Media + Entertainment

Co-production deals are often vital in securing financing and production infrastructure for a project, particularly when the project is not being fully financed by a single distributor or platform, or in situations where producers are seeking to retain certain rights. They are also often – but not exclusively – entered into between two companies from different territories or even other industries. They can take on different legal structures and may go by different labels, but the basic concept is this: they lay out the terms upon which two or more parties will work together to develop, produce, finance, and distribute an audiovisual project by contributing rights, capital, services or a combination of those things.

Here are some issues to consider. As you will see, even the simplest co-production can be reasonably complex when you get down to drafting, and accordingly my perspective is that it’s always helpful to start the process by having a frank conversation about its goals and priorities in entering into the co-production. Identifying and discussing potential issues at the outset is always better (and more cost-effective) than trying to resolve them later in the paperwork – or worse, down the line after the paperwork has been signed and the parties are in the middle of development or production.

1. Format and Language:

On a practical note, it’s often helpful to think about the form of a co-production agreement at the very outset of the relationship, taking into consideration the background and sophistication of the parties, and the goals of the venture. For example, an international co-production between a United States or European company and an Asian company may be best served by a simple form of term sheet, especially if translation is required. However, be cognizant of the details (see point eight).

2. Project Specifications:

This is easy to trivialize or overlook, but the parties need to agree to what they are producing together with as much specificity as possible. It is usually a good idea to state this expressly in the agreement – format (feature vs. television, live action vs. animation), number of episodes, runtime, original language, creative treatment, broad target audience (e.g., kids versus adults), and so on. Aside from anything else, this can help flush out any potential disagreements that otherwise might only reveal themselves later down the line.

3. Form of Contributions:

The classic form of co-production is a straight co-financing, with two or more parties committing to share the development costs and – if produced – production costs in some negotiated proportion. For example, a classic television co-production is two studios committing to bear the production cost (or deficit) on a 50/50 basis and co-own the project on an equal, 50/50 basis. However, financial contribution – and therefore ownership – is not always split down the middle. Moreover, in certain circumstances, a co-producer may contribute something else partly or wholly in lieu of cash. For example, the owner of an extremely high-level IP may take the position that the rights it is contributing to the co-production should have a certain deemed cash value, and offset its requirement to fund half the budget (while still retaining a fifty percent ownership in the project). As ever, the details are subject to negotiation.

4. Rights Contribution:

To drill down on the rights contribution point, it is often necessary to specify precisely what an underlying rightsholder is contributing to a co-production. On one end of the spectrum, the rightsholder could transfer the entire copyright (and any trademarks) in an IP, so that the co-production venture (or any entity formed in furtherance of it) is the owner on a prospective basis. On the other end of the spectrum, the rightsholder may provide solely a “one picture license” to the co-production – thus reserving all derivative and ancillary rights to itself. That can have significant implications for success. It is also usually helpful to specify some kind of reversion or turnaround provision to allow the rightsholder to get back the underlying rights in the event that the parties do not proceed to production.

5. Future Involvement:

Like any business relationship, it is important to specify how the relationship between the parties will evolve in success, and in failure. For example, if the parties are committing to co-finance season one of a television series, what happens if the series is successful enough to earn a second season? Are the partners required to fund that second season in the same proportion? Is it at their option? What happens if they opt not to fund? Additionally, what are the entitlements of the parties if the production yields a spinoff, sequel, or other subsequent production? What about format rights and foreign remakes? Again, it is usually best to discuss this transparently from the outset in order to establish and preserve trust between the parties.

6. Distribution and Administration Rights:

In many forms of co-productions (including many European co-pros and Asian committee deals), one or more of the parties is granted the right to distribute the production in certain media and/or territories, and/or the right to administer certain ancillary rights (e.g., merchandising, soundtrack). These rights need to be articulated specifically in the co-production agreement. For example, if a party is going to control “gaming” rights, does that include video games and tabletop games? Is it all forms of video games (e.g., PC, console, mobile)? It also raises multiple other questions – are there holdbacks on distribution in certain formats? What are the parties’ obligations to account back to the co-production? What fees and expenses can each party deduct in its capacity as distributor or administrator before paying the remainder to the co-production? Is the party administering the rights entitled to contract with an affiliate, and on what basis?

7. Profits and Accounting:

The hope is that a co-production will generate profits that can be distributed between the parties in success. This raises both substantive and procedural questions. On the substance side, the parties need to agree to an internal waterfall, so that everyone is aligned on how revenues will be distributed, and what deductions can be made at the co-production (as opposed to distributor) level. For example, the party handling distribution in a traditional film or TV co-production paradigm may be able to deduct a distribution fee in consideration for those services, while the “lead studio” often deducts a deferred overhead fee. Third-party participation will also need to be paid off the top. On the process side, the parties need to establish whether one of the parties will directly collect and administer revenue, or whether the parties will use a neutral third-party collection agent (in which case, it will be necessary to negotiate a CAMA). Likewise, the accounting and audit entitlements of the parties need to be specified.

8. Approvals:

This is at the heart of most business relationships – how will decisions be made? In entertainment, it is customary to break down approvals broadly into “business decisions” (e.g., budget, cashflow schedule, finance plan, distribution) and “creative decisions” (e.g., screenwriter, director, screenplay, casting, art/production design, music). However, in certain circumstances, it may make sense to specify approvals in a more granular way based on the specific goals of the venture, and the specific requirements and expertise of the parties. That also helps protect against future disputes arising from issues that fall into a grey area between business and creative (for example, script and casting decisions can impact the budget).

9. The Details:

Points numbers 1-8 above deal with some of the material issues that one might encounter in a co-production agreement. However, there are a plethora of other provisions that need to be contemplated in the “standard terms.” What representations and warranties are the parties making? What are the indemnification obligations? Where will the parties litigate any disputes, and under what law? Who is responsible for obtaining insurance? What about responsibility for technical and paper delivery to distributors? What constitutes a breach, and what happens if a party breaches? What about force majeure or bankruptcy? Who covers overages? Who retains underages? There are a lot of plausible “what ifs” that would not necessarily be covered in a short-form co-production term sheet, and thus proceeding without a more formal agreement can carry some degree of risk with it.