While rockstars such as Iggy Pop and Nikki Sixx of Mötley Crüe were infamous for outlandish rider requests while on tour, perhaps nobody is more notorious for their demands of concert promoters than Van Halen. In its heyday, the band famously stipulated in a 53-page list of rider requests that concert promoter provide backstage, among other things, herring in sour cream, two large bars of ivory soap, and M&Ms with the caveat that there be “ABSOLUTELY NO BROWN ONES”. If brown M&Ms were found, Van Halen would not perform.
While mocked as an example of rockstar excess, David Lee Roth of Van Halen professed that the M&M rider was actually a savvy test to gauge whether an inattentive promoter may have botched more important details, such as safety measures on stage. It’s no surprise then that today’s modern rockstars, electronic dance music (“EDM”) DJs/producers, are equally, if not more savvy and assertive than their predecessors when it comes to dealing with and making demands of concert promoters. Those characteristics have been exemplified in the ongoing chapter 11 case of In re SFX Entertainment, Inc. (“SFX”).
SFX, which filed for chapter 11 protection in February 2016, is a producer of live events focused exclusively on electronic music culture. SFX owns or operates some of the world’s largest EDM festivals and event series, including TomorrowWorld, Sensation, Bestival and New York City’s very own Electric Zoo.
According to SFX, the company does business with major DJs such as Hardwell, Tiesto, Skrillex, and Steve Aoki pursuant to short term agreements. After its chapter 11 filing, artists were allegedly unwilling to enter into agreements to perform at SFX’s festivals and events without receiving 100% payment in advance. With the world’s top DJs charging in excess of $500,000 per performance, such an arrangement would either lead to (i) disruptions to the company’s working capital due to the substantial prepayments or (ii) an inability to promptly announce highly anticipated artist line-ups for upcoming events.
Leading into the bankruptcy filing, the company was suffering from liquidity issues and obtained $115 million in debtor in possession financing to stabilize its business. To assuage artists’ concerns about nonpayment, the company negotiated a “carve out” in the Bankruptcy Court order approving the DIP Financing to set aside up to $15 million for amounts payable to artists and talent agents, amongst others, for services performed after the bankruptcy filing. Generally speaking, secured creditors have first priority over any distributions in the bankruptcy case. However, it is typical for a DIP lender to set aside or “carve out” a portion of the proceeds of its collateral to pay the professional fees incurred during a chapter 11 case. The carve out is essentially an agreement by the DIP lender to subordinate its liens and claims and provide security to a party concerned about nonpayment. A carve out provides incentive for a party to provide services to a chapter 11 debtor by securing the recipient in the event of a liquidation.
SFX sought the carve out for artists and others on the basis that any concerns about artist payment would ripple among the small, tight-knit EDM community and dissuade artists and DJs from performing at the company’s future events. According to SFX, these DJs are vital to a successful reorganization as there is a limited talent pool and limited number of top artists that are able to attract millions of fans to SFX’s events and maintain value for the debtors’ estates. While it is rare to see a company’s vendors obtain a carve out for postpetition services, the artists and agents in SFX’s case successfully negotiated for this treatment using the same tactics as 1980s rockstars such as Van Halen – the threat of nonperformance. It’s fair to say that artists have come a long way since merely negotiating for M&Ms.
The company then entered into a Carve Out Agreement with certain talent agencies providing that their DJs/producers could avail themselves of the carve out, if, among other things, the artist agreed to perform on the terms agreed upon before the bankruptcy, or if no such terms were agreed to, on standard terms provided for in the Carve Out Agreement. For headliners such as Tiesto or Hardwell, a performance at a large festival means being paid 25% before the announcement of the lineup, 50% thirty days before the festival, and the remaining 25% not less than five business days prior to the event.
In March the company filed a motion with the Bankruptcy Court for the District of Delaware to have the Carve Out Agreement approved as well as to assume a number of existing artist agreements to secure performances at upcoming festivals (the “Approval and Assumption Motion”). In bankruptcy, a chapter 11 debtor may enter into new agreements that are outside “the ordinary course of business” pursuant to section 363 of the Bankruptcy Code, or assume an executory contract pursuant to section 365 of the Bankruptcy Code, if the company exercises reasonable business judgment in doing so.
No objections were filed to the Approval and Assumption Motion, which argued that entry and assumption of the agreements was a prudent exercise of business judgment because it would secure the artists’ performances and prevent the cancellation of music festivals or necessitate the signing of lesser-known artists. Accordingly, the Bankruptcy Court ordered the relief.
According to the Wall Street Journal, however, when SFX filed the Approval and Assumption Motion, it may have inadvertently leaked the lineups for its upcoming festivals by attaching a schedule of yet to be announced performances. Whether the release was unintended or not, the Bankruptcy Court for the District of Delaware has traditionally not competed with Instagram as the platform from which to announce that Skrillex is your big headliner.
In any event, the case is a good reminder for bankruptcy lawyers to carefully review any exhibits to be filed in Court. If information is confidential, consider whether the exhibit needs to be filed, and if so, whether it can be filed under seal pursuant to section of 107(b) of the Bankruptcy Code, and Rule 9018 of the Bankruptcy Rules.
David J. Cohen is an Associate at Weil Gotshal & Manges, LLP in New York.
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