Entertainment

Practical Considerations For Reviewing Entertainment Agreements In M&A Transactions – Corporate/Commercial Law

With content distribution methods evolving rapidly, major
players within the entertainment industry are looking to mergers
and acquisitions (M&A) as a means to strengthen their position
and maintain market share. Industry insiders predict a continued
increase in M&A activity within the entertainment sector. In
light of the likelihood that entertainment companies may be
presented with an M&A opportunity, either as a buyer or as a
seller, it would serve entertainment companies well to prepare for
such an opportunity.

An essential part of any M&A transaction is the due
diligence process, which allows a buyer to confirm key information
about the seller. A buyer can use the information obtained during
the due diligence process to make an informed decision whether to
finalize the transaction and/or whether any modifications to the
deal need to be made to address issues that may have been revealed.
The seller can also benefit from the due diligence process, as the
process can function as a way to confirm that the seller can agree
to the representations, warranties and other deal terms required by
the buyer.

Certain provisions in existing contracts are always closely
scrutinized during the due diligence process and
entertainment-related contracts are no exception. However,
entertainment agreements often pose unique issues that buyers and
sellers should be mindful of when reviewing agreements in
connection with a proposed M&A transaction.

Party to the Agreement: While it may seem simple, the
first question that should be answered when reviewing an agreement
in the due diligence process is, “what entity is party to this
agreement”? The answer to this question will assist in
determining whether the rights to the assets a buyer intends to
purchase (whether by way of a merger, stock purchase, asset sale,
etc.) are actually owned by the entity being acquired or whose
assets are being acquired.

If a transaction involves the acquisition of the assets or
equity of a parent company, the fact that assets are held at a
subsidiary level will likely not result in a material issue.
However, if a subsidiary entity is the target, it is possible that
certain rights might sit within a different entity that is not part
of the transaction. A common scenario in which this may occur is
when most of the rights to a specific piece of content are owned by
one entity, but the distribution rights to such content are owned
by another. If the rights that are to be acquired are owned by
entities not part of the transaction, internal assignments of those
rights should be included as a condition to closing the
transaction.

Assignment: In the M&A context, an assignment of an
agreement from a target company to a buyer is required to transfer
such agreement to an entity other than the existing target company.
An anti-assignment provision typically provides that a party may
not assign the agreement without the consent of the other party.
Assignment provisions may provide specific carve-outs to a
counterparty’s right to consent to the assignment of the
agreement, such as a change of control transaction or an assignment
to an affiliate. Typically in the event of a stock acquisition or
merger, an anti-assignment provision will not be applicable, as the
agreement will remain in the name of the existing target company.
However, anti-assignment provisions may be drafted so that they
also implicate a merger or equity transaction (i.e., by specifying
that a merger is deemed an assignment).

Even if assignment is permitted under the terms of an agreement,
frequently entertainment agreements will provide that following an
assignment the assigning party will remain secondarily liable to
the other party, unless such assignment is to a major studio,
distribution platform, or similarly financially responsible third
party that assumes the assigning party’s obligations under the
agreement in writing.

Change-of-Control: As with assignment provisions, there
is also a wide range of provisions restricting change of control.
Common examples of what constitutes change of control for such
provisions include change of ownership, sale of all or
substantially all of a target company’s assets, or change in a
majority of board members. These provisions provide counterparties
with various rights upon the announcement or consummation of a
proposed M&A transaction, including termination rights and
consent rights. Of particular note for production services
agreements (PSAs), a change of control of a target company is
frequently included in the list of events that trigger a
studio’s production takeover rights.

Back-End Participations: As studios accelerate initially
releasing content on their owned and operated platforms, agreements
related to such content increasingly contain provisions pursuant to
which key above-the-line talent receive adjusted compensation
depending on whether the film opens in theaters, on platform or
both. Typically this compensation is a “back-end buyout”
of the talent’s ongoing right to participate in revenue
generated by the project. It is also not uncommon for a modified
adjusted gross receipts, adjusted gross receipts or net proceeds
definition to contemplate the ability to “buy-out” talent
following an M&A transaction. In such a scenario, the
“buy-out” amount will be a portion of the transaction
purchase price, calculated in a variety of ways. The ability to
buy-out a participant’s back-end participation may be
particularly attractive for a buyer that wants to limit ongoing
obligations post-transaction.

Key Individuals: Often entertainment agreements,
particularly PSAs, specifically require the services of a
particular individual. If these services are not provided, the
party that is obligated to provide such services may be in breach
of the Agreement, or the party’s attachment to the project
could be impacted. If an individual’s ongoing participation in
a project has implications for the project going forward, the
parties should discuss whether that individual will continue with
target company post-transaction and, if not, whether consent or a
waiver should be obtained from the counterparty to the agreement at
issue.

Content Restrictions: It is not uncommon for PSAs with a
network and/or streamer to contain a restriction on a production
company’s ability to create similar content while engaged by
the network or streamer. These provisions are also often applicable
to a production company’s affiliates, which would include a
buyer and their affiliates following a transaction. If a buyer has
or plans to have projects that are similar to the projects of a
target company, close consideration should be given to any
restrictions that might impact the buyer’s existing and future
projects.

While this note highlights selected key provisions to review in
existing agreements during an M&A process, it can also serve as
a road map for entertainment companies in negotiating agreements to
avoid terms that may raise a red flag for potential buyers. In
addition to the specific provisions discussed above, given the
unique and industry-specific structure of entertainment agreements,
any buyer pursuing entertainment M&A opportunities should be
prepared to undertake a significant due diligence process and make
modifications to the transaction to address the findings of such
due diligence.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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