M&A activity on the rise in the entertainment industry in an evolving content distribution environment
As content distribution methods evolve rapidly, major players in the entertainment industry are turning to mergers and acquisitions (M&A) as a way to strengthen their position and maintain their market share. Industry insiders predict a continued increase in M&A activity in the entertainment industry. Given the likelihood that entertainment companies will be presented with a merger and acquisition opportunity, either as a buyer or as a seller, it would be helpful for entertainment companies to prepare for such an opportunity.
An essential part of any merger and acquisition 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 complete the transaction and / or whether changes to the agreement need to be made to resolve any issues that may have been revealed. The seller can also benefit from the due diligence process, as the process can function as a means of confirming that the seller can accept any representations, warranties and other terms of the agreement required by the buyer.
Certain provisions of existing contracts are always closely scrutinized during the due diligence process, and entertainment-related contracts are no exception. However, entertainment deals often pose unique issues that buyers and sellers should be aware of when considering deals in a proposed merger and acquisition transaction.
Party to the Agreement: Although it may seem simple, the first question to answer when considering an agreement as part of the due diligence process is: “which entity is a party to this agreement”? The answer to this question will help determine whether the rights to the assets that a buyer intends to buy (whether by way of merger, stock purchase, asset sale, etc.) actually belong to the entity being acquired or whose assets are being acquired. acquired.
If a transaction involves the acquisition of the assets or equity of a parent company, having the assets held at a subsidiary level is unlikely to cause a material problem. However, if a subsidiary entity is the target, it is possible that some rights belong to a different entity that is not part of the transaction. A common scenario in which this can occur is when most of the rights to a specific piece of content belong to one entity, but the rights to distribute such content belong to another. If the rights to be acquired belong to entities that are not part of the transaction, internal assignments of these rights should be included as a condition to the closing of the transaction.
Mission: In a merger and acquisition, an assignment of an agreement from a target company to a buyer is necessary to transfer that agreement to an entity other than the existing target company. An anti-assignment provision generally provides that one party cannot assign the contract without the consent of the other party. Disposal provisions may provide specific exceptions to a counterparty’s right to consent to the disposal of the arrangement, such as a change of control transaction or an assignment to an affiliate. Typically in the event of a share acquisition or merger, an anti-cession provision will not apply, as the agreement will remain in the name of the existing target company. However, anti-cession provisions may be drafted to also involve a merger or equity investment transaction (i.e. specifying that a merger is considered a cession).
Even if the assignment is authorized by agreement, entertainment agreements frequently provide that following an assignment, the assigning party will remain secondarily liable to the other party, unless that assignment is to a third party. large studio, a distribution platform or a financially responsible third party in the same way. party which assumes in writing the obligations of the ceding party under the contract.
Change of control: As with the divestiture provisions, there is also a wide range of provisions restricting the change of control. Common examples of what constitutes a change of control for such arrangements include changing ownership, selling all or substantially all of the assets of a target company, or changing the majority of board members. administration. These provisions give counterparties various rights when announcing or completing a proposed merger and acquisition transaction, including termination rights and consent rights. Particularly for production service contracts (PSA), a change of control of a target company is frequently included in the list of events that trigger the buyout of a studio’s production rights.
Back-end participations: As studios accelerate the initial release of content on their owned and operated platforms, agreements related to that content increasingly contain provisions under which key above-the-line talents receive compensation adjusted according to whether the movie hits theaters, on the platform, or both. Typically, this compensation is a “downstream buy-back” of the talent’s continued right to participate in the income generated by the project. It is also not uncommon for a modified definition of adjusted gross revenue, adjusted gross revenue, or net proceeds to consider the possibility of “buying back” talent as a result of a merger and acquisition transaction. In such a scenario, the “buy-back” amount will be a part of the purchase price of the transaction, calculated in various ways. The ability to buy back a participant’s back-end stake can be particularly attractive to a buyer who wishes to limit outstanding obligations after the trade.
Key people: Often entertainment deals, especially PSAs, specifically require the services of a particular person. If these services are not provided, the party that is obligated to provide these services may be in violation of the Agreement, or the party’s commitment to the project may be affected. If an individual’s continued participation in a project has implications for the upcoming project, the parties should discuss whether that individual will continue with the target company after the transaction and, if not, whether consent or a waiver should be obtained from the transaction. counterpart to the agreement a handkerchief.
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 when engaged by the network or streamer. . These provisions are also often applicable to affiliates of a production company, which would include a buyer and its affiliates as a result of a transaction. If a buyer has or plans to have projects similar to the projects of a target company, special attention should be paid to restrictions that could impact the buyer’s existing and future projects.
While this memo highlights some key provisions to consider in existing agreements during a merger and acquisition process, it can also serve as a roadmap for entertainment companies when negotiating deals to avoid conditions that could set off 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 seeking entertainment merger and acquisition opportunities should be prepared to undertake a significant process. due diligence and to make changes to the transaction to meet the findings of such due diligence.
Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.Revue nationale de droit, volume XI, number 322