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Ahead of an expected sale, Entertainment One is being sued for allegedly shortchanging Endemol Shine North America out of its share of profits for Hell on Wheels.
The suit, filed in Los Angeles Superior Court on Wednesday, alleges that eOne failed to report millions of dollars in tax credits it received from producing the series in Canada, even though it was specifically brought on to secure the incentives. Endemol also allegedly uncovered millions more in underreported revenue and overstated expenses.
The complaint was filed as Hasbro explores selling the production and distribution unit back to eOne founder Darren Throop, who has the backing of private equity firm CVC Capital Partners, to focus on branded assets like Dungeon & Dragons, Peppa Pig and Transformers with the goal of becoming a digital games giant. Recent titles from the company include The Woman King and Yellowjackets.
Hell on Wheels, which tells the building of the American transcontinental railroad, premiered in 2011 on AMC Network and became the second-highest watched series debut in network history. It ran for five seasons.
Endemol developed the show and sold it to AMC Network for distribution in the United States. It then brought on eOne to produce the series in Canada and to distribute it in certain territories. eOne, which assumed responsibility for accounting for and paying the profits participation for the series, agreed to ensure that Endemol would receive a 20 percent share of the net profits and 7.5 percent of modified adjusted gross receipts (MAGR) — or the revenue the company receives minus distributions fees, expenses and production costs — derived from the series, according to the complaint. The agreement states that “net profits shall be defined in accordance with [eOne’s] customary industry standard definition.”
Endemol chose to shoot in Canada to take advantage of tax incentives to shoot in the region, according to the complaint. This led to Endemol approaching Toronto-based eOne instead of more experienced U.S.-based companies, like Sony or 20th Century Fox, to ensure that the series would qualify for the incentives.
For years, eOne’s accounting statements indicated that it owed no participation payments to Endemol, which isn’t uncommon as many shows take years to break even, the suit claims. But an audit in 2019 revealed that the company was underpaying all of the other participants. This prompted eOne to ask Endemol if it was interested in participating in ongoing settlement discussions it was having with others, according to the suit.
Endemol says that a subsequent audit showed that eOne underreported $25 million in total MAGR, mostly attributable to the company keeping for itself all the production tax credits it received for shooting the series in Canada. This allowed eOne to report a massively inflated figure for show’s production costs, the suit claims.
“There was no justification for eOne’s hogging of the tax credits for its sole benefit,” reads the suit. “eOne’s decision to keep them solely to itself breaches not only the express terms of the MAGR Agreement, but also reflects eOne’s bad faith and unfair behavior that frustrates Endemol’s reasonable expectations regarding the benefit of contracting with eOne in the first place.”
On top of pocketing the tax incentives, eOne also charged a 15 percent overhead fee on the series’ production costs, according to the complaint.
An audit of net profits similarly revealed that eOne failed to report over $31 million. A significant portion of that came from the company’s choice not to report license revenue from iTunes and Netflix, according to the complaint.
eOne allegedly justified the accounting by claiming that some of the issues, including its retention of all production tax credits and the addition of an overhead charge of 15 percent of production costs, were authorized under the company’s standard definition of MAGR and net profits.
“Endemol has no way of verifying that, however, because eOne had never deigned to send Endemol either definition,” writes Robert Schwartz, Endemol’s lawyer, in the complaint.
Hasbro and eOne didn’t immediately respond to requests for comment.
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