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In late July, cameras began to roll on director Steven Soderbergh’s twin projects about Che Guevara: “The Argentine,” which focuses primarily on Guevara’s quest to overthrow Cuban dictator Fulgencio Batista during the 1950s; and “Guerrilla,” which revisits the man a number of years later. Benicio del Toro stars as the iconic revolutionary in both productions, which are being shot largely back-to-back in Spain, Puerto Rico, Mexico and Bolivia on a $60 million-plus budget.
An ambitious undertaking, certainly, but not unmanageable. A key factor, according to producer Laura Bickford — whose credits include 2000’s “Traffic,” Soderbergh’s Oscar-nominated drama about the illicit drug trade — was crafting a smart financial plan that would take advantage of the various tax schemes and incentives offered around the world.
Her first step was to contact veteran attorney Robert Darwell of Sheppard Mullin Richter & Hampton, whom Bickford says became her “right-hand man” throughout a process that involved roughly 20 additional attorneys.
Darwell helped Bickford set up the “Che” projects as Spanish co-productions; that decision alone helped secure 25%-30% of the budget. The rest of the financing came from several different sources: Virtual, a film fund operated by international sales outfit Wild Bunch, which put up part of the budget against the sales; the Puerto Rican government, which will kick in a to-be-determined sum in the form of tax rebates once the films’ location work there has wrapped; and major financial institutions such as Citibank and Societe Generale provided loans.
It was an enormously complicated endeavor, Darwell says. “Any time you have a transaction where there are multiple parties that all have to squeeze together, if one piece of the puzzle moves, the whole thing risks coming apart,” he warns.
Darwell should know. He is one of a number of attorneys — including Akin Gump Strauss Hauer & Feld’s John Burke and Loeb & Loeb’s Mickey Mayerson — who are experts in an arcane corner of the industry that can intimidate even experienced producers. Finance lawyers have to understand tax and securities law, copyrights and trademarks; their work can range from completing three-foot-deep contracts to sitting down with the guilds in order to explain how multipicture deals are structured and win their approval.
They also must be able to pay painstaking attention to detail. A poorly written clause can cost a client millions of dollars, not to mention an attorney his reputation. One finance lawyer recalls reading a contract drafted by a colleague who had clumsily worded a critical clause that designated the order in which the parties would receive their share of revenue from a particular slate of films. “We’d have been paid last instead of first, and that is often the difference between profit and loss,” he says.
As the budgets for indie films have grown larger and revenue sources have begun to multiply, attorneys specializing in finance are more frequently setting up entire slates of films. It wasn’t so long ago, though, that these lawyers spent most of their time cobbling together funds for independent producers to make individual films.
“I started back in the early 1980s doing negative pick-up motion picture finances,” notes Joe Calabrese, head of the entertainment and media practice group at O’Melveny & Myers. “Then we moved into company financings, which were all individual producers borrowing money from the bank, but they were generally two-party deals. Then you get into the mid-’90s, and some financial-engineering types say, ‘You can take credit card receivables and auto leases and securitize them (sell off the risk), so why can’t you securitize motion picture receivables?’
“That was the beginning of these structures that (have as many tiers as) wedding cakes, with equity, mezzanine and senior debt all together going to seek content, hoping to be exposed in a way that will give them their money back, plus a return,” Calabrese adds.
The attorneys must ensure that the producers can deliver what they promise. “These slate structures typically require a minimum portfolio size of 15 pictures,” Burke says. “One difficult issue is: How you can assure people funding into this structure that there will be 15 pictures?”
Because of problems like these, large-scale financings of the sort Burke engages in often take months to complete — “anywhere from one to two years,” he says. Of course, securing funding for single films or pairs of films like Soderbergh’s “Che” features can be just as demanding for the lawyers involved because so many elements go into financing them.
“Slate deals are complex in that they will continue for a number of years, but at least you are usually dealing with only one main transaction document,” Darwell says. “On a large independent picture, you may have 50 co-financing documents from multiple sources of financing, along with the (completion guarantee agreement, which protects the financier) and the (producer’s completion agreement).”
Given that most creative types feel more comfortable developing scripts or even glad-handing agents in Hollywood’s more expensive watering holes, entertainment lawyers who understand finance like Darwell function as intermediaries or even interpreters linking two worlds.
“In some ways there is clash of cultures — the clash of the Hollywood creative community with the financial community,” observes Greenberg Traurig’s Alan Schwartz. “With so much money around with hedge funds and other things, there are a lot more connections being made directly between the creative community and the financial community and it takes a while for these parties to get used to each other.
“The biggest mistake you can make is believing that the parties understand each other and are basically on the same wavelength going in, because that can destroy the timing of any investment, the credibility of any investment,” Schwartz adds.
Two major deals that closed earlier this year illustrate just how important the work of these finance lawyers can be. They were not for slates of individual films but rather for entirely new companies — Robert Friedman and Patrick Wachsberger’s Summit Entertainment, which is billing itself as a full-service studio, and Mark Gill and Neil Sacker’s recently launched $200 million production entity, the Film Department.
In the case of Summit, former Paramount Pictures vice chairman Friedman first formulated the notion of creating a new domestic distribution organization to fill a gap in the market back in October 2005. “I had a business plan and a strategy I wanted to execute, and the idea was to talk to Merrill Lynch about it,” Friedman says. “I was introduced to (Liner Yankelevitz Sunshine & Regenstreif attorney) Josh Grode, and Josh then introduced me to Ron Hohauser, who is now our chief financial officer, and who helped to structure the business plan. The three of us marched forward.”
With the help of Merrill Lynch, the team refined their business plan, and it was at that point, Grode says, that he “started to think of different financing structures — the ratio of senior debt to junior debt, looking at different alternatives for how to finance different pieces of the business.” Among the questions he pondered: “How do you make a (prints and advertising) facility work in tandem with a production facility? How do you make that work with an ultimate facility?”
Before long, Friedman and Hohauser had decided to team with sales executive Wachsberger on their venture; but in order to do so, the new company needed to buy out his business, also named Summit Entertainment. “It became a two-pronged transaction,” Grode explains. “There was a new business financing, and inside the new business financing there was an M&A (mergers and acquisitions) transaction.”
It took attorneys from six major firms to complete the deal, which closed April 19. “The transaction was complex,” says Stroock & Stroock & Lavan’s Schuyler Moore, who also worked on the Summit deal. “It involved securities and complying with SEC securities laws. There were tax consequences for all the parties; I had diagrams and charts that went for pages, outlining the tax consequences alone. It involved corporate issues, such as how you structure it from a corporate point of view and are you buying assets or stock? Are you inheriting liabilities or are you trying to limit liabilities by keeping them in an entity with limited liability? It involved international issues; this transaction covered four foreign jurisdictions. And it involved copyright because films are copyrighted.”
Mayerson also became involved with Gill and Sacker in the beginning stages of developing the business plan for the Film Department.
“One of the early things we did was to develop a target list of people whom Neil and Mark should see — hedge funds and equity funds and other institutions,” Mayerson recalls. “They then developed a hit list of people they needed to talk to, and who could introduce them.”
As the new company moved forward, more lawyers came onboard. “As you get into the deals, there are a lot of specialists who have to be brought in — trademark lawyers, tax lawyers, securities lawyers,” Mayerson says. “The team becomes much bigger, (but) you have got to get everyone focused on your deal.”
The deal closed June 27, with Gill and Sacker landing some $200 million to help achieve their goal of producing six films a year with budgets between $10 million-$35 million. Their final list of equity investors included Sheikh Waleed Al Ibrahim, Zeid Masri of SilverHaze Partners, Michael Singer, GE, CRG Movie Partners, Mark Esses, David Larcher, Michael Goguen, Richard Landry, Michael Reilly and Rafael Fogel.
“The Mickey Mayersons of the world get approached by people looking for money who say, ‘I want to get this done in three months,'” Sacker says. “They go, ‘Clearly you don’t understand.’ It is such an amazingly long process, especially if you are not just raising equity, but also multiple forms of finance — debt and equity and mezzanine. It’s very, very complicated.”
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