Structure of an Exclusive Management Agreement for a K-Pop Artist (Standard Form Contract)

Posted by Joseph Hwang Joseph Hwang 8/04/2024

Structure of an Exclusive Management Agreement for a K-Pop Artist (Standard Form Contract) - Part 13.

Joseph Hwang

* Attention: This article is based on the latest version of the "Standard Form of Exclusive Contract for Musicians (hereinafter referred to as "SFEC", Notice No. 2024-0021, Ministry of Culture, Sports and Tourism of the Republic of Korea, amended on June 3, 2024)."

** Contract parties: Artist (hereinafter referred to as "Artist"), and artist management company (hereinafter referred to as "Company")

***

Article 12 (Distribution of Profits, etc.)

① All revenues caused by the following items according to the Agreement hereof shall first be collected by the Company and should be distributed by Paragraphs ② and ③.

1. Revenues from the sale of sound recordings and content (including revenues under Articles 8 to 10)

2. Revenues earned in exchange for popular culture artistic services

② Revenues from the sale of music recordings and content (including revenues under Articles 8 to 10) shall be distributed to the Company and the Artist after deducting expenses such as various distribution fees, copyright fees, performance fees, and the distribution method (e.g., sliding system) and specific distribution ratio shall be separately agreed upon by the Company and the Artist.

③ Revenues according to each of the subparagraphs of Paragraph ① regarding popular cultural art services mean the amount of income earned in exchange for popular cultural arts services after deducting the following expenses, and the distribution method (e.g., sliding system) or specific distribution ratio shall be separately agreed upon by the Company and the Artist.

1. expenses directly related to the Artist's official popular cultural art services (actual expenses necessary to support and maintain the popular cultural art services, such as vehicle maintenance expenses, living necessary costs, transportation charges, etc.)

2. Advertising agency fees

3. Other expenses incurred by the Company with the consent of the Artist

④ The Artist's distribution of revenues under Paragraphs ② and ③ as a group member shall be divided equally by the number of people in the group. However, if there is a separate agreement between the Company and the Artist hereon, it shall be adopted accordingly.

⑤ In case of that occurring the compensated money to the third parties before the distribution of revenues by the Company on behalf of the Artist caused by the defaults attributable to the Artist, the Company may first deduct this amount and the expenses incurred for indemnification from the Artist's revenues.

⑥ If the Company collected payment from third parties for the Artist's provisions of popular culture art services, the Company shall pay the Artist the monetary amount stipulated in the Agreement within forty-five (45) days from the date of receipt. However, when having legitimate causes for delaying the payment, the payment deadline may be extended within 45 days from the due date of payment.

⑦ The Company shall pay the Artist the revenues distributed under Paragraph ① and at the same time provide the Artist with the settlement details of the revenues (data that can confirm the total revenues, distribution of revenues, settlement method, and expense deductions, etc.), If necessary, the Artist can appeal the settlement details to the Company within thirty (30) days from the due date of receipt of the settlement details, and the Company shall submit the Artist with the basis for the settlement details in good faith.

⑧ The Artist can require the Company to provide the settlement details if necessary, and the cycle of submission of the settlement details shall be as stipulated in the Popular Culture and Art Industry Development Act.

⑨ The Company and the Artist shall each bear the taxes on their respective income.

***

The rules on profit sharing for K-pop artists are one of the SFEC's most important regulations, along with the issue of attribution of Artist rights. This regulation is mandated by Korean law, which establishes overarching principles as mandatory regulations and allows the parties to negotiate detailed rules for revenue distribution within the scope of the law. The statute is the Popular Culture and Arts Industry Development Act. Article 14 of the act sets out the principles of the profit distribution between companies and artists, which are as follows

Article 14 (Keeping Accounting Records)

(1) A popular culture planner shall appropriate and manage costs and expenses for popular culture planning duties provided to affiliated popular culture artists separately for each popular culture artist, and prepare and keep a separate book of account for each popular culture artist: Provided, That this shall not apply where the contents and extent of popular culture services provided by popular culture artists are not divisible when at least two popular culture artists provide a piece of popular culture service together.

(2) Where an affiliated popular culture artist makes a request, the popular culture planner shall, without delay, disclose accounting records related to the relevant popular culture artist to him/her, such as books of accounting under paragraph (1), etc.

(3) Where a popular culture planner receives the cost of popular culture services from a third party, he/she shall pay remuneration under a contract to affiliated popular culture artists within forty-five (45) days from the date of receipt: Provided, That where there is just cause for delay of payment, the payment deadline may be extended within the scope of forty-five (45) days.

Under these regulations, the Company is obligated to keep the accounting records of the Artist's revenues and expenses and provide the accounting data for the Artist whenever the Artist requests to peruse it. The Agreement can be subject to termination by the Artist in case of that, the Company refuses to provide the accounting data for a prolonged period without justifiable grounds.

Accounting records should be free of falsehoods, especially when recording expenses, the Company should book direct costs related to the Artist's activities only. This point has always provided a bone of contention between management Companies and Artists. The Company maximized its profits by passing on indirect costs to the Artist, and then the Company's unreasonable accounting methods with bad faith were claimed by the Artist later. For instance, when a Company had multiple idol groups under contract covering only a single manager in charge instead of one-to-one corresponding managers to each group, in spite the salary of the manager would have been divided proportionally by the number of groups, however, the Company applied the same amount of salary of the manager equally per each group as a deductible expense, on top of that, the interest on loans or office management costs that belonged to the general management of the Company were included in the deductible costs and expenses of the artist's activities for reducing the Artist's benefit portion, on the contrary, increasing the Company's profit. As a conclusion of frequent conflicts, the Korean government enacted the SFEC and relevant laws to recognize only direct expenses related to Artists' activities.

The relevant law mandated that independent accounting records be kept for each member of an organized group of two or more artists, with the only exception being if the group's expenses could not be separately recorded.

The key to accounting records is transparency and accuracy, but it also depends on the morality and management standards of the Company when doing the accounting. The law requires Companies to distribute profits to Artists within 45 days of receiving payment from a third party for an artist's activities, or an additional 45 days are expendable for justifiable grounds why payment cannot be remitted within this period. When the Company delays payment of the Artist's profits, the Artist shall notify the Company of a reminder letter passed over the above period or expiring the payment period separately agreed in the Supplement Agreement, if payment is still delayed, the Artist shall give notice of termination to the Company. The contractual relationship between the Company and the Artist will then terminate and the Company will be obliged to pay the Artist the unpaid profits in a lump sum. The being of the Company's nonfulfillment of payment for the Artist goes on, and the Artist has no choice but to file a lawsuit against the Company.

Under the SFEC, the Company is authorized to receive revenues earned from the Artist's activities on behalf of the Artist. Therefore, if the Company diverts profits sharing funds owed to the Artist for other purposes and fails to pay the Artist, the Company may be guilty of business embezzlement and subject to criminal penalties. For this obligation to be so important, the Company CEO should sensitively pay close attention to profit distribution in managing Artists.

In addition, the SFEC's rules for profit distribution refer to a distribution method called the "sliding system" as an example. The sliding system is an economic term. The original meaning is "a method of stabilizing real wages by increasing or decreasing wages or dividends in response to changes in inflation or cost of living indexes." However, it has a slightly different meaning here.

The sliding system example by SFEC is a suggested profit distribution method for most K-pop artists working in groups. The principle of profit-sharing for groups is to pay a proportional amount based on the number of members in the group. This can vary from case to case - some artists are signed to companies as individuals, others as groups, but almost all K-pop artists are signed as simultaneously individuals and group members. This can lead to confusion and inequity in profit distribution.

It's not uncommon for artists to earn revenues as solo artists in their works while maintaining a member of each group. Earlier in the K-pop industry, revenues earned by individual group members were shared in the same proportion as the other members despite being inequitable. Companies were concerned that any marginalized members' frustration could affect the collapse of the teamwork caused by discrimination between group members. However, a highly active member might consider why sharing revenues with less active members is unreasonable. Not all members of a group are equally loved by their fans, and some members will inevitably be more popular than others, this imbalance will eventually shake the group's teamwork to the point of disintegration. None of this situation is desirable for the company. The adoption of a sliding system of profit distribution as an appropriate solution would satisfy each member passing over time. This is the sliding system mentioned by SFEC. Of course, No system is perfect anywhere.

* Standard contract analysis continues in the series.

** References and quotations:

https://www.mcst.go.kr/kor/s_data/ordinance/instruction/instructionView.jsp?pSeq=2413

https://news.tf.co.kr/read/entertain/1676265.htm

Series Articles

Overview

https://www.musicbusiness.co.kr/2024/05/structure-of-exclusive-management.html

Part 1.

https://www.musicbusiness.co.kr/2024/05/structure-of-exclusive-management_26.html

Part 2.

https://www.musicbusiness.co.kr/2024/06/structure-of-exclusive-management.html

Part 3.