Reinventing The Deal

Imagine this: You’re an independent producer who has just received a “QD letter” from a studio, agreeing to release your film, only the studio won’t accept responsibility for the $800,000 the Screen Actors Guild is demanding as residuals’ contingency.

Or this: You’ve pieced together the elements for a U.K. “sale-and-leaseback” subsidy. But the British government insists on having a print by late March, when the finished film won’t be ready until the fall.

Maybe: Arnold Schwarzenegger has decided to abandon governing California in order to become one of the essential elements in your movie. But that means extending “force majeure” insurance by 120 days, with added payments and interest for your completion bond.

Confused? If so, you are ready to join the legions of independent producers who wrestle with such matters every day, struggling to untangle a thicket of legal and financial problems that have become ever more complicated as funding sources stretch across the globe and local tax breaks and subsidies become integral to film financing.

Terms like a QD letter (a “qualified distributor” letter), sale-and-leaseback (a British subsidy) and force majeure (acts of nature that might sabotage your movie) are as common to the indie world as above-the-line and below-the-line talent are to the studios, only they take a lot more vetting. Because of that, indie producers are turning more and more to battalions of lawyers to help sort them out.

“The reason these matters are so complex is to make sure you are satisfying the legal requirements of what are frequently multijurisdictional transactions,” says John Burke, a partner with the law firm Akin Gump Strauss Hauer & Feld. “That means you are dealing with laws and people in a variety of countries.”

An independent movie frequently calls on the services of anywhere from a dozen attorneys to as many as three times that number here and abroad, with individual lawyers representing producers, writers, actors and directors, as well as sales and distribution companies and the financial institutions that back them. These attorneys charge fees ranging from $250-$800 per hour or take a percentage of their clients’ income — often around 5%, half an agent’s standard commission.

Add up these sums, and the result is that an indie film must allocate upward of $250,000 for legal costs and sometimes as much as $1 million — certainly in the case of higher-budgeted indie titles like Lions Gate’s September release “Lord of War,” starring Nicolas Cage. But often, the budget is not the most important criterion governing legal costs.

“Whether it is a $5 million or $8 million picture, or ‘Lord of War,’ the budget almost doesn’t make a difference,” says attorney Robert Darwell, chair of the entertainment and media group at Sheppard Mullin Richter & Hampton Llp. “Even smaller-budgeted films can be just as complicated in the arrangements because the same type of documents need to be (completed). Size of budget doesn’t dictate paperwork; what does is how many parties are involved and whether or not there is some tax-incentive component.”

All of these came into play with “Lord,” which took a veritable army of attorneys to piece together, Darwell notes.

“There’s in-house counsel for the bond (insurance) company and for the bank, which also has outside counsel; there’s producer’s counsel; there’s the German film fund’s counsel — they had both German and Los Angeles counsel. (Financing entity) Endgame Entertainment provided a bridge loan, and they had counsel; a sales agent had counsel; we also had a separate French equity source, and they had counsel; and our lead actor, Nicolas Cage, was very involved (in the legal issues) because of his compensation arrangement on the picture,” Darwell says.

Typically, a star’s revenue for an indie film is much more complicated to figure out than for a studio film, where one source — the studio — makes all the payments. (Cage took a pay cut in order to make “Lord.”) As a result, a considerable amount of legal work has to be done in brokering deals and verifying funding, which often comes from at least 20 different worldwide distributors and usually goes into a pool where it is checked and handled by companies that specialize in collections — often one of two companies in Europe: Fintage House and Freeway Entertainment. There, clerks and assistants who have never even been to Hollywood know more about the details of star salaries than anyone at a studio.

Collection is the endgame in a years-long process that involves lawyers from the very start.

Doug Stone, an attorney with Stone, Meyer & Genow, became involved with Lions Gate’s upcoming “Flyboys” at the film’s inception, when he helped his client, producer Dean Devlin, get the process of developing a screenplay underway.

“My first involvement with ‘Flyboys’ was in acquiring the script and hiring a writer to do additional writing,” says Stone, who has repped Devlin for nearly 15 years. That, he says, is “meat and potatoes” for a lawyer, though “in the independent world, the trick is coming up with enough money to interest somebody like (scripter) David S. Ward.”

Once the deal was in place, Stone could essentially wait until Devlin felt ready to make the film. Then, when Devlin decided to go the independent route with his $60 million-plus period piece, Stone again became actively involved in the project.

In May 2004, he flew to Cannes for meetings with Devlin and different financiers. “Dean had set up a lot of meetings through his own contacts and relationships,” Stone says. “I would attend meetings if he asked me to, with everybody from tax funds to equity to sales companies.”

At that stage, Stone says, “I see my job as trying to guide the early parameters of the deal in a way that would ultimately work. At this point, you are not (contending with) legal jargon. (You’re) trying to keep track of what you have to give, what they have to give and knowing what other elements you need — whether international sales or domestic distribution or private equity or where the copyright ultimately resides or who has ultimate control of creative and business (affairs).”

Stone would have been thrilled if the Cannes meetings had led to financing for the picture, but he came home with no pacts in place.

Meanwhile, Devlin continued to pursue money, finding some through British tax fund Ingenious Film Partners. Then Stone took on a new client, David Ellison, son of Oracle chief Larry Ellison, who was just coming out of film school at USC and looking to produce films.

Ellison happened to be an experienced pilot and related to the theme of the film. “I asked Dean for permission to give him the script,” Stone says. “He loved it, and he was willing to bring in some equity.”

Stone then had to part ways with Ellison on the deal because of strict conflict-of-interest rules governing lawyers that made it inadvisable for him to handle both clients on the same deal.

This, of course, was just the beginning of getting “Flyboys” made. “The financing and documentation were extensive,” Stone says. “They involved hundreds, if not thousands, of pages and were complicated because you have equity from different sources — you’ve got Ingenious’ equity; sale-and-leaseback, which has a lot of specific regulations; you’ve got the bank and the bank’s lawyers; you’ve got a collection account (whenever you have this kind of money, you generally want a third- party independent collection agent so everybody knows where the money is going); and you’ve got a sales agent” (in this case, Lions Gate International). Needless to say, Stone was involved in all of those deals.

Hardest of all in negotiating deals, he says, is the issue of who gets paid when. “The biggest thing you are negotiating is the return-on-investment that each of the parties is putting up and the recoupment schedule for how all of those parties will get their money,” Stone says. “You have to negotiate with each party how that comes to pass.”

Stone estimates that putting “Flyboys” together involved the work of “probably 10 key lawyers and 30-35 lawyers in all.”

And all of them were racing against the clock. “We had a very firm date by which the deal had to close: the end of March 2005 (because it was) a fiscal end-of-year issue for one of the financiers,” Stone says. How close did it get? “We had one hour and 15 minutes to spare!”

For anyone who doubts how much work is involved, a glance at the documents that need to be negotiated and signed is an eye-opener. Craig Emanuel, a partner with Loeb & Loeb and head of its entertainment division in California, supplied The Hollywood Reporter with a double-spaced list of document titles that ran six pages and included such abstruse fare as an “initial drawdown notice and borrowing certificate,” a “collection account-management agreement” and a contract governing “mortgages and assignments of copyright.” Chain-of-title documentation alone — that is, proof of ownership of the underlying material — includes not only the relevant contracts but even a copyright research report that has to be ordered by the producer.

The biggest challenge for lawyers is to get everyone to agree to the basic terms of the deal and to sign the most important contract, known as an inter-party agreement (a document signed between the key players — the producer, the distributor, the bank and the bond company — governing such issues as budget and payment schedule). Getting this document signed involves doing deals encompassing different currencies and tax breaks and subsidies that change by the month.

“Films that don’t have domestic distribution end up looking for these elaborate multiparty, equity co-production deals,” Emanuel says. “But the danger with that is, the more parties you have involved, the greater the risk that one of the elements may fall out.”

Of course, when a key element does fall out, the movie can die a sudden death, no matter how much preparation has gone into it.

“Until all the pieces come together, you don’t know if you actually have a movie to make,” says Fred Bernstein, a partner with Manatt, Phelps & Phillips and co-chair of its entertainment, advertising and media practice. “In the studio world, you only need one person to say yes. In the independent world, what you are often doing is constructing a financial plan out of multiple pieces from often very disparate sources, and they all have to mesh together. And every time there is a change or a hiccup or a problem with one of the pieces, it affects everything else.”

Even when a movie has solid financing from a private-equity investor like real estate mogul Bob Yari, the legal issues can be extraordinarily complicated. Neil Sacker, chief operating officer of the Yari Film Group and a former business/legal affairs executive with Miramax Films, says signing talent pacts is among the most difficult of tasks.

Referring to a deal he is negotiating for Naomi Watts to star in Warner Independent’s drama “The Painted Veil,” he says: “You are dealing with an actor coming off (Universal’s planned December release) ‘King Kong.’ She is at an A-plus level in her career, and when an A-plus actor does an independent film, there is a tension between the studio accoutrements and how you make that work on a limited budget.”

One problem in any such contract, Sacker adds, is defining the back end. “With lead actors in independent films, that is always an adventure. Every issue is up for discussion in terms of how to define what gross receipts go into the pot and what fees we can take. Because we don’t necessarily know who’s distributing, we don’t know what fees might be charged us.”

Sacker says that many of the issues with “Veil” are still being worked out — or they were at press time — even though production started in August. In this case, once he has agreed to some of the basic deal points, other lawyers “will go through hundreds of issues in the long form (contract). This one is taking three to four months. We need to get it done because the banks require that the key actors’ contracts be executed. We are self-financing the film until our bank loan closes. We are under enormous pressure.”

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