J echoed the point first made by him in B v S  regarding a footballer only getting paid after divorce if he gets up and plays football, regardless of whether those skills were developed during the marriage. H’s income would still benefit W and their children, however, via child periodical payments until each child completed tertiary education, school fees payable by H and the interim spousal periodical payments by H to W continuing until the clean break.
The total assets available for sharing at the end of this long marriage therefore amounted to some £10,220,158 of which W’s share was £5,110,079. After accounting for W’s own net assets, the balancing lump sum payment due to her was £2,355,728. This was to be paid in three instalments between 1st April 2020 and 1st October 2023 to give H time to generate the income to do so. H’s spousal periodical payments to W would reduce rateably from the time of the second lump sum payment.
Mostyn J held that such settlement would allow W’s needs to be met for the rest of her life, allocating her a nominal earned income of £25,000 per annum she could generate for herself which, when added to investment income and child periodical payments, would total £222,526 per annum and meet her reasonable needs with reference to the standard of living enjoyed. It was also reasonable for her to downsize her home in her later years when the last of the children had grown up, releasing to her a further £1.5M.
CB v KB is all well and good where there are assets and income available to make it affordable to achieve a clean break regarding the royalties element. However, that isn’t always the case. Some clients have royalty streams that are generous, but not to the extent that capitalisation is affordable. In those circumstances, the income stream is usually utilised to pay spousal periodical payments instead, ensuring the other spouse is able to take their share in this way. It’s possible that is what happened for The Clash divorce of Paul Simonon and Tricia Ronane in their privately reached original settlement.
However, not all clients want to capitalise their royalties in this way, even when it’s possible. I’ve seen clients reach agreement that royalty streams are not capitalised, and instead are used to pay agreed spousal and child maintenance at higher rates than would otherwise be reasonable and agreement that the royalties are left to their children in an irrevocable part of their will. Anything is possible where there is goodwill and a wish to do so. A word of warning, however, that this is only advisable and possible where the parties remain on good terms. If there is a likelihood of bad blood in future, clients may find themselves in an unbearable situation of both legal and accounting issues that don’t work for either of them.
Neither party may be keen to rely on a valuation of such rights, particularly given the level of variation between experts in valuing intellectual property. Furthermore, the parties may not wish to incur the cost of such an exercise. It comes back to the general point to clients that if they want a settlement tailored to their own family circumstances and wishes, don’t leave it to the court to make findings of fact and impose a decision on them.
In CK v KB there were 4 expert accountant valuers: two single joint experts, one for H and one for W.
However, two of the experts did not have experience acting for musicians and monetising their interests. Mostyn J found the view of such joint expert unreliable, in part because of such lack of specialism and experience in this niche area, a warning to all practitioners to choose our experts with caution.
Deborah's article was published in LexisNexis Family Law, 1 August 2022.