Financial Manager Magazine May-June 2010

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Article in the Financial Manager Magazine May-June 2010.

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Financial Manager Magazine May-June 2010

  1. 1. LEGAL ISSUES Reprinted from the May/June 2010 issue of The Financial Manager magazine SHIFTS IN MARKET FORCES AND A TALKSHOW BROUHAHA POINT TO CRITICAL CONTRACT ISSUES INVOLVING EVERYONE FROM STARS TO MID-LEVEL EXECUTIVES. Conan Lessons From By WENDI S. LAZAR W HEN CONAN O’BRIEN WALKED AWAY For example, companies may want and need flexibility due to the from his NBC late-night deal with a cool $32.5 possibility of a merger; a reduction in staff, or the subsequent success million earlier this year, he gave the entertain- or failure of a program or series. On the other hand, talent may need ment industry a big reminder that the contract security and guarantees because by signing one contract, he or she is negotiation process is critical. likely to give up other career opportunities. You don’t need to be at the pinnacle of the entertainment food chain Because the parties may not always agree, it is essential to assign a to feel the effects of the contract process, or how the balance of power value to what is most important to each party, and to assess the level can shift. The downturn in the economy has placed new pressures on of risk, tolerance or flexibility that is needed to make the deal. those negotiating agreements with executives and talent. With many On a basic level, every talent agreement should define the role, media companies going out of business or reducing their staff and pro- duties and responsibilities inherent in the position. Is the role local gramming, talent is competing for fewer roles and opportunities. or global? To whom does the talent report and who reports to him While the top of the talent sector always seems to get their price or her? Is he or she anchoring one show a day or three, and will the and their terms, those in the middle are often pushed to compromise network be able to rerun the show on cable, the Internet or by post- on their deals. In fact, since the writers strike in 2007, many employ- ing it on YouTube? ers are presenting “take it or leave it” approaches to contracts with an For an executive, deepest concerns may include the location of her unwillingness to move off their one-sided boilerplates. office or the reporting line or authority. And this requires specific- Regardless of the level of talent or employee concerned, O’Brien’s ity in the agreement. For a major star, it could be who her co-star settlement points to a primary rule: agreements need to be specific is; the size of her trailer, or who is doing her make-up and hair. In and consistent. drafting or responding to these agreements, these non-business terms According to an article in The Hollywood Reporter published Feb. may be material and must be spelled out in explicit detail to avoid 9, if O’Brien’s initial agreement hadn’t specified the exact time of his ambiguity. program’s late-night slot, he would likely have been forced to move it to a different time period. Or if he had breached his agreement by Changing Terms leaving, he would have been required to pay damages. Once the non-business terms are established, the specific business Instead, O’Brien is not only receiving a huge sum of money, but his terms must be clearly articulated in the contract as well. It’s important team gets $12 million. And he departs with few strings attached. to define such matters as the requisite performance with clear targets The challenge lies in creating documents that accurately reflect and goals if compensation is attached to the terms. Further, ensuring the intentions of parties on both sides of the negotiation table. In that sales levels for products (such as DVDs) are stated in the agree- the media business – where change is happening at lightening speed, ment is necessary, so that there is no second-guessing by the parties and technology is affecting roles, opportunities, and costs – everyone as to what triggers certain payments. needs to insure that their documents take the future into account as The level of guaranteed payments and the timing of these pay- well as the present. ments will also change, depending on the leverage of the talent. Of Anticipating potential issues during a negotiation and papering the course, the most senior-level executives and some major stars will deal effectively in an agreement is key. always have the leverage to negotiate and specify their own terms and
  2. 2. conditions and to receive enhanced compensa- tion and benefit packages accordingly. However, in the new economy these deals are affected as well. For major talent, the deals are less frequently driven by large upfront sala- ries. Instead, talent is lowering their fees and tak- ing a piece of the gross – the backend. Big stars have risked millions this year as their contracts paid out only when the show was successful. Similarly, for the high-level executive, the deals are less about upfront cash and stock and more about deferred cash or equity that vests over time and is likely to be based on reaching target performance goals. For both these groups, the financial rewards will depend on drafting clarity in terms of defining net, gross and ultimately, defining success. It may become more expensive for talent to prove their worth in this economy, because they may need compensa- tion experts, in addition to lawyers. That ensures that the deal negotiated is the deal papered. Proving your worth is worthless if the agreement is not clear on the factors that will contribute and pay out bonuses, backends and residual payments. Complicating all of this is the downturn in the economy, which is fostering companies to restructure, refinance and then attempt to redefine these contracts in order to survive. This is certainly an issue in the television test-pilot business, and the result is that mid-level talent is likely to garner less money in the backend for new television and cable series. When test-pilot season was in full swing this year, companies included non-negotiable language in pilot agreements stating that rerun residuals were included in performers’ prepayment. In other words, they were treated as part of the actor’s regular salary. This new language could eliminate an actor’s opportunity to make more money if the pilot is a success. Clearly, those representing series actors are under pressure to get decent upfront salaries if the back- end is now non-existent. Boilerplate Vs. Tailored Contracts Usually a company’s counsel drafts employ- ment or talent agreements, regardless of a person’s relative importance. Some- times, these boilerplate agreements are in the form of an offer letter. If In most executive negotiated by the parties and fully executed, they are binding, even agreements, the if the document states that the employer wants employment is “at-will.” the grounds for While boilerplates are easy termination to be to access and provide con- as broad as possible, sistent rules and policies and the talent for the company, they can wants it to be just also be treacherous if they as narrow. are overly broad or over- ly inclusive, in that they may not address the spe-
  3. 3. LEGAL ISSUES cific role of the talent or the obligations Terms for Departure erance plans that are formulaic and provide of that role. Such boilerplates may also In most executive agreements, the employer payments under certain situations. result in the company giving up valu- wants the grounds for termination to be as Severance can also be negotiated by an able rights because their contract terms broad as possible, and the talent wants it to attorney in the employment agreement and are outdated. For example, if companies be just as narrow. Fixed-term agreements be controlling, even if a company’s plan would have not redefined new-technology terms, usually provide for early termination under pay out less cash and benefits at termination. they may be giving up certain electron- circumstances such as death, disability and ic or digital rights. Also, if the company “for cause.” Agreements more favorable to the Non-Compete Restrictions has a non-compete that applies to all its talent also provide for voluntary termination Non-competition provisions often appear employees but has not been structured to by the talent for “good reason.” in talent and executive agreements, stock address individual talent competition or A “for cause” definition for termination forfeiture plans, severance agreements and solicitation, the document may be found should present a high threshold of wrong- non-disclosure and proprietary information unenforceable in certain states when other doing before an employer can terminate tal- documents. While volumes could be writ- factors are present. ent, because the consequences of doing so ten about these restrictions, it is important At the same time, boilerplate agreements may be severe and have a major impact on to note that each state has its own laws about that do not capture the specific and individu- the right to salary, benefits, severance, vesting what kinds of restrictions are reasonable and Boilerplate agreements are easy to access and provide consistent rules and policies, but they can be treacherous if they are overly broad or overly inclusive al reason for an early termination of an agree- of options and other equity compensation or enforceable, and this will be a consideration ment, or that allow for competition if certain profit participation. before signing an agreement. trigger events take place, may be costly for tal- These definitions usually state that a con- Often, the amount of severance is tied to ent when they look for and attempt to secure viction, misrepresentation, fraud, embezzle- a period of non-competition or non-solici- new opportunities after leaving the position. ment and other breaches of the relationship tation in order to provide “consideration” in Individually drafted agreements give both constitute “cause.” An executive agreement exchange for not working for a competitor of parties an enhanced opportunity to exam- should have objective qualifiers such as will- the company or network and not poaching ine and understand their relationship with- ful misrepresentation or material breaches company staff. Again, this is an area where out a preconceived form to inhibit or govern before “cause” can be triggered. the definitions of client, program, account and it. Understanding how and why the parties An ability to resign for “good reason” gen- business can completely alter the obligation agreed to contract in the first place – and on erally means that if an employer drastically and the protection. what the consideration for the specific deal changes the material terms of the employ- In the media industry, on-air talent and was based – can be worth the time and effort ment relationship, or there is a change in senior executives are also privy to company to document. control of the company, an executive can vol- secrets and marketing strategies. As a result, Once basic terms and business terms are untarily resign claiming “good reason,” and they are subject to restrictions on which net- agreed upon and both parties have signifi- will still be eligible to receive severance. works they can appear on or be hired by, if cantly invested in the process, it is time to These provisions are important, particular- and when they leave the job. engage in a more aggressive negotiation over ly in the media industry where mergers and Many states will only enforce these pro- the legal issues that likely remain. Whether acquisition can drastically change the posi- visions if there is adequate compensation in this is done by an attorney, a talent agent or tion, duties and even the location of a job. exchange for the restriction. However, because an executive, there are important legal provi- In O’Brien’s case, “good reason” may the industry is fast-paced and constantly sions that must be considered and will affect have been defined as a move to a different changing, an executive should consider wheth- both parties’ rights during employment and timeslot, other than the 11:35. For a senior- er being out of the business for even a minimal often after it ends. level executive, it could be a different report- amount of paid time will negatively affect his From an executive’s perspective, the essen- ing line or that financing for the company or her chance for a position in the future and tial legal terms worth fighting for concern fell through. Whatever the reason, if drafted agree to language that is relatively limited. the grounds for termination; how termina- with precision, it will cause an early depar- In the end, making sure an experienced attor- tion effects compensation and severance, and ture by the talent; legally trigger certain ben- ney who understands the deal and who has what, if any, restrictions there are on future efits, and could eliminate certain obligations properly translated and crafted what is intended employment. As we saw with O’Brien, the such as a non-compete. by the parties will help to eliminate uncertainty issues that trigger talents’ departure and the Severance payments or separation pay usu- and tribulations in the future and result in a restrictions that could limit their ability to ally include compensation and certain health stronger and more balanced contract. work are paramount. For the company, bind- benefits, and are paid following termination ing the talent for as long as they are needed in either a lump-sum amount, or as contin- Wendi S. Lazar is a partner at the New York law but reducing any liability if they are not, will uation of salary for a number of weeks or firm Outten & Golden. She can be contacted at create the tension in drafting these terms. months. Many companies have separate sev- (212) 245-1000 X9811 or wsl@outtengolden.com.

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