• INTRODUCTION

Mergers and acquisitions often necessitate extensive due diligence on the part of the buyer. Before committing to the transaction, the buyer will want to make certain that it understands what it is purchasing, what duties it is assuming, the nature and scope of the seller’s contingent liabilities, problematic contracts, litigation risks, intellectual property difficulties, and much more. This is especially true in private firm purchases, where the seller has not been subjected to public market scrutiny. Recent mergers and acquisitions and litigation have highlighted the importance of a buyer conducting thorough due diligence on potential risks, particularly when it comes to financial statements, data breach and cyber-security issues, intellectual property issues, and potential employment law and sexual harassment liability.

The previous few years have seen an increase in M&A activity across industries, with Media and Entertainment (“M&E”) being one of them. The cost of running a media corporation is a large budget operation that encompasses distribution and keeping a constant flow of new and changing content. Diverse channels and streaming services with large budgets would use such possibilities to grow and expand to earn massive profits. The Indian media and entertainment industry is a thriving sector for our economy, and it is making notable success in demonstrating its importance to the globe as it pushes forward in meeting expanding consumer needs in the industry.

This creates unique due diligence issues for the legal experts participating in such transactions. Even in normal circumstances, such as acquiring several musical compositions or sound recordings, due diligence investigation in the entertainment and media sector can be difficult, for example, due to the number of such songwriters, artists, musicians, and producers, and other stakeholders from whom rights must be obtained.

• CHALLENGES

Acquirers such as entertainment and media conglomerates are looking for more content that can be used across many platforms and as raw material for the creation of a plethora of new goods. In other words, purchasers like these are frequently acquiring content assets with the intent not only to exploit those assets as they exist at the time of the transaction, but also to repackage, repurpose, and transform those assets into a potentially infinite number of new items for exploitation via various methods, some of which may not even be anticipated at the time.

Under such conditions, the due diligence investigation, which is typically critical in any such acquisition, takes on added importance and requires special care, lest the acquirer discover, for example, that copyright issues impede its ability to repackage the content assets as planned or prevent it from exploiting those assets in certain jurisdictions. Although each due diligence investigation is unique to the specific transaction, we may generalise by stating that there are three major problems to legal due diligence investigations in the Media and Entertainment industry that must be addressed:

I. Issues around Intellectual Property Rights

The majority of entertainment content assets are subject to one or more forms of intellectual property protection and these protections might exist, or have varying applications, on a state, federal, regional, or global level.  These protections include copyright, trademark, and “rights of publicity”.

The due diligence must include investigating and analyzing not just the ownership of the existing content but also the status of the underlying rights to the content, and determining how else the purchaser can use the content; in other words, determining the rights that are, and are not, controlled by the target.  This includes confirming that as part of the production process each person who contributed to creating the content granted all of his or her rights to the commissioning party, including all of the rights needed to exploit those contributions without atypical restrictions, and that the terms of these grants conform with applicable requirements under the Copyright and related common law.

II. Agreements related to Producing, Distributing, And Exploiting Content

The majority of agreements and other contractual arrangements linked to producing, distributing, and monetizing entertainment material add to the queue of a checklist in the M&E Due diligence. The due diligence team must be able to extract and comprehend crucial information about the material and its utilisation from such documents, such as financial obligations like royalties and other contingent payments, sums payable to other parties, and amounts payable. It also necessitates a grasp of royalties and the procedure for recouping advances, as well as a check of the respective accounts associated with the applicable agreements to ensure that the state of each account appropriately reflects any paid contractual advances. In the case of agreements that anticipate the acquisition of more than one piece of material to be generated in the future, such as exclusive recording or exclusive songwriting agreements, the review must assess how much new product, if any, is still to be given under the agreement.  

III. Volume of Content

Millions of unique pieces of material may be owned by a target company, many of which were developed decades ago or are now controlled by the target company as a result of a succession of preceding purchases by the target or its predecessors. On the business side, there is a need to strike a balance between the desire to close the acquisition fast and the risks of reducing the due diligence examination. One popular solution is to take a two-step approach: first, identify and concentrate on a subset of the most valuable content, such as the highest-grossing movies, or the compositions that together account for a significant portion of the target’s revenue, or every album that has sold more than a certain threshold, etc.

• PRACTICAL CONSIDERATIONS FOR DUE DILIGENCE

Certain provisions in existing contracts are always closely scrutinized during the due diligence process and entertainment-related contracts are no exception. However, entertainment agreements often pose unique issues that buyers and sellers should be mindful of when reviewing agreements in connection with a proposed M&A transaction.

1. Party to the Agreement: While it may seem simple, the first question that should be answered when reviewing an agreement in the due diligence process is, “what entity is party to this agreement”? The answer to this question will assist in determining whether the rights to the assets a buyer intends to purchase are actually owned by the entity being acquired or whose assets are being acquired. If a transaction involves the acquisition of the assets or equity of a parent company, the fact that assets are held at a subsidiary level will likely not result in a material issue. However, if a subsidiary entity is the target, it is possible that certain rights might sit within a different entity that is not part of the transaction. A common scenario in which this may occur is when most of the rights to a specific piece of content are owned by one entity, but the distribution rights to such content are owned by another. If the rights that are to be acquired are owned by entities not part of the transaction, internal assignments of those rights should be included as a condition to closing the transaction.
2. Assignment: In the M&A context, an assignment of an agreement from a target company to a buyer is required to transfer such agreement to an entity other than the existing target company. An anti-assignment provision typically provides that a party may not assign the agreement without the consent of the other party. Assignment provisions may provide specific carve-outs to a counterparty’s right to consent to the assignment of the agreement, such as a change of control transaction or an assignment to an affiliate. Typically in the event of a stock acquisition or merger, an anti-assignment provision will not be applicable, as the agreement will remain in the name of the existing target company. However, anti-assignment provisions may be drafted so that they also implicate a merger or equity transaction (i.e., by specifying that a merger is deemed an assignment). Even if assignment is permitted under the terms of an agreement, frequently entertainment agreements will provide that following an assignment the assigning party will remain secondarily liable to the other party, unless such assignment is to a major studio, distribution platform, or similarly financially responsible third party that assumes the assigning party’s obligations under the agreement in writing.
3. Change-of-Control: As with assignment provisions, there is also a wide range of provisions restricting change of control. Common examples of what constitutes change of control for such provisions include change of ownership, sale of all or substantially all of a target company’s assets, or change in a majority of board members. These provisions provide counterparties with various rights upon the announcement or consummation of a proposed M&A transaction, including termination rights and consent rights. Of particular note for production services agreements (PSAs), a change of control of a target company is frequently included in the list of events that trigger a studio’s production takeover rights.
4. Back-End Participations: As studios accelerate initially releasing content on their owned and operated platforms, agreements related to such content increasingly contain provisions pursuant to which key above-the-line talent receive adjusted compensation depending on whether the film opens in theaters, on platform or both. Typically this compensation is a “back-end buyout” of the talent’s ongoing right to participate in revenue generated by the project. It is also not uncommon for a modified adjusted gross receipts, adjusted gross receipts or net proceeds definition to contemplate the ability to “buy-out” talent following an M&A transaction. In such a scenario, the “buy-out” amount will be a portion of the transaction purchase price, calculated in a variety of ways. The ability to buy-out a participant’s back-end participation may be particularly attractive for a buyer that wants to limit ongoing obligations post-transaction.
5. Key Individuals: Often entertainment agreements, particularly PSAs, specifically require the services of a particular individual. If these services are not provided, the party that is obligated to provide such services may be in breach of the Agreement, or the party’s attachment to the project could be impacted. If an individual’s ongoing participation in a project has implications for the project going forward, the parties should discuss whether that individual will continue with target company post-transaction and, if not, whether consent or a waiver should be obtained from the counterparty to the agreement at issue.
6. 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 while engaged by the network or streamer. These provisions are also often applicable to a production company’s affiliates, which would include a buyer and their affiliates following a transaction. If a buyer has or plans to have projects that are similar to the projects of a target company, close consideration should be given to any restrictions that might impact the buyer’s existing and future projects.

• CONCLUSION

At its core, due diligence is independent investigative work conducted either by using primary and secondary resources remotely or by conducting more investigatory assurance locally. In both cases the goal is to gather vital information that either sheds light on new red flags that require risk assessment or comfort that your third party is reputable. With media, entertainment, and technology companies seeking to acquire and deliver more content over a multiplicity of pathways, conducting a due diligence investigation in the entertainment and media sector can be challenging and requires a deep understanding of industry agreements, deal points, and practices. Particularly with purchasers here typically aiming to acquire content that is an established brand, that can be used in ways not yet anticipated, and that can serve as the raw material for creating new content, meticulous attention to matters such as copyright and other intellectual property matters, rights confirmation, and contractual issues is essential if the goals of the deals are to be fully achieved.