Category Archives: Film

The unreasonable expansion of the Right of First Refusal Clause in entertainment contracts.

The unreasonable expansion of the Right of First Refusal Clause in entertainment contracts.

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The unreasonable expansion of the Right of First Refusal Clause in entertainment contracts.Get Your Head around the movie biz

After practicing entertainment law for nearly 25 years, I've noticed a disconcerting trend in deals with major studios and networks. That trend is toward expanding the scope of a Right of First Refusal and First Negotiation clause(s) in such a way as to unreasonably encumber things, even after the studio or network has “passed” on a project.

What is a Right of First Refusal?

A Right of first refusal (ROFR or RFR) is a contractual right that gives its holder the option to enter a business transaction with the owner of something, according to specified terms, before the owner is entitled to enter into that transaction with a third party.

What is Right of First Negotiation?

Sometimes called a “Right of First Offer”,  a Right of First Negotiation  means that the  owner must undergo exclusive good faith negotiations with the network or studio before negotiating with other parties.

So, for example, when selling rights for a screen adaptation of a novel, the author of the book might wish to reserve rights for audiobooks, an author-written sequel, or a stage adaptation. Often, studios will grant such reservations of rights, but insist on a Right of First Refusal or First Negotiation.

Under such a clause, before selling or licensing a reserved right a third party, the author would be required to first offer the right to the studio. Then, if the studio doesn't accept the proposed terms, the author is free to sell to (or negotiate with, as the case may be) others.

But, over the past few decades, studios and networks have apparently decided that Rights of First Negotiation and First Refusal aren't sufficient to secure their stranglehold on content. As a result, they have increasingly insisted on also including similar, but more onerous Right of Last Refusal clauses.

What is a Right of Last Refusal?

A right of last refusal gives one party to a contract the right to accept any bona fide offer made by a third party for some right.

So, in the aforementioned example, the book author might decide she'd like to see a stage play of her novel. Because of the Right of First Negotiation, she is obliged first to approach the film studio, and to negotiate for a period of time. Then, if that time, expires and the parties haven't reached any agreement, she's free to offer the stage rights to others. But  with the Last Refusal in place, after negotiating a stage rights deal with a Broadway producer, our book author must first go back to the film studio, and allow them to match the terms.

How a Right of Last Refusal unreasonably encumbers a property.

Such Rights of Last Refusal are an unreasonable encumbrance on creators' property rights. They effectively, deny the holder of reserved rights any meaningful opportunity to exercise those rights,  and that renders the reservation of rights essentially void. As you might imagine, it can be difficult for a rights holder to interest any third party in a property, if that party knows that, after lengthy negotiations, the best deal to be struck can simply be matched by the film studio. As a consequence, the studio (or network) effectively holds a free, perpetual option to acquire the reserved rights. In my view, this is patently unfair, and should be avoided.

Of course, if the financial terms justify such an encumbrance, then so be it, but parties should understand the consequences of the provisions to which they agree.

When negotiating contracts with reservations of rights, it is of utmost importance that rights holders resist the use of clauses granting rights of last refusal.  Unfortunately, the only way to accomplish may involve saying “no” to an otherwise attractive deal.

How (and why) to set up a special purpose production entity for your film or show

In the fields of independent film and theatre, the use of Special Purpose Entities is very common. This article explains what these are, why they're used, and how to get started.

What is a Special Purpose Entity (or Vehicle)?

An SPE is a legal entity (usually a limited liability company of some type or, sometimes, a limited partnership) created to fulfill narrow, specific or temporary objectives. In the case of film and theatre projects, the SPE would be created to produce a single film or production.

In a common scenario, the producer of the company may have several projects in various stages of production at any given time. This producer or company would establish a single, umbrella company (a “holding company”) which would then create individual SPE's (subsidiaries, essentially) for each project. This allows projects to be developed as wholly-owned or Joint-ventures.

Why form a Special Purpose Entity?

Using a Special Purpose Entity for each project carries a number of benefits. First, it permits clarity as to administration, control, and ownership of the company. The Company's Bylaws, Operating Agreement or Limited Partnership Agreement can identify the ownership structure, voting rights, and other rights of the various owners, and afford important protections for investors and the hands-on producers as well.

Secondly, the SPE provides the structure through which to sell equity investment. Depending in the entity type, investors may purchase shares of corporate stock, limited partnership interests, or LLC membership interests.

Next, the use of the SPE allows for the separation of assets of the particular project from unrelated ones. This keeps accounting much simpler, and prevents the cross-Collateralization of revenues and expenses from multiple projects.

Finally, and possibly most importantly, the use of Special Purpose Entities affords important protection against liability. Owners of Corporations, LLCs and Limited Partnerships are protected from the company's exposure to claims, and each shareholder, member or partner (as the case may be) has his or her risk of loss limited only to the amount invested.

How to form an SPE/SPV

Determine the Entity Type

There are a number of possible entity types available, but the specifics of each, and the factors to be considered in the selection of the appropriate form are too numerous to be addressed in an article of this type. This is not a decision to be taken lightly, as it can have long-lasting and wide-ranging consequences. Seek professional advice from financial, tax and legal advisers.

Select the Jurisdiction

Where to form your company is also an important consideration. While many companies are formed in the home-state of the founders, many others opt to form in distant states to gain advantages offered there, or avoid unnecessary costs at home. Many companies elect to be organized under Delaware's law, which offers a number of provisions that favor the mangement of the company, while still protecting those who invest.

But ultimately, the size and scope of the project in question may influence this decision. Since companies will have to “qualify” as so-called “foreign” companies in all states where they do business, the cost and tax savings state-to-state may be illusory.

Prepare & File the Papers

Forming an Entity to operate as a SPE seems deceptively simple. In most jurisdictions, it's a simple matter of completing a form (often called “Articles” or “Certificate” of Organization), or preparing a document outlining a few basics, name, address, number of shares/units available, etc. But in this simplicity lie traps for the unwary. Inclusion of certain provisions can alter the application of certain “default” state-law provisions, or change the rights and obligations of officers, directors and shareholder/members.

Depending on the type of organization and the jurisdiction, there may be other governing documents that need to be filed with the government.

Draft governing Documents

Next, the company will need a set of Bylaws or an Operating Agreement to set forth the specifics of how the company will operate, be managed, and financed. While default rules might be suitable for your business, it's likely that variations will be desirable.

Once the company is formed, it becomes a separate “person” in the eyes of the government, particularly for tax purposes. The company will need to obtain a tax-identification number, and make certain tax-elections that will influence how the business will pay its taxes, as well as how (and when) the owners will be realize their share(s) of company profits and losses.

Still another consideration is whether the company, if held by a very small number of stakeholders, will be subject to any voting agreements, or a buy-sell agreement governing how, when, and to whom an owner may sell his or her interest in the company.

Obviously, custom-tailored professional advice is called for in making these determinations. It is unwise and risky to rely on hearsay, popular belief, and out-of-context research in deciding on such matters.

When to form an SPV

Ideally, the SPV should exist before any assets are acquired, liabilities incurred, or investment accepted. In practice, this is quite difficult to achieve, but it certainly makes sense to form the entity before taking in investors' funds. Assets can be transferred into the company by the founders (often called “promoters”), and liabilities can be addressed through insurance policies and indemnity agreements. But with only a few exceptions, investments must be made in an existing company.

Should I use an online filing bureau to start my SPV?

“Would you stick your head in a machine that promises to give you a perfect haircut?”

Well, maybe if your head was the exact same size and shape as everyone else… and your hair is the same texture, length, moisture content, and so on, and you want the same basic haircut as everyone else who uses this machine gets.. then yes, you might. But, you know that you're not exactly like every other person who comes along… so you're going to go to a professional. A trained hairstylist who can take a look at you, help you figure out what kind of cut is best, and then do it so you look great.

Well, your business isn't the same as every other one. Heck, one SPV will vary in some ways from the next. You really need more than a plain-vanilla set up. Especially because you're going to be conducting a round of financing to fund your project, right? So the “standard” operating agreement isn't going to cover the bases properly.

And, let's face it, producing films, plays and musicals is not like making widgets.. A cookie-cutter approach to setting up the company is not the way to go.

A bad haircut will grow out if it's messed up. A badly structured company will be around a lot longer, and give you a whole lot more grief.

You want the people that are helping you with the production to be tuned in to the company structure and financing setup… So they should be the ones putting together the SPE as well. It'll save you time, hassle and money. Plus, there is the added advantage of one-stop shopping, so you have one less thing to juggle.

Conclusion

So, if you are financing a film, play, musical or other media project by taking in investment, loans or Presales, setting up a Special Purpose Entity is just the first step on the road to getting things up and running. Consult your lawyer about what type of entity is best for your next project.

 

Production Services Agreements

A commonly used, but often misunderstood type of contract used throughout the entertainment industry is the Production Services Agreement. This short article will attempt to demystify and explain the use of such agreements, but shouldn't be treated as a substitute for real legal advice from a lawyer you've hired to help you determine the best overall deal structure for your project.

What is a Production Services Agreement?

A Production Services Agreement is a contract between a financier, distributor (sometimes), or a lead-producer who wishes to hire a production company to handle all of the boots-on-the-ground aspects of producing a film, television program, commercial or other media production (we'll call this the “Project”). The production company brings to bear all of its expertise, knowledge, personnel, and other resources to produce and deliver the Project according to the financier's specifications. Continue Reading

Is Equity Crowdfunding a game changer?

Equity Crowdfunding is finally a reality. Almost. In a long-awaited move, on October 30, 2015 the Securities Exchange Commission (SEC) finally adopted a set of rules mandated by the 2012 JOBS act. These rules are designed to facilitate small businesses with capital formation through the use of a crowdfunding approach to sell securities. The rules… Continue Reading

Transitioning from Kickstarting to Company Starting

The differences between contribution crowdfunding and equity funding Sites like Kickstarter and Indiegogo have been enormously successful in popularizing the new trend in fundraising, crowdfunding. As of the writing of this post, Kickstarter boasts nearly 11 million pledges on over 100,000 different projects. For those looking to create an independent film, theater production, video game,… Continue Reading

Seeking investors for your film project?  Things just got a little easier (almost).

Seeking investors for your film project? Things just got a little easier (almost).

SEC Adopts Rules implementing [some] provisions of the JOBS Act of 2012 If you’re planning to finance your film, play, musical or other project by seeking investors, things may have just gotten a little bit easier for you. A few days ago, on July 10th, the Securities Exchange Commission finally took a long-awaited step toward… Continue Reading

Warranties and Representations – What these contract clauses really mean.

If you’re like most of the entertainment industry folks I come into contact with, you’ve signed a few contracts in your day. And, if you’re like most of those folks, those contracts have required you to make certain “warranties and representations”. But, what’s interesting to me (and a little scary) is that when I ask my clients whether they’ve read and understood what they’re signing, often as not, the answer is either a blank stare, or a simple “No. That’s what I have you for.” Continue Reading

4 reasons why receiving Producer Credit may not be all it’s cracked up to be.

4 reasons why receiving Producer Credit may not be all it’s cracked up to be. It’s a common practice in the entertainment industry. Producers operating on shoestring budgets will, in an effort to secure the property and/or services of talented individuals, ofer them some kind of producer credit in lieu of the usual compensation those… Continue Reading

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