And Now, Chuck D Is ‘Complicating’ the Sale of EMI

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You can almost hear “Fight the Power” playing in the background.

Because more than twenty years after that song broke, D is not only bringing serious heat to Universal Music Group, but he’s also complicating the sales process for EMI owner Citigroup, according to sources willing to discuss the matter.

The reason is that Chuck D – whose real name is Carlton Douglas Ridenhour – is at the forefront of an early-stage class action lawsuit against Universal Music Group, one that seeks to dramatically increase artist payouts on digital assets.  And if victorious, D – and others similarly situated – could produce a royalty windfall estimated in the “hundreds of millions” of dollars.  That, according to sources, would subsequently produce a huge potential liability for the other majors, including Warner Music Group, Sony Music Entertainment, and the as-yet-unsold EMI Music.

It’s a vicious and interlinked scenario that’s being hand-delivered to EMI’s doorstep.  And according to our sources in M&A and financial firms with ties to this deal, only the possibility of a catastrophe is what matters.  “It absolutely has ramifications for [owner] Citi[group], because any buyer will demand a provision that gives them some comfort on a sudden devaluation of the assets in question,” one source told us.  “This [protection] could be accomplished through mechanisms like graduated payments, it could be done through clawbacks or sunsetting.”

Which are all basically mechanisms for protecting the buyer from looming cracks in the foundation.  Still, this may not affect the actual price tag, according to an investor in the private equity space. “If you’re an interested buyer, then you’ve done the diligence and you know that what you’re buying is potentially volatile in value,” the source noted.  “But as long as you’ve insured yourself against that event, you’re still a buyer, but it’s a layer of complication.”

But wait: are we getting ahead of ourselves, here?  After all, the Chuck D complaint is only days old – and does this case have a chance?  Actually, the answer is a serious yes, according to the music attorneys we’ve spoken to.  “Chuck D has a good chance of succeeding,” New York-based music attorney Steve Gordon told Digital Music News this afternoon.  “Each case is fact-specific and invariably depends on each contract and is thus open to interpretation by the court.  But I think the impact of this case as well as the Rob Zombie and Rick James cases taken as a whole will wildly impact future case holdings within the industry.”