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.

The Hollywood Reporter reported recently that Tess Gerritsen, the author of the book, “Gravity”, upon which the movie of the same name starring Sandra Bullock and George Clooney and directed by Alfonso Cuaron is based, has just suffered another setback in her case against Warner Bros. You can see the article here. Gerritsen filed the action on April 29, 2014 against Katja Motion Picture Corporation (“Katja”), New Line Productions, Inc. (“New Line”) and Warner Bros Entertainment, Inc. (“WB”) (collectively, “Defendants”) alleging breach of contract and guaranty on the option/purchase agreement entered into in 1999 and that she is owed a portion of the profits from the movie comprising of bonus and profit participation. Gerritsen based her claims on two theories: (i) direct breach; and (ii) indirect or vicarious breach.

The court allowed the defendants’ motion to dismiss the plaintiff’s direct liability claim on the ground that Gerritsen has not shown any connection between WB and Katja/New Line since the former was not party to the agreement. The court held further that the guaranty claim, even though is based on the main contract, is a standalone claim that should be pled separately and since it did not form the original complaint, the plaintiff cannot add it to the amended complaint. The court concluded that the plaintiff has not shown any alternative theory to make WB liable under direct breach. The plaintiff claimed under the second theory of indirect breach that WB is liable (i) as successor-in-interest to Katja and New Line, (ii) as alter ego of Katja and New Line and asked the court to use third party reverse piercing of the corporate veil, and (iii) because Katja and New Line acted as agents of WB which the latter ratified when it took the benefit of the assignment agreement between Katja and Gerritsen and made the movie. Gerritsen based her claim on the consolidation of defendants’ businesses in 2008 shortly after the acquisition of New Line and WB by Time Warner. The court upheld the defendants’ motion to dismiss the plaintiff’s claim mainly on the ground that she has not shown enough evidence or facts to support her claim and that her assertions are conclusory. The court gave Gerritsen an opportunity to amend her complaint for this purpose.

Gerritsen wrote the book, “Gravity” and Katja, the then literary properties acquisition and development arm of New Line, acquired the movie right in the book. Katja developed the film based on the book with New Line and Artists Production Group (“APG”), which is the production affiliate of the management company Artists Management Group (“AMG”), whose clients include Alfonso Cuaron. The project went into development by attaching Cuaron who created the screenplay for the movie. Gerritsen claimed that she assisted with the screenplay by adding additional scenes. In 2009, Cuaron with his son working on the movie, allegedly granted all rights in the Cuaron Gravity Project to WB which produced and distributed the film.

It is not unusual in the development and production process of a movie to have different assignment of rights from a production company or studio to another. This oftentimes occurs in independent film productions where the producer, in sourcing development and production finance, has had to assign rights acquired through the literary right option/acquisition agreement to the finance company, a bigger production company or studio. While it is normally expected during negotiation of the finance, production and/or distribution deals that the assignment of the movie rights to a book from the producer to the finance company, studio or distributor does not absolve the producer from its obligation as it may still be secondarily liable, there is also the presumption of law that assignment to and acquisition of benefits of a contract by an assignee also come with its obligation. See sections 1589 and 3521 of the California Civil Code. These obligations may include without limitation payment of bonuses and profit participation, according credit, honoring the reserved and/or frozen rights and other obligations in the agreement. Many production finance and distribution agreements will address these obligations by either acknowledging them and making sure that they take priority over any investment return or payment of loan plus interest; or pass the obligation along to the assignee or licensee of the movie distribution rights in making sure that any bonuses and profit participation payments are made by the distributor to be recouped as distribution expenses. The fact that these issues may not have been clearly spelled out in the option/acquisition deal may be one of the problems affecting Gerritsen’s claims.

Let’s take a look at a typical “right to assign” clause in an option/acquisition agreement. Given the entertainment industry’s response to the case of Gardner v. Nike Inc., 279 F. 3d 774 (2002) in which the court held that unless expressly stated in the contract, the assignee cannot license or assign the right granted under the agreement, you will often find the following clause “right to assign” in option/acquisition agreements:

Right To Assign. Company shall be free to sell, assign, license, mortgage, encumber or otherwise transfer this Agreement and its rights hereunder, and/or to delegate any or all of its duties hereunder at any time and from time to time to any person or entity. Upon such assignment of this Agreement, Company shall be released and discharged of and from any and all of its duties, obligations and liabilities arising under this Agreement if such assignment is to: (i) a person or entity into which Company merges or is consolidated or (ii) a person or entity which acquires all or substantially all of Company’s business and assets or (iii) a person or entity which is controlled by, under common control with, or controls Company or (iv) any major or “mini-major” motion picture company, United States television network or affiliates of such entities or (v) a person or entity who supplies a substantial amount of Company’s motion picture financing or financing for any Production produced hereunder or (vi) other financially responsible party who assumes in writing the performance and obligations of Company hereunder to be performed from and after such assignment. Owner may not assign this Agreement or Owner’s rights hereunder, or delegate Owner’s duties under this Agreement in whole or in part.”

Although the above clause allows the assignee of movie rights to assign their right and be released and discharged from all obligations and liabilities arising under the agreement if such assignment is made to any of the entities listed in the clause, it does not address where such assignment is only an “asset sale” (thus excluding liability or obligation under the agreement) or any instance whereby the assignee, like in the Gravity case, can claim that even though there is a combination of the businesses between the original assignee of the movie right and the second assignee, there is no evidence to show that any obligation or liability flows from the original assignee to the second assignee. It is very likely that Gerritsen will be able to supply more evidence to show that in proving the chain of title of the movie either while getting financing or distribution through the in-house process of WB, there were some documentation or agreements that transfer the rights and obligations under the option/acquisition agreement from Katja/New Line to WB. There is no doubt that Katja was the development arm of New Line and most option/acquisition deals of New Line were done through Katja. It may also not be difficult to get documents through discovery to show that upon consolidation of New Line with WB, there were documentation and agreements flowing from New Line to WB even though WB got an assignment of the screenplay from Cuaron. Note that Cuaron’s screenplay is a derivative work of Territsen’s book, the subject of the option/acquisition deal.

Apart from the issue in the ‘Gravity’ case, there may be an instance where upon assignment of the option/purchase agreement, the producer/original assignee jets into sunset and is no longer involved in the production of the movie. It is therefore important that in that case, the author will want to make sure that s/he is a part of the film making process to ensure that the assignee’s now transferred obligations are honored. So, how does the author or any copyright owner in an option/acquisition deal anticipate these issues and address them during negotiation of the agreement? Firstly, the original assignee must be secondarily liable for its obligation under the contract in spite of the assignment to the third party. Such clause will likely be drafted as follows:

Assignment: Purchaser shall have the right to assign any or all of its rights under this Agreement to any person, and upon such assignment Purchaser shall have no further obligations to Owner hereunder; provided that Purchaser shall remain secondarily liable for all of its obligations.” [underline mine].

The other option (perhaps a supplementary one) is for the author or copyright owner to state in the agreement that all assignment of right by the original assignee shall be invalid except the author’s consent is obtained and that such assignment shall have the effect of an assignment of rights as well as the obligations and liabilities of the original assignee under the contract, provided however that the original assignee shall remain secondarily liable for all of its obligations. The aim of this option is to ensure that the author is involved in the film making process in order to ensure that all obligations due to him or her are honored. Such assignment must anticipate all kinds of assignment including direct or indirect one which may be inferred from consolidation or merger and acquisition. This clause may be drafted as follows:

Assignment (or Right to Assign): Company shall have the right to assign any or all of its rights under this Agreement to any person provided that Author’s consent is first had and obtained. Any such assignment shall have the effect of an assignment of rights as well as the obligations and liabilities of the Company hereunder; provided, however, that the Company shall remain secondarily liable for all of its obligations and liabilities under this Agreement.”

While we await how this plays out in court as Gerritsen makes another attempt in her case, rights owner should carefully consider and have their attorneys review the “right to assign” clauses in their option/acquisition deals to avoid a similar situation in the future.