With series two of BBC legal drama The Split currently airing, featuring the complexities of high profile divorces it seemed timely to look at a developing issue surrounding celebrity divorce and how to deal with royalties.
“For successful artists, living from their talents, royalties can represent a large part of the parties’ resources”, said Kate Allen, partner and Floriane Laruelle, trainee, at Dawson Cornwell.
Valuations hit a sour note
Yet, “there can be issues as to how royalties should be valued”, said Barbara Reeves partner at Mishcon de Reya. “There are instances where the rights to royalties have been sold as a capital asset. Spouses rarely want to be tied to each other longer than necessary. However, valuing royalties as a capital asset is rarely straightforward”.
“The starting point is that both parties share the wealth created by their endeavours during the marriage”, said Rebecca Christie, family law associate at Hunters. However, it’s important to note that “future income is not subject to the sharing principle, as it arises from work done after the marriage has ended”. However, when it comes to royalties, they are an “interesting hybrid as they generate income in the future, based on work carried out in the past”.
Strings attached: ‘Gifted’ royalties don’t count
A recent case in the High Court, CB v KB  EWFC 78, involving the bass player of a well-known and successful band sheds further light on how different income streams ought to be dealt with.
Tracey Rodford, partner at specialist family law firm Camilla Baldwin explained, “The case required the court to value five music income streams, in the context of financial remedy proceedings on divorce”.
“Where the royalty payments related to the band's music created during the parties' relationship, the court's approach was to attribute a capital value to the income stream produced by the royalties, and provide for that value to be shared between the parties”, said Christie.
For the most part, the division between the parties was equal but for two streams it was not. “One of the royalty streams to which the husband was entitled was a share of the lead songwriter's royalties. The court identified that there was an "element of gratuity" in this, as the lead songwriter was under no obligation to share his song-writing royalties with the other band-members. As gifts are not considered to be the product of a party's ‘endeavours’, they don’t have to be shared on divorce. Taking this into account, only 75% of the capitalised value of this royalty stream was shared between the parties”, said Christie.
Future earnings bring no satisfaction
Furthermore, “The fifth income stream was excluded because it referred to future music tours” said Rodford. Any income generated from future tours would arise from endeavours after the marriage and therefore they would not be subject to sharing.
The bass player’s income stream was valued at almost £4.5million and he was ordered to pay his ex-wife a lump sum premised on her having a half share of that. The decision demonstrates the court’s preference to find a clean break where possible. In order to be able to do so, valuing the royalties is paramount. It’s also very challenging, as James Freeman, partner, and Henry Dawson, associate at Charles Russell Speechlys explained, “In this case four experts gave valuations on the income streams, which leaves much scope for disagreement”.
When the lights gone out and the food run out
“We would advise clients to be pragmatic. It may be better to get on with having royalties valued and find a number that everyone can work with. Until that happens, it’s difficult to even have a serious conversation about what the outcome of the divorce will be. Where things become contentious, many people will be reviewing the financial data and it can not only be a long process but a very expensive one”, they added.
Yellow submarine or Hogwarts?
Finding an expert can also be challenging and it really depends on the area of expertise required as to who is best placed. Freeman and Dawson point to the judgment in CK v KB where one accountant is cited as having “no direct experience in either managing musicians or in the sale or purchase of their income rights”. His calculations are not accepted as ‘valid analogue’, stating that “it is like using the accounts of Tesco to value the village shop in Ambridge”.
While this particular case being discussed involved a musician’s income stream, “it could be applied to anyone working in the creative industry where there are varied and ranging income streams, including royalties”, explained Rodford. For example, film directors or authors.
Prepayment problems: nothing left
Authors may find their own complications in instances where royalties are paid prior to the endeavor, such as an advance on a novel. “Ordinarily, income arising from work carried out after the marriage has ended should not be subject to sharing between the spouses, save where it is required to meet ongoing needs. Where an advance has been paid prior to separation, but the work is to be done afterwards, there are likely to be arguments as to how such a payment should be treated, particularly where the money may already have been spent or invested”, said Reeves.
In certain circumstances, a pre-nuptial or a post-nuptial agreement can be used to ring fence assets.
Second time around
Freeman and Dawson provided some tips: ““It can be difficult to be too prescriptive about the value of assets. Sometimes it may be better to focus on defining what is a marital asset and what is not”. In their opinion, a prenup can be of significant value when “A couple are marrying following previous professional success, or when it is a second marriage. In these instances, the pre-nup can be used to define how the royalty streams will be dealt with and hopefully head off a potentially acrimonious, long and grueling dispute later on”.
Rodford added, “Provided that an agreement is entered into with the benefit of independent legal advice, there is no suggestion that either party has been pressurised to sign and provided the agreement is fair in all the circumstances, it is likely that the agreement will be considered as highly persuasive if there is any dispute on divorce”.
“If, however, the endeavour giving rise to the royalties was undertaken during the marriage, during which time the other party looked after children, that spouse would be more likely to succeed on a claim that the pre-nuptial agreement was "unfair" and should not be binding”, said Reeves.
So although rock stars might be top of the pops as a partner, wrangling a payout from a split might cause both sides an achy breaky heart.
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