$40 mil fund set to keep key music staff

NEW YORK — Polygram Holdings will distribute $40 million in cash to key employees as an inducement for them to stay for at least a year after the music giant is acquired by Seagram Co, according to the definitive agreement for the sale of Polygram that was filed with the Securities and Exchange Commission Thursday.

The agreement also makes clear that Seagram has veto power over the terms of any sale of Polygram Filmed Entertainment, despite Seagram’s expectation that PFE will be sold before Seagram completes its purchase of Polygram.

Seagram and Philips Electronics, Polygram’s parent, signed the definitive agreement Sunday night after Philips agreed to a reduction in the price of Polygram from $10.6 billion to $10.26 billion to reflect a deterioration in Polygram’s performance during the second quarter.

Rumors that Polygram was setting up a pool to pay incentive bonuses to key people have circulated for the past few weeks, but the definitive agreement provided the first evidence of it.

While the agreement does not specify whether the pool is limited to music group employees, Seagram’s stated intention to sell the film side before the deal is completed would suggest film employees won’t be included. Polygram declined comment, and a Seagram spokesman refused to clarify anything in the definitive agreement.

The maximum any employee can receive is $500,000 or a year’s salary, whichever is less, paid half when the sale closes and the rest a year after the closing — on condition the employee is still with Polygram.

Polygram’s supervisory board, which is controlled by Philips, will play a role in picking the employees who receive the bonuses, but though Seagram will be consulted, it won’t have any approval over the list, the agreement said.

The definitive agreement also outlines how the sale of PFE will be managed, noting that Goldman Sachs will be hired to get the sale done “as promptly as practicable.” Until the overall Polygram purchase is completed, the PFE sale will be overseen by a three-person committee representing Philips, PFE and Seagram that will operate “by majority vote,” the agreement said.

Veto power

But it noted that Seagram has veto power over any decision made by the committee, including over “any specific proposal to sell the film division including the sale price or terms of any sale.”

Goldman Sachs is believed to be close to distributing a book on the sale to interested buyers, beginning the formal auction process.

The agreement also sets out the terms under which Polygram will do business until the deal closes, limiting any spending by either the music group or film company to budgeted levels previously disclosed to Seagram.

Spending limits

For instance, it says Polygram Film cannot commit to spend more than $750,000 on any film development project, cannot commit or spend more than $25 million for production of any picture with certain specified exceptions or renew or sign new first-look deals not approved by Philips before the deal was signed.

A spokeswoman for Polygram said, “There is nothing unusual in the covenants and our directive is to operate business as usual.”

Polygram stock, which had slipped in recent days, recovered slightly Thursday when it closed up 37¢ to $51.31.

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