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.

Recently, some Nigerian film makers made headlines, not because of how well their movies are doing at the box office, but about the widespread piracy of their films. They alleged that some film marketers in Alaba market in Lagos, Nigeria are saboteurs of their works. Interestingly, there are businesses in Alaba and Onitsha markets which officially distribute and market entertainment content, mostly on DVDs. Nigerian music superstars have in fact made deals with these distributors by licensing the distribution right in their music.

Film is a copyright work protected under the Nigerian Copyright Act. Nigerian films will not only enjoy the protection of the Act but will do so abroad under the international copyright treaties. One of the rights protected under the copyright law is the right of the copyright owner to control, exclusively, the distribution of their work. The exploitation of this right and the transactions involved seem to be a missing link between film producers and the distributors.

The Nigerian film industry is no different from the independent film industry in United States and across the world with many producers belonging to an organization called the International Film and Television Alliance (IFTA – www.ifta-online.org). The independent film business is however a lot different from the studio film business, which process is built in-house. An independent film will always start with an idea from the producer. The producer will then set up an entity, usually a corporation or limited liability company, which will operate as the vehicle for the production and other business and legal affairs of the film. The process often starts with obtaining an option or outright acquisition of a literary right upon which the screenplay to the film will be based. This could be a movie right to a book, a news article, a movie (in terms of production of a prequel, sequel or spin-off), screenplay or even a television show, etc. The process then leads to financing which could be through equity investment or debt financing. Thereafter, it leads to production legal works including negotiating and drafting all necessary talent agreements, location agreements, music and other rights clearances, music composer agreement (if applicable), etc. If the movie gets through all these processes, then the independent producer will start looking for distribution.

The way distribution works for independent films could happen at either of these two stages: (i) financing or (ii) distribution. One of the ways for obtaining financing for independent film is through foreign pre-sales. This happens when the producer contacts sale agents and distributors in foreign territories to license the right to distribute the movie in those territories. The distribution right could be an “all-rights” deal or be limited to any of the following windows: theatrical, home video, hotels and in-flight, per-per-view, video on demand (VOD), electronic sell through (EST), etc. The producer will then obtain a minimum guarantee (that is, the license fee which will be an advance against gross receipts to be shared at negotiated percentages, e.g. 60/40) from the distributor for the distribution rights. The producer thereafter puts the pre-sale agreements with those minimum guarantees together and approaches a bank by tendering them as collateral for the production loan. The industry term for this is called “lending against the presale”. The bank will often lend about 30% of the production budget or 50% of the pre-sale guarantees.

The other instance of distribution will arise either during production or after production of the film. If a movie is already in place, you will likely find independent producers at international film markets like Sundance, Toronto or Cannes Film Festivals (or other film festivals in Europe, Asia and Africa) seeking distribution deals. Oftentimes subsidiaries or independent film divisions of major movie studios will be on hand seeking to acquire distribution rights to these movies. This could be an outright sale without any right to share in proceeds or a license with all the terms including profit sharing properly negotiated by the producer and the distributor. Instead of making rounds at film festival, the producer may approach a major studio or distribution company for a distribution deal. Why the studio? The major studios, which are based in United States, have proven to have the financial strength and requisite resources for the nationwide or worldwide marketing and distribution of movies. More so, the budget for distribution expenses covering print and advertising alone could run into $45 million. That doesn’t mean there are no distribution companies other than the studios in the distribution business.

Now let’s talk about how distribution deals could work in Nigeria towards reducing piracy.

In getting the distribution deal done, the producer will license the right to distribute the movie to the distributor. This right, like in a pre-sale deal, could also be an “all-rights” “throughout the universe” “in perpetuity” deal or it could be structured in a way to explore different rights in the movie. Oftentimes, independent producers will prefer to control different rights and explore those rights by licensing them to different distributors, in different territories and across different platforms. For example, the producer may license the theatrical right to the distributor for the sole purpose of distributing the movie across the theaters. The right could also be limited to different territories; for example, “the right to distribute the movie theatrically in the “Territory”. “Territory” shall mean the English speaking countries of West Africa, including but not limited to Nigeria, Ghana, English-speaking Cameroon, Liberia…””

Keep in mind that the licensed right will determine the value of the licensed fee. The licensed fee could be a fixed and final amount to be paid for the right to distribute or could be a minimum guarantee. A minimum guarantee is the minimum amount which the distributor pays to the producer for the distribution right as an advance against the producer’s share of net proceeds. This means that where the distributor pays the producer $200,000 for the distribution right of its movie in Africa as a minimum guarantee, the producer will get a base amount of $200,000 from the distributor whether or not the distributor distributes the movie within the Term. If the distributor distributes the movie, the distributor will be entitled to recoup the license fee, distribution fees (which is often about 25% of the gross proceeds), distribution costs and other expenses, which may include conversion/transmission costs, collection costs, guild payments of residuals and re-use fees, foreign version costs, reediting costs, physical material costs, royalties (for copyright works used in the movie), insurance costs, copyright registration costs, copyright infringement costs, claims and litigation costs, third party participation (where producer has negotiated assignment of this obligation to the distributor) and of course, print and advertising. The producer will then start to share with the distributor, at a negotiated percentage, in the net proceeds from the film distribution.

Although there are marketers, distributors and sales agents in Nigeria, it is however not clear if their business executives and attorneys understand the intricacies of the above business and legal affairs issues in structuring those distribution deals and how it can help to stem the tide of piracy in Nigeria. I believe that the Copyright Act, as it is, is a good regulatory framework which could cater to the piracy problem; however not from enforcement by the Nigerian Police Force or other government agencies. I believe business people and stakeholders in the media and entertainment industry could actually control how their works get out through distribution deals. Piracy thrives because demand of entertainment content far outweighs the supply. A way of fixing this is through distribution.

Film production is not cheap. Even the low budget movies are produced with the aim of making money through distribution. Since many of Nigerian distributors are based in Alaba and Onitsha markets, these distributors could either individually or through joint ventures (and I envisage that in order to do more, these companies may need to consider merger or acquisition of smaller distribution companies) license the distribution rights to these independent films. Since these Alaba and Onitsha market distributors will now have stake in these films, they will do their best to police the channels of distribution. They have the incentive to do this since they will be able to recoup copyright infringement costs and the producer’s attorneys can always negotiate a cap on those costs and the right to audit the books of the distribution company. With time, some of these distribution companies will either rise to the occasion to become major studios with all the financial and logistic resources. Just maybe sooner than we think, they will be able to release a blockbuster with lots of box office receipts.