Power, Profits Key Ingredients at Produced By Panel
Lawyers and finance experts pulled back the curtain for a look at how profit participations are born and where they sometimes end up.
Like companies, it turns out that profit participations have a lifecycle: They’re born, they struggle and, eventually, they may get bought out. So explained a panel of experts under the questioning of Green Hasson Janks LLP’s David J. Robinson to a full house at a Sunday afternoon session at the Produced By conference on the Fox lot.
As befit the conference, the focus was on profit participations for producers.
Superstar lawyer Ken Ziffren of Ziffren Brittenham set the scene, saying there are probably only 10 or 15 producers in town who command deals on the order of a $2 million fee against 7.5 percent of the adjusted gross. Other producers are looking at deals with participations that don’t kick in until the distributor has received 10 percent distribution fees and has recouped production and distribution costs -- a so-called CBE 10 deal (cash break-even 10) -- or a net participation deal, which is similar to CBE 10 but with fees of around 32 percent.
“The deals that are being done reflect the bargaining strength of the parties," ZIffren said. "The more sophisticated and powerful the producer, the better the deal.”
Of course, that doesn’t always mean payments will always flow smoothly and in accord with the deal, or what the producer believes it to be. That’s when it may be time to have a participations auditor examine the contract and the books and records. Steve Sills of Green Hasson Janks, one of the top such auditors, discussed that process.
Audits often lead to settlements of the disputed sums, but sometimes the next step is litigation. Veteran litigator Michael J. Kump of Kinsella Weitzman Iser Kump and Aldisert (“I don’t often get invited onto the Fox lot,” he quipped) talked about trends in participation litigation. Because the industry is so highly integrated, related party transactions -- more bluntly known as self-dealing -- are often an issue, Kump said. Also common: arbitration clauses, which divert these disputes from the scrutiny of courts and juries.
Interestingly, after fighting so hard to obtain participations, some producers and others may find themselves wanting to sell off the participation -- that is, reduce it to a lump sum. That’s where Content Partners LLC can step in. According to Steve Blume, the company’s co-founder, COO and CFO, they buy participations.
But why do people want to sell? Blume described several circumstances:
Liquidity. The cash may be needed to pay off debts or finance a luxury purchase. Or, for instance, a talent agency with participation interests may wish to buy out its existing older leadership to make way for new leaders.
Certainty of amount. By selling the participation and buying an annuity with the proceeds, a retiree can smooth the inherent uncertainty of a participation.
Untenable situations. It’s great to co-own a participation with a spouse or business partner -- until divorce or a business dissolution makes it not so great. Selling the participation and dividing the proceeds can end the necessity of continuing to deal with an untenable personal or business relationship.
Structural reasons. A private equity fund may face a dilemma: Profit participations are often perpetual, but a fund may have a five-year term. Selling the participation may be necessary in order to return capital at the time promised. Banks exiting the entertinment sector may have a need to reduce a participation to cash. And the death of a profit participant can create awkwardness; rather than splitting the control and ongoing proceeds of a participation among several beneficiaries, it may be easier to sell the participation.
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