By Segun Aluko, Esq.
The life of a filmmaker is very interesting. In fact the process of transforming that idea into a movie with lots of box office receipt, if the filmmaker is lucky, is far more interesting. While many processes towards getting the idea into a movie abound, co-production if properly structured can be a veritable process towards getting the movie made.
Co-production is basically the collaboration between two or more entities (in this case film producers) in the development, finance, production and in some cases distribution of a movie. Just in case you don’t know, filmmaking is both an art and a business. This article will walk you through co-production as a tool to getting your movie made and the process and structure of a co-production deal.
What are the types of co-production deals out there? Co-production can evolve in either of the following three forms, which are not mutually exclusive since these forms could in fact work cumulatively in some cases: (i) an investment in return for equity in the film; (ii) a creative collaboration on the production between or among the parties; and (iii) investment in return for distribution rights (which could be domestic or international, or both). Keep in mind that the distribution right could be an outright acquisition by one of the parties, or the distributor playing a passive role in the creative process, or an ownership/profit share arrangement. Co-production may also be a pure collaborative effort between the parties involved or structured under a co-production treaty in order to get the necessary benefit under applicable treaty.
A co-production treaty is a bilateral agreement between two countries that provides the framework upon which film producers in member countries can collaborate on film projects. Yes, it’s that simple but complying with the treaty and local rules may sometimes be complex thus requiring you to engage a good entertainment attorney with great understanding of these deals.
Apart from getting your film made, doing a co-production deal whether or not it’s under a co-production treaty has great benefits. Some of these benefits include national treatment of the co-production movie in treaty countries. This provides access to the box office market of the country. A good example will be the China-France Co-Production Treaty of 2006. A film co-produced by a French filmmaker and a Chinese filmmaker or financier will be treated as a Chinese (and French) movie thus avoiding the quota system which limits the number of foreign films that can be shown in China. Other benefits include access to finance in the form of grants and equity investment from the government and other film funds, tax incentives (credit or rebate) and other practical measures including crew and equipment; movement of technical equipment and filming materials on a temporary admission basis and free of import duties and taxes; facilitation of entry of nationals from treaty countries; etc.
Whichever form or type of co-production deal you choose, it will very likely follow the process and structure discussed below:
(i) Acquisition of Underlying Right
You probably know by now that entertainment business is premised on “RIGHT” and lots of negotiation go into who owns or controls it. Since the co-production deal is premised on the ownership of the right and collaboration of parties involved in producing the right in the property, acquiring the right is very important. This is basically the chain of title to the movie which starts with whether the production entity in fact owns the right in the underlying work which could be a book, a movie, newspaper article, a screenplay, etc. upon which a movie is based. The producer who is party to the co-production deal could either own this originally or have an option to develop and purchase the underlying work. It could also be acquired as a commissioned work under the work-for-hire process. Oftentimes one of the co-producers may already have the right to this underlying work and will be contributing that work towards the co-production of the movie.
(ii) Establish A Production Entity
This is important for many reasons, chief among them are the tax implications and the ability to hold the copyright in the film. The production entity could be in the form of an LLC or a corporation. In the United States, an LLC is favored because of its “pass-through” taxation benefit and ease in structuring the preferred return unlike in corporation where you have to create different classes of shares. However, a non-US resident investor may not be able to take this benefit unless they set up an entity here in the States.
(iii) Divide Responsibilities and Entitlements
Now this is the meat of the co-production process. This part of the process will cover the rights, obligations and entitlements of each party. Will party A contribute the screenplay to make the film? Will party B provide financing? Who will provide production services? Who gets the domestic distribution rights? Who takes the international rights? Who has the authority to sign? How is the proceeds shared among the producers (the “Waterfall” provision”)? What about credit, approval rights, control, etc.? It is important to note that a co-production deal is a form of a partnership or joint venture deal and usually these issues will be addressed in the Co-Production Agreement. Keep in mind that parties will still need to negotiate and structure the LLC Operating Agreement (for LLC) or the Shareholder Agreement (for corporation). For the most part, the organization agreement will mirror the terms of the Co-Production Agreement.
(iv) Secure Foreign Distribution Agreement
In case you do not know, foreign presale is crucial to independent film production and distribution. Foreign presale helps the filmmaker raise financing and get distribution for the movie at the same time. This is how it works. Prior to making the movie but after putting the essential elements together (e.g. attaching the lead actor, director and/or producer), the filmmaker approaches sales agent (e.g. Arclight, Summit) who presell the distribution right to the film to certain marketable territories. The distributors in those territories will make a commitment of a dollar amount for the distribution right to the movie in their respective territories. The filmmaker can then collateralize these commitments to obtain production loan from a bank.
(v) Secure Production Financing
Production finance comes in creative ways for independent films. The co-producers will most likely be equity investors in the project. That does not mean that there might not be more investors who play passive roles. Nonetheless, the co-producers may borrow against their presales from the bank or finance the gap between the foreign presales and the shortfall (“gap lending”) or even get mezzanine (subordinate) financing with higher interest rate. Other form of financing include tax incentive financing whereby the filmmakers approach tax incentive brokers who will lend at a discount against the estimated tax incentive.
(vi) Secure Creative Service Agreements, Completion Bond and Production Insurance, and Fund Escrow
Now that all the elements are in place and the producers are ready to shoot the movie, all talent agreements (above and below the line), producer agreement as well as completion bond (banks and investors may request this so the completion guarantor – a company providing this sort of services – can take up and complete the project in case things fall out of hand). You also need to get error and omission insurance to cover any risk that might arise during or after production. Lastly, you will need to fund the escrow with the amount of the production budget which will be disbursed by the unit production manager in order to ensure that the project is in line with the budget.