In harmony – the Universal Music/ KWMSJB relationship

How music giant Universal and its external legal adviser maintain a harmonious and enduring working relationship 

The music industry is in crisis. Physical sales of music have decreased dramatically in the past decade. Although digital sales and legitimate streaming via services such as Spotify have increased, they have not filled the gap. Instead, that gap has been filled by illegal downloads.

Yet record labels have a history and heritage that cannot easily be rubbed out, and EMI is no exception.

universal

Last year it was sold to Universal Music Group, a French-owned, US-based conglomerate, in a controversial deal that involved so many lawyers it would have made  The Beatles’ mop-top heads spin (the group were for a time signed to EMI). But at least the main legal players involved in the deal on the Universal side are very much still talking to each other.

Not to put too fine a point on it, the two are very big fans of each other, having built the sort of close professional relationship many general counsel and their advisers would kill for.

“He’s not just the best antitrust lawyer I’ve ever come across, he’s the best lawyer I’ve ever come across.” says general counsel of Universal Richard Constant of main external legal contact Stephen Kon, senior partner of what is now King & Wood Mallesons SJ Berwin (KWMSJB), “He’s the main reason we return to the firm every time for the big deals.”

That is about as glowing a recommendation that can be heard in the often back-biting world of entertainment, media and law. And Kon, who is also his firm’s global deputy chairman, does not hesitate to return the praise.

“Richard describes himself as a very demanding client, which he is, but he’s also a client who really wants to understand what is going on in great detail – why a particular situation is what it is and what can be done about it. He doesn’t give up until he has a full understanding. That is a great quality in a general counsel, because it is ultimately the general counsel who has to test his lawyer. That’s the way you get a good result – by having that sort of dynamic between the two.”

The bid

Universal needed all the dynamic it could muster from its lawyers when putting together its bid for EMI. The deal was hardly welcomed in the international music industry, with the purchaser having to climb a regulatory mountain in the EU. That was a challenge not aided by the fact that Universal had itself, about six years previously, strongly objected to a similar takeover of EMI by Warner Music Group.

Work on the deal began when EMI was put up for sale by owner Citigroup in mid-2011. Universal was keen to secure the company, as was rival Warner.

“EMI was essentially taken off Terra Firma’s hands by Citigroup and the entire market knew it would be up for sale pretty quickly,” Universal vice-president of legal and business affairs Alex Doherty told our sister title Lawyer 2B last year. “It was something we were thinking about and when the process started we got involved pretty quickly.”

Bidders were not just competing on price but also on who would take the antitrust risk, deciding whether it would be the seller or the buyer that would suffer the consequences if the deal was blocked.

“It’s hard to say for sure, but we think one of the reasons Universal won the bid was not just the purchase price but because it was prepared, perhaps unexpectedly in the eyes of other bidders, to take that risk,” KWMSJB competition associate Michael Reiss told Lawyer2B.

If Universal had purchased EMI and then been refused competition clearance it would have been forced to sell on all or most of it under pressure.

This would have led to a poor sale price and the costs associated with the initial purchase and subsequent sale would have been borne by the company. It was essential that legacy SJ Berwin was able to gain competition clearance.

Indeed, for many in the sector, it was the deal that couldn’t be done. But the duo of Universal general counsel Constant and client-relationship partner at SJ Berwin Kon kept the faith and by November 2011 they had done the initial heavy lifting, with both Universal and EMI agreeing to the £1.2bn sale.

But serious obstacles remained, notably in the form of the European Commission’s competition authorities. Still, by the last fortnight of September 2012 – after nearly six months of intense investigations – Joaquin Almunia, the commission vice-president in charge of competition policy, switched on the green light for the deal.

As an indication of the monumental nature of the deal, Almunia told a press briefing that the process had involved one of the most difficult decisions of his time in the role, owing to the “complex culture dimensions” of the takeover. Ultimately, however, he said “as a result of this decision we can continue, as music lovers, to enjoy a wide choice of music”.

But that Brussels fanfare was not the end of the show for Constant and Kon. There was an encore to come, as the quid pro quo for commission approval involved Universal having to sell EMI’s Parlophone label as well as EMI operations in 10 EU countries – and all to a timeframe considerably less than the eight months it took The Beatles to record their Abbey Road album. Last year at The Lawyer Awards, SJ Berwin won Competition Team of the Year for its work on the deal.

Five months after Almunia announced the commission’s conditional stamp of approval, Universal unveiled a deal to dispose of Parlophone to rival Warner in a transaction worth £487m, with Kon playing another key role. He has been the client relationship partner for Universal since the late 1980s. Many marriages fail in far fewer years. This is the story of how Kon has kept Constant on side.

The background

For his part, Constant acknowledges that at first glance, having maintained such a long relationship with one law firm could leave him open to allegations of complacency. 

“I can see how the length of the relationship might suggest that I’ve comfortably stayed with the same firm,” he says. “However, I’m pretty demanding, both in terms of service and costs, so it was no means automatic that we stayed with them.”

Constant’s philosophy is to look at individuals at law firms before assessing the practice as a whole. 

“For me, it’s the people rather than the firm,” he says. “[KWMSJB] have some extraordinarily good people and they’ve been able to deliver deals for us when we needed them. We use other firms occasionally on smaller matters, but for the big deals we return to them and they have always delivered.”

Universal lawyers

Universal has 200 lawyers spread around the globe. Constant and only four others form the corporate legal team at the business’s international headquarters in London.

Constant does not run a law firm panel. He instructs specialist firms on artist agreement-related matters, but for almost all Universal’s corporate work – and certainly all competition work – he picks up the telephone to “SJ Berwin”, as he continues to call the firm, despite last autumn’s merger with Sino-Australians King & Wood Mallesons, and Kon.

Years of familiarity with Kon and what was SJ Berwin have not, according to the Universal in-houser, dulled Constant’s interest in getting a fair deal on fees. 

“We have robust discussions around bills,” he maintains, adding that, contrary to much of contemporary in-house thinking, he remains a supporter of the billable hour.

“My approach is that I prefer to do it on a time-spent basis because that’s fairer,” says Constant. “It can be a hostage to fortune if you’ve agreed a fixed fee and then the transaction turns out to be considerably more complicated than anticipated. In that event, you’d probably end up renegotiating the fees anyway. I would find it difficult to run a transaction where our external lawyers are effectively working for free.

“On smaller transactions we might consider fixed fees, but hourly billing is still the fairest way to do it for the larger matters. That said, we do have discussions about the levels of fees, the chargeable hours, and whether parts of the transaction merited that much time being spent.”

Kon has his own theory to explain the longevity of the relationship with Universal. 

“The key is complete transparency,” he says. “And we want to be can-do lawyers rather than can’t-do lawyers. That means when a client comes to you and says ‘I want to do a deal’, of course as lawyers we could write a 40-page memo giving all the reasons why the client shouldn’t do that deal. But ultimately, you need to engage fully with the client and the business in terms of what they want out of the transaction and the commercial context, and to try and find a way you can achieve those objectives.”

The objective in the EMI deal was one of the biggest challenges for both Universal and the law firm, and its roots stretch back five years prior to a 2006 purchase. In the late summer of that year, SJ Berwin advised Universal on a €1.63bn (£1.33bn) acquisition of Bertelsmann’s BMG music publishing division. The deal created the world’s largest music publisher at the time and paved the way for contemplation of an even bigger purchase.

“A couple of years before the EMI transaction started,” explains Constant, “we sat down with Stephen and started talking about whether we thought we could do it. Everyone had assumed we couldn’t. So this is a good example of Stephen’s can-do attitude: I was half expecting the advice to be ‘no way’. But we talked it through, assessed the risks and, ultimately, we thought ‘it’ll take guts but we can do this’.”

Kon also remembers an initial mood of trepidation. 

“Richard’s right about the guts,” he says. “I said several times in the run-up to and during the deal that it was not one for the faint-hearted. And the important thing is – while you tell a client that ‘we can do this’, you also have to say ‘it’s going to be a painful process’. I said originally that we’d be going into a black hole for about 12 months and I hoped we’d come out the other end.”

The deal

Ultimately, the EMI purchase – which ran for about two years – was one of the most complicated transactions either lawyer had been involved in, not least because it was effectively several deals wrapped into one. First came a competitive acquisition conducted under a fairly constrained period; then came the type of tough regulatory negotiations expected when the world’s biggest record company attempts to buy the fourth-largest.

Finally came the series of disposals mandated by the European regulator. That involved a complicated segmentation of EMI and ultimately the sale of considerable assets. All of which required a raft of legal advice ranging from M&A, regulatory, general commercial and employment to tax.

On a deal that many thought could not be cut, there must have been a darkest hour, when the in-house legal team and their law firm advisers stared into the middle distance mulling over retreat tactics. 

But Constant maintains that failure was never factored into the thinking.

“We anticipated roughly how the transaction would go,” he says. “Perhaps we didn’t anticipate quite the amount of work involved and how long the whole process would last. But we went into it knowing it was going to be a tough regulatory process – we went in with our eyes open. We knew we had to take the antitrust risk to acquire EMI. That’s something we discussed at length with Stephen. We knew the risks, we measured them and we decided they were worth taking.”

The lawyers recognised early that they were at a potential negotiating disadvantage with the commission competition authorities, owing to historic positions. 

“There’s no doubt we had opposed a not-altogether dissimilar transaction 10 years or so previously,” says Kon. ”But our view was that the industry had moved on significantly since then.”

The previous jilted bride, Warner, fiercely opposed the Universal-EMI deal. 

“That sort of thing weighs heavily on the minds of the commission,” explains Kon, “partly because they think it reflects what the market thinks of the transaction and partly because they would have a significant ally in taking on the transaction in the way they took us on.

“All those are issues you’ve got to put on the table with the client from the beginning,” Kon continues, “so you can form a strategy for dealing with them. We had a particularly aggressive chief economist on the case from the commission who decided to use it to create a theory of harm based on how the digital markets operate. We thought it was misconceived, but nonetheless the commission is in the driving seat. You can spend all the time in the world bashing them over the head, but you’ve got to find a way through.”

In addition to a hard-nosed economist, the commission brought to bear a 20-strong team of officials to deal with the merger. 

“They’re all talented people,” says Kon before smiling, “and they all have firm views.”

Constant points out that a criticism of European competition investigations is that the commission holds all the cards. 

“It is judge, jury and executioner,” he says, before half-joking: “I’ve always blamed Stephen for being one of the senior and foremost competition lawyers in the world, yet not having done enough to lobby to change the process in the EU so that there’s an effective appeals process. 

“You can appeal a decision but it takes two or three years, by which time your deal is over. So you have to factor that in – that you are facing not just a regulatory body but one that can take the final decision.”

Kon takes the friendly jibe with good grace. 

“Richard is right – the great weakness of merger control at the European level is the lack of an effective appeals process. You know that these people sitting across the negotiating table from you control the fate of the merger – and sometimes they clearly let you know that they know that.

“It’s been the subject of some debate in the UK – here, we have a much more effective appeals procedure. A lot of people would like to see a similar system introduced in Europe.”

Kon put together a core team of a dozen competition lawyers, not least because the commission chose the EMI deal to start a fresh policy of issuing significantly increased discovery requests. 

“They asked us to produce every document on a particular subject going back five years,” recalls Kon. 

In the end, Universal had to search for and disclose hundreds of thousands of documents in various languages within three weeks.

“They’re looking for smoking guns,” explains Kon. “Documents that undermine the arguments you’ve put forward, or that would support the case that the commission wants to put forward.”

Faced with such a tight deadline the law firm brought in 40 multi-lingual paralegals, boosting the total disclosure team to 60. At times they worked 20-hour days on the project.

Such an intense workload doubtless left little time for the lawyers to kick off their shoes, pick up the air guitar and sing along to their favourite artists. Who would those songsmiths be when they do have a spare moment? Constant is cagey: “One’s tastes are rooted in one’s late teens and early 20s – that is Universal’s primary market. I’m in my late 50s, so you can work out who are my favourite artists.”

Kon is less evasive, saying he recently reached his “musical nirvana”, partly thanks to Universal at the firm’s first client party since it cut its own ground-breaking merger deal. 

“We held it at the Abbey Road Studios, which came to Universal with the EMI acquisition. There were loads of Chinese lawyers clogging up the zebra crossing. But for me, to be able to go to the piano on which The Beatles played Lady Madonna and pick up John Lennon’s microphone was very special. The Beatles are my idols.”

Surely John and Paul would not have had him in mind when they bashed out their Abbey Road rancour.

Fact file: Universal Music Group

  • Turnover: €4.89bn (£3.98bn) in 2013, up from €4.54bn in 2012
  • Employees: 7,649
  • As general counsel of Universal Music Group International, Richard Constant’s responsibilities cover the
  • world outside the US. Constant reports to Universal chairman and chief executive Max Hole.
  • Five corporate lawyers are based at the international headquarters in London. The figure for the rest of the world (excluding the US, a separate division) is about 80 lawyers who report to the operational head of that country or division. The company tends not to use secondees in London.
  • On external firms: “There are dozens of firms we instruct around the world, but KWMSJB is the one we instruct the most and they were the lead firm for the EMI transaction,” says Constant.
stephen kon

The players: Stephen Kon

Senior partner of King & Wood Mallesons SJ Berwin as well as deputy chairman of the firm’s wider network and a member of its international management committee. Kon chairs the firm’s partnership board and is a longstanding EU, competition and regulation lawyer, advising on high-profile contentious and non-contentious competition matters at EU and domestic
levels.

In addition to Universal, Kon’s recent client list includes leading Australian financial institution Macquarie Bank, and a group of global tyre manufacturers – Bridgestone, Continental, Cooper, Michelin and Pirelli – involved in a cartel damages claim.

richard constant

The players: Richard Constant

Studied law at Cambridge and qualified as a lawyer in 1978. Constant joined the music industry two years later, joining PolyGram’s group legal department in Hamburg, becoming general counsel of that business in 1990.

Following the acquisition of PolyGram by Seagram, Constant became general counsel of Universal Music Group International (UMGI) in 1998. In that role, he has legal, business affairs and government affairs responsibility for UMGI’s operations internationally.

He is a member of the main board of the International Federation of the Phonographic Industry, the recorded music industry trade association.

A hard day’s night: how Universal and KWMSJB teams got the deal through

Following the November 2011 purchase, work began to ensure that Universal’s sale did not derail, despite its competitors’ best efforts.

“In Warner’s eyes, no doubt, it was quite surprising that we’d take the risk,” KWMSJB competition associate Michael Reiss says. “That may be the reason why we managed to secure the assets and also why Warner could be seen as a jilted bride – because it had very much hoped to buy EMI.

“It missed out and vigorously opposed Universal’s acquisition of EMI, whether that was in the form of PR or more rigorous legal submissions to competition authorities around the world.”

Digital music power 

Other parties that opposed the deal included indie record label association Impala, which adopted the same strategy as Warner, mobilising PR teams and making submissions to competition authorities.

“Impala was one of the strongest opponents,” Reiss says. “The indies are much stronger nowadays. With digital platforms it’s much easier to sell your music. You don’t necessarily need to have a big infrastructure to do that.”

The increased strength of indie record labels was an important argument in favour of the Universal/EMI deal being allowed to continue.

“There are all sorts of services that aggregate music from indies and might sell them collectively to retailers, whether through digital or physical copies,” Reiss continues. “It’s easier for indies to sign artists and sell their music. We used the example of Adele. She was one of the top-selling stars at the time the sale was going through and was signed to an indie that had managed to launch a global superstar.”

Competition clearance was forthcoming in September 2012, but it was given with certain restrictions – notably, that certain divestments had to be made.

KWMSJB’s corporate team had four months to sell the nine different businesses. Divestments were auctioned off to bidders, subject once more to competition clearance.

The principal divestment was the Parlophone group, which was purchased by Warner. The creation of Parlophone was effectively the creation of a new label with UK and various European operations. Other smaller divestments, such as the Now That’s What I Call Music division, were also made, but these were self-contained units and relatively simple to transfer to new owners.

By contrast, Parlophone was completely integrated with EMI and so needed to be separated from the main business to be sold. 

“It had to be separated out – everything from its IT systems to its contractual arrangements and archives of recording tapes,” says associate Richard Davies. “There was the period between exchanging contracts in February and completing in July which involved separating out the building and moving people who wouldn’t be working in the EMI building.”

Associate Matthew Pearson, a trainee at the time of the deal, says: “A lot of the other divestments were already formed and quite distinct, but we had to create the Parlophone divestment so that’s what a lot of our efforts went into.”

Davies was first aware of the Universal deal as a trainee, when it was making its way through competition clearance. He qualified into the commercial department in September 2012 and went to a briefing on the deal on his first morning back in the office after NQ leave.

He recalls: ”On normal corporate deals it is usually quite straightforward, but with this there were so many documents, tens of thousands of them – everything from David Guetta’s recording contract to licensing agreements with iTunes and Amazon.

“We had to make sure that certain artists could still use the record labels they wanted on their next albums.” 

Managing the data room holding the documents became a job in itself. 

“It ended up being a pretty bespoke job,” corporate partner Will Holder recalls. “You invariably need to be concerned about, for example, a Coldplay contract or a Pink Floyd contract. There were multiple data rooms to deal with redacted and unredacted versions of documents.”

Aside from documentation governing the internal licensing of the labels, the KWMSJB team also had to ensure that external licensing agreements were transferred from EMI to Universal and Warner. 

Becky Waller-Davies 

Parts of this originally appeared in Lawyer2B, The Lawyer’s sister title for law students