Pre-Production / Contracts Development

• The Production Entity - Company

  In order to finance a feature film, producers generally form a production company and sell interests in the business entity. A production company can be any form of business entity, such as a corporation, a limited partnership (LP) or a limited liability company (LLC).
  
  Generally LLCs are recommended as production entities. They are the most flexible in terms of tax treatment and allocation of power among and between members while still providing the benefits of limited liability for the business owners. This means that personal assets of individual LLC members will be protected from the debts of the LLC.
  
  To form an LLC, organizational papers must be filed with the secretary of state in the state of formation, along with filing fees. In some states, such as New York, there is also a publication requirement. Members of LLCs can be individuals or other entities, such as corporations or other LLCs.
  
  The basic agreement necessary for an LLC is called an operating agreement, which sets forth the rules that govern the LLC and is analogous to a "shareholders' agreement" for a corporation. The operating agreement must address keys issues such as management control, the scope of the business of the LLC, the personal role of the filmmakers and their fees, as well as the role and obligations of investors and the priority and allocation of return of their investment.
  
  Also, while many people do not like to discuss the dissolution of a business at the time of formation, the operating agreement should nevertheless address what would in the event that the LLC needs to be wound up or if new members need to be added because of death, disability or budget shortfalls.
  
  From the filmmakers' perspective, it is very important that the operating agreement be drafted to ensure that the filmmaker retains complete control of the company's management.
  
  As films are highly personal to the filmmaker, the operating agreement should include a "contingency plan", which as the name implies, should lay out the back up plan and consequences in the event that the filmmaker, for whatever reason, cannot complete the project.
  
  We also recommend that the filmmakers' obligations be more specifically set forth in separate employment agreements, so that the filmmakers become employees of the LLC and the intellectual property created is owned by the LLC under traditional "work for hire" principles.
  
  The investor, on the other hand, will try to negotiate so as to protect his investment and allow for continuity in the event that new creative teams or members need to be brought in for the benefit of the project. Counsel for the filmmakers would try to draft the agreement to ensure that their clients maintain creative control at least through the initial production and distribution stages.
  
  The operating agreement should further include the investor's obligations, such as when and how their money will become available to the filmmakers. Typically, these agreements require that the investor's funds be released to the filmmaker when there is enough money to make "meaningful progress," in a manner this is defined by the operating agreement.
  
  Remember, the best way to prevent misunderstandings is to have the expectations of all parties expressly provided for and written down along with contingency plans.
  
  The next question to be considered is the scope of the business of the LLC. For example, is the film company being created to produce one film or multiple films? Generally, LLC operating agreements are drafted to allow the LLC to participate in "any lawful business" but it may offer more protection to small investors if the LLC is limited to a single film project given the risks of motion picture investment.
  
  Finally, and perhaps most importantly, are the terms regarding the wrap-up or "winding down" of the business. As mentioned earlier, many producers do not wish to discuss the wrapping up of a business at the time of its formation because they consider it bad luck. However, it is very important to address these issues before problems actually arise so that producers will know what to do in the event of dissolution.
  
  The operating agreement may also provide for mandatory repurchase of the investor's ownership interests at some point in the future. Often this is triggered by the fact that the production company does not have any financing for a certain period of time.
  
  An operating agreement is not only necessary for the formation of an LLC, but it is also an extremely important tool used to address certain issues in writing before the problems come to fruition in reality. If the operating agreement provides guidance for what the parties involved should do throughout the production of a film, it would eliminate the stress and chaos of having to figure out what to do when problems actually arise-and they almost always do.
   

• The Business Entity - Securities Issues

  Because a production entity is a business and involves selling passive interests in the business to finance the film, this raises many issues regarding federal and state disclosure requirements set forth by applicable securities laws.
  
  The producers and promoters of the business are responsible for providing full disclosure of all the material facts regarding the investment and its risks to their passive investors.
  
  Material information is any information that a reasonable person would want to know when deciding whether or not to invest in a film.
  
  It is typical for the producers to hire experienced securities counsel to write an Offering Plan ("Private Placement Memorandum"), which they then either register with the proper federal and state authorities or file for an exemption from registration with those same state and federal authorities.
  
  These Offering Plans must include a description of all material elements of the film project including bios of all personnel involved, risk factors, budgets and projections.
  
  They must state where all original, underlying agreements relating to the offering are on file and that they can be examined on request. One major risk that must be disclosed is the risk of failure to obtain distribution and to recoup negative costs. For instance, independent films that never obtain distribution do not recover their expenditures, resulting in a loss for the investors.
  
  Thus, the producer should be sure to be honest from the beginning, as they can be held criminally liable for knowing misrepresentations of facts. The investors may be entitled to a full refund of their investment if the producer or any of his agents or associates hides or misrepresents facts regarding production.
  
   

Screenwriter Agreements.

• Rights Purchase Agreement

  A rights purchase agreement is used when a producer desires to purchase a script or story outright from a writer or other owner.
  
  Generally, these agreements are known as "Assignments of Rights" and often include the sale of "the sole and exclusive motion picture, television, photograph record, merchandising and commercial rights and all allied and ancillary rights, throughout the universe, in perpetuity."
  
  Put simply, a rights purchase agreement provides for the purchase of all rights associated with a motion picture, not just the rights to purchase the script.
  
  However, these agreements can, and often are, limited to only certain rights and can exclude others.
  
  Which rights are kept by the writer usually depend on the bargaining power of the writer and the desires of those purchasing the property.
  
  Rights purchase agreements are the broadest form of purchasing a property from a writer or other owner. They can be used to purchase anything from a movie script to a book to a short story and can be tailored to a myriad of purposes.
   

• Life Rights

  Similar to a rights purchase agreement is a life rights purchase agreement. If a producer intends to produce a biography on a person's life, they may purchase that person's cooperation with a so-called life rights agreement.
  
  These rights can also be purchased from someone who knows the subject well. This is most commonly used when the subject is deceased.
  
  In that case, the life rights can be purchased from the subject's heirs or other immediate family who inherited these rights upon the subject's death.
  
  While story rights of certain deceased individuals may be considered "public domain," particularly if the individuals did not exploit their right of publicity during their lifetime, there are dangers in producing a "bio pic" without an actual person's verified story.
  
  Included in these dangers is being sued for slander by the deceased individual's estate and/or being prosecuted for criminal slander against a deceased individual in certain jurisdictions.
  
  Clearance of these issues can be critical in obtaining errors & omissions ("E&O") insurance at the time of distribution.
   

• Option Agreement

  An option agreement is a contractual agreement in which a producer buys the right to purchase a screenplay from a writer or other owner. Unlike the Rights Purchase Agreement, which is a flat out purchase of a property, an option agreement is not actually the purchase of the right to use the screenplay.
  
  Instead, the producer purchases the "exclusive right to purchase" the screenplay at a later date, for instance, when the producer secures financing.
  
  Option agreements are usually used to put a property "on hold", allotting the producer more time to conduct more research and to explore other avenues relating to the making of the film.
  
  Options are generally less expensive than Rights Purchase Agreements, as writers are often happy to get a few thousand dollars for their work.
  
  Options are used often in Hollywood and it is far cheaper to option a screenplay than buy it from the onset. An option agreement is especially useful when a producer is unsure of whether their financing will come through.
  
  This is basically a way of hedging your bets in case financing does not come through as anticipated. In such an event, if you purchase the rights to the property outright, you might be forced to purchase a screenplay which cannot be made into a profitable motion picture.
  
  With an option agreement, on the other hand, even if you fail to secure financing, you can simply let the option expire and "cut your losses".
   

• Writer Agreement

  A writer agreement may be needed in two specific instances. One reason a producer would use a writer's agreement is when a producer has an idea for a film (for example, based on a book or a Broadway play) and wants to convert this idea into a screenplay.
  
  A producer would use a writer's agreement in order to formally engage the writer's services to adapt his idea (or "property") into a screenplay.
  
  Another reason a writer's agreement would be used is when the producer wants to engage a screenwriter for a final rewrite of an existing screenplay.
  
  In both scenarios, a writer's agreement is an excellent option to engage a writer, but producers should use caution when engaging writers belonging to the Writer's Guild of America.
  
  When drafting writer's agreements for WGA writers, producers should take into account additional protections that the WGA provide for writers.
  
   

Production Agreements.

• Crew - Above the Line

  There are two types of crew members.
  
  Above the line crew members are those who control the aesthetics of a movie, such as the director, producer and cinematographer, just to name a few.
  
  Above the line crew members are generally paid a flat fee, as provided in their employment agreements. These agreements most likely contain very complex terms and provisions than those needed for their below the line counterparts due to the nature and extent of their work on a film.
  
  For example, a director's employment agreement would include compensation for development and production, depending on when the director was hired. The agreement might also include a provision to share a part of the profits if the film does well at the box office.
  
  Moreover, it is not uncommon for above the line crew to receive a daily stipend, or per diem, to cover their expenses while on-set. The agreement generally also includes provisions for how above the line crew are credited in a film, which can sometimes become highly contested.
  
  Also, an agreement of this type might confer the right for directors to hire other crew members and to decide on the cast.
  
  A director might want to have control over the editing and final cut of the film and the extent of such control should also be memorialized in the director's employment agreement.
  
  Finally, an agreement with a director might have a "a right of first refusal" provision that gives the director a right to choose whether to direct any prequels or sequels of the film before the producers can hire another director. Like writers, many experienced directors are members of the DGA.
  
  Their agreements would be subject to DGA rules and their Basic Agreement.
  
  An agreement with a producer should also cover the basic terms of employment, such as a description of the producers' obligations and compensation. The agreement should cover how the producer will be credited in the film.
  
  Often, it is wise to have an exhaustive list of applicable terms memorialized in the agreement, rather than risking the possibility of running into problems in the course of the film production which could be catastrophic, especially at or near the end of the filmmaking stage.
   

• Crew - Below the Line

  "Below the Line" crew refers to those crew members who deal with hands-on aspects of filmmaking, such as lighting and sound technicians and script supervisors.
  
  Below the line crew members are generally paid hourly, as opposed to the flat fee above the line crewmembers receive. Therefore, agreements with below the line crew are often less complex than those of their above the line counterparts.
  
  Accordingly, a crew deal memo can be used instead of a full contract for below the line crew members. Deal memos include personal information of the crewmembers such as their name, address, and emergency contact information and social security number.
  
  The deal memo also discusses individual crewmember's job title, rate of compensation and expense reimbursement. The memo also covers what if any credit a crewmember will receive.
  
  A deal memo is usually only one page long. Deal memos are often a good idea because they clearly set out all the important information on one page and copies can be made available to all crewmembers.
  
  Because of its length, a deal memo is easy for reference, which is especially important in the event a conflict arises.
   

Cast Agreements

Location Agreements.