Joseph Hwang
1. Understanding the Law on K-Pop Artist Profit Sharing
In K-pop, the artists and their management companies are considered financial partners. Nevertheless, the Standard Artist Exclusive Agreement acknowledges the management company's prerogative to direct, supervise, and manage the artist. This fact is indicative of the nature and character of this industry. To gain insight into the distribution of profits among artists in the K-pop industry, it is necessary to examine the legal framework governing this system. Of particular note is the Popular Culture and Arts Industry Development Act. To comprehend this legislation, it is essential to be conversant with the terminology it employs. Let us examine the following terms.
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Article 2 (Definitions)
4. The term "popular culture production business" means a business of producing popular culture products using popular culture services. In such case, where a popular culture product is produced through multi-level subcontracting arrangements, this shall include the business of an upper-tier subcontractor (including the prime contractor);
5.The term "popular culture producer" means a person who conducts popular culture production business;
6. The term "popular culture planning business" means a business of providing or brokering popular culture services or a business of training or directing popular culture artists, or giving counsel, etc. thereto;
7. The term "popular culture planner" means a person who registers with the Minister of Culture, Sports, and Tourism as prescribed in Article 26 (1) in order to conduct popular culture planning business;
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The legislation delineates two categories of K-pop operators. One may be classified as a producer, while the other may be classified as a planner. The definitions are identical to those outlined in the legislation. What is the rationale behind this categorization?
In light of the above definitions, it is pertinent to ascertain the classification of an artist management company that enters into exclusive contracts with K-pop artists and derives profits from its operations. Under the above definition, an artist management company could be classified as a planner.
The rationale for classifying K-pop operators into these two categories is that the concurrent involvement of artist management and content production companies leads to a conflict of interest for artists. Artists typically engage in performances for which they receive remuneration. The artist's management company is remunerated with a percentage of the artist's performance fee and is obliged to share the profits with the artist. The economic interests of these two parties are not fundamentally incompatible; however, when the artist management company also serves as a production company, the two roles may present a conflict of interest. To illustrate, consider a K-pop artist who is both a musician and an actor. If the management company produces a drama, the artist will likely encounter difficulties negotiating a higher fee than if their appearance were in a drama by a different production company. Such occurrences have been observed in practice. In this scenario, the artist is at a distinct disadvantage.
To circumvent the potential conflicts of interest, labor laws in the United States mandate that only duly licensed third-party agencies are permitted to engage with artists concerning their appearances. Such agencies are legally prohibited from engaging in business activities outside their core competencies.
Similarly, South Korean legislation prohibits planners from assuming the role of producer. However, the prohibition does not extend to K-pop. A review of the relevant legislation reveals that, concerning music, paragraph (1) provides a key indication of the exception to the rule. It stipulates that a planner may assume the role of producer. This outcome resulted from lobbying by K-pop planners during the legislative process.
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Article 11 (Exceptions to Concurrent Operation of Popular Culture Planning Business and Popular Culture Production Business)
(1) Where a popular culture planner concurrently operating a popular culture production business intends to obtain an affiliated popular culture artist's popular culture services, he/she shall obtain consent from the relevant popular culture artist: Provided, That this shall not apply where the popular culture planner produces music records or music files.
(2) Where a popular culture artist receives unfair treatment, such as where any of the terms of a contract are unilaterally amended, he/she is given discriminatory treatment compared with other affiliated popular culture artists, etc., for reasons that he/she did not give consent pursuant to paragraph (1), he/she may terminate the contract with a popular culture planner.
(3) A popular culture planner shall not charge affiliated popular culture artists expenses appurtenant to a brokerage fee, nor unreasonably reduce remuneration for services to be paid to popular culture artists for such reasons.
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2. Accounting Methods
The distribution of profits necessitates the implementation of accounting procedures. The law establishes the principles that must be respected in this accounting process.
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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 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 45 days.
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In summary, the above regulations encompass the following three key tenets: (1) the necessity for independent and segregated bookkeeping, (2) the obligation to inspect and provide accounting records, and (3) the requirement for payment within 45 days of receipt. This is the management company's responsibility, as they are contracted to collect the artist's royalties on their behalf. When raising a breach of this provision, the Korean government shall impose a fine on the management company under Article 41 of the Act.
The fundamental principle of accounting is bookkeeping. It is essential to ascertain the rationale behind the influx and outflow of funds and to document it under the established accounting standards. While the accuracy of the amounts is important, the most significant and fundamental aspect of accounting is bookkeeping, which categorizes the accounts accurately. If the company fails to provide the artist with a ledger exhibiting the rationale behind the entries and the pertinent documentation, the likelihood of accounting irregularities increases. Should such irregularities occur, they may constitute a criminal offense. It is incumbent upon artists to exercise due diligence in monitoring the financial activities of their management company. In the event of any ambiguity, it is their appropriate right to demand a detailed explanation and supporting documentation from the management company. It is incumbent upon the management company to acknowledge the artist's entitlement to inspect the accounts and to respond in a spirit of cooperation to the artist's request for documentation. This is particularly important given that the artist and the management company are financial partners.
* Series Articles
Part 1.
https://www.musicbusiness.co.kr/2024/09/k-pop-industry-profits-share-system.html
Part 2.
https://www.musicbusiness.co.kr/2024/09/k-pop-industry-profits-share-system_01072806606.html
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