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London private equity & banking law firm Crefovi is delighted to bring you this M&A, private equity & banking law blog, to provide you with forward-thinking and insightful information on the financial and corporate issues for the creative industries.

This M&A, private equity & banking law blog provides regular news and updates, and features summaries of recent news reports, on legal issues facing the global banking, finance and private equity community, in particular in the United Kingdom and France. This blog also provides timely updates and commentary on legal issues in the capital markets and mergers & acquisitions sectors. It is curated by the finance lawyers of our law firm, who specialise in advising our finance, banking, mergers & acquisitions, capital markets & private equity clients in London, Paris and internationally on all their legal issues.

London banking & finance law firm Crefovi advises its clients on all their financing needs, in particular, those related to the fashion and luxury goods sectors, the entertainment, music and film sectors, the art world & high tech market. Crefovi writes and curates this M&A, private equity & banking law blog to guide its clients through the complexities of banking & finance law.

We support our clients out of London, Paris and globally, in finding the best solutions to their various legal issues relating to banking and finance law, either on contentious or non-contentious matters. We also advise our clients on private equity and private equity financing matters, capital markets issuances and mergers & acquisitions.

Crefovi has experience representing either lenders and financiers, or borrowers and invested businesses (which are all trading in the creative industries), in which equity or debt is injected.

Moreover, Crefovi has industry teams, built by experienced lawyers with a wide range of practice and geographic backgrounds. These industry teams apply their extensive industry expertise to best serve clients’ business needs. Some of these industry teams are the Banking & finance, Mergers & acquisitions, Capital markets and Private equity departments, which curate this M&A, private equity & banking law blog below for you. 

Annabelle Gauberti, founding and managing partner of London private equity & banking law firm Crefovi, is also the president of the International association of lawyers for creative industries (ialci). This association is instrumental in providing very high quality seminars, webinars & brainstorming sessions on legal & business issues to which the creative industries are confronted.

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How to fight abuses of dominant position done by way of IP claims & denigration?

Crefovi : 23/07/2020 12:24 pm : Antitrust & competition, Art law, Articles, Banking & finance, Capital markets, Consumer goods & retail, Copyright litigation, Emerging companies, Employment, compensation & benefits, Entertainment & media, Fashion law, Gaming, Hospitality, Information technology - hardware, software & services, Insolvency & workouts, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, Life sciences, Litigation & dispute resolution, Mergers & acquisitions, Music law, Outsourcing, Private equity & private equity finance, Product liability, Real estate, Restructuring, Tax, Technology transactions, Trademark litigation

When a competitor which used to reign as a warlord in a particular market becomes challenged by a new player, this competitor may use tactics such as systematic and heavy-handed enforcement of alleged intellectual property rights, as well as aggressive smearing and denigration campaigns, to deter this new entrant. The situation may soon become untenable for the new kid on the block, as potential customers are scared away and dissuaded by the blows forcefully and repeatedly inflicted upon by the dominant player. What to do if you and your business are targeted by such hyper-aggressive competitor? How can you defend yourself against these abuses of dominant position?

abuses of dominant positionThe right balance between intellectual property rights (“IPRs“) and free competition is very difficult to strike, especially in markets and jurisdictions which are hyper protective of IPRs of right owners, like in Europe. When the right owner is manipulative, hyper-aggressive and unprepared to share his or her turf, they may use the so-called enforcement of IPRs to drive any new entrants in their specific market away; thus creating many abuses of dominant position.

1. What’s going on?

Nowhere as seriously have I witnessed such anti-competitive behaviour from a competitor occur, than in the automotive sector.

I was instructed to attend a trade show in the South of France, last year in September 2019, in order to assist a Chinese automotive company and its Spanish distributor on their stand, as they were systematically and repetitively subjected to court-ordered police raids and interim seizures, on any European trade fair that they had attended, and were attending, since the launch of their new automotive business two years’ prior.

As you might have guessed, it is their competitor, a German company in a monopolistic situation on that particular segment of the automotive sector, which was behind this constant derailing of each one of my clients’ trade exhibitions in Europe.

None of my clients’ trade shows in the USA were perturbed by these court-ordered seizures and police raids and court orders to immediately close down their stand on the tradeshows, based on the allegations of IPR counterfeiting made by such German competitor: no US court was accepting to grant the German competitor such overarching measures to stop free competition on a pretence of infringement of IPRs.

However, each one of the European courts to which such over-the-top interim and immediate measures were requested by such German competitor, in the context of European trade fairs held in Germany, Spain, France and Monaco, happily obliged and granted such court orders. As a result, these interim measures had forced my clients to close down their stand on each of these European trade shows prematurely, because my clients were deprived of their products and prototypes taken away during those police-led raids and seizures on their stands, as well as forced sales and seizures of their prototypes and products, ordered by some of these European courts.

Not only was the German competitor using its monopolistic status to manipulate European courts into driving its Spanish and Chinese competitors (my clients) away, alleging some IPRs infringements right and left, but it also conducted a vast, well-oiled and well-orchestrated denigration and smearing campaign against my clients, through the use of private eyes in various European locations, as well as through listening and taping the phone calls and text messages exchanged by my clients on their mobile phones. As a result, the German monopolist was able to always contact, before my clients, all the trade fair organisers, potential distributors and other third parties and business partners interested in my clients’ products, in order to denigrate my clients as “Chinese counterfeiters” who manufactured “dangerous and unfit automotive sea products” (sic). Consequently, European trade show organisers, potential European distributors and potential European end-consumers of my Chinese and Spanish clients were spooked, and took an enormous amount of convincing and cajoling, in order to establish, or re-establish, a rapport with my two clients.

Thanks to my intervention, during two of my clients’ trade fairs in Cannes, France, and Monaco, in September 2019, the humiliating option of having to close down their stand before the end of these trade shows was spared, since I efficiently liaised with the bailiff instructed by the French lawyers of the German competitor, in order to salvage some of my clients’ prototypes from a forced sale imposed by the Paris “tribunal de grande instance” on some quaint and unfounded allegations of patent and design infringement made by this German competitor.

I had seen some prior abuses of dominant position, in particular in the fashion sector and the fashion textile trade shows’ segment, perpetrated by luxury conglomerates and the largest fashion textile trade fair in the world, in the past. However, this first-hand experience of abuse of IPRs, abuse of dominant position and smearing and denigration campaigns against my automotive clients was on another level.

2. What can you do to protect yourself against some abuses of IPRs and of dominant position perpetrated by a competitor?

The enforcement of IPRs across the European Union (“EU“) has been harmonised, to some extent, by the Directive 2004/48/EC of 29 April 2004 on the enforcement of intellectual property rights (the “Enforcement directive”). However, nothing is set out, in the 21 articles of the Enforcement directive about any restrictions on the enforcement of IPRs due to a breach of competition law by the IPRs owner.

Consequently, and since France is extremely protective of IPRs owners, there are no restrictions on how IPRs may be enforced by right owners against third parties, in the French Intellectual property code; provided that any mandatory prior depositing and registration procedures (which are applicable to industrial IPRs such as design rights, trademarks and patents) have been complied with.

Under English law, there are some key restrictions on the ability to enforce IPRs, which include:

  • the risk of incurring liability for groundless threats of IPRs infringements, the law of which has been significantly reformed in the United Kingdom (UK) by the Intellectual Property (Unjustified Threats) Act 2017, and
  • specific defences to infringement and restrictions on available remedies for each IPR.

Therefore, if your dominant competitor raises some alleged IPRs infringement claims against you and your business in the UK, then you may make the most of these legal tools offered to you, from the “actionable threats” defense, to the “unjustified threats” defense, via UK civil court proceedings.

When an IPRs owner abuses its dominant position, it starts with obtaining some interim IPRs measures, such as the seizures and force sales on my clients’ stands in their trade show, against its competitors. Then, the dominant abuser lodges some IPRs infringement proceedings in front of the competent civil – and sometimes criminal – courts, against its smaller competitors, to obtain some damages for the alleged acts of IPRs infringements.

In France, the Tribunaux judiciaires (district courts) have exclusive jurisdiction in hearing cases concerning copyright, national trademarks and national design rights; while the Paris Tribunal judiciaire has exclusive jurisdiction in hearing cases concerning patents and EU rights (i.e. EU trademark and design rights). For example, after the Cannes yachting trade show in September 2019, the German monopolist lodged a fully-fledged patent infringement lawsuit against the Spanish distributor of the Chinese manufacturer, with the Paris Tribunal judiciaire, within 30 days from the day of the seizure and forced sale which took place during the Cannes trade fair. Copyright holders can also take action in the French criminal courts for counterfeiting.

In the UK, IPRs are primarily enforced via civil court proceedings, and the English High Court is the most common venue. IPRs proceedings in the English High Court are heard in the Chancery division, and different specialist lists are available:

  • the Intellectual Property Enterprise Court (“IPEC“) can hear any IPRs claim of relatively low complexity and value: the IPEC is suitable for claims which can be tried in two days or less, damages are capped at GBP500,000 and recoverable legal costs are subject to a cap of GBP50,000;
  • the Patent Court can hear claims relating to patents, registered designs, semiconductor rights and plant varieties. There is no cap on damages or recoverable legal costs; and
  • all other IPRs claims can be heard in the Intellectual Property List of the Chancery Division, of which the Patent Court and IPEC are sub-lists.

The problem, though, is that aside from the above-mentioned “actionable threats” and “unjustified threats” defenses, which can only be invoked in front of UK courts, neither the French Tribunaux judiciaires, nor the English High Court and its specialist lists, can review and decide on any anti-competitive behaviour and abuse of dominant position claims raised, as a counter-offensive, by the new entrant in a particular industrial sector, which is being subjected to IPRs infringement claims in front of these IP courts by the dominant player in that particular industry.

So, to continue with the example of my Spanish and Chinese clients, the Spanish distributor which is now the defendant in the patent infringement lawsuit lodged by the German monopolist in the automotive sector (the claimant), with the Paris Tribunal judiciaire, cannot make some counterclaims of abuse of dominant position and anti-competitive behaviour, as a counter-offensive, within the scope of that lawsuit with the Paris Tribunal judiciaire. Why? Because the Paris Tribunal judiciaire is not competent to review such claims relating to breaches of competition law: like the other French tribunaux judiciaires, it is only competent to review claims in relation to breaches of IPRs and laws on intellectual property.

So what is a quashed new entrant in this industrial sector to do then, under these circumstances? Well, the first priority is to find and retain expert and very aggressive legal counsel who will defend it against the wrongful allegations of IPRs infringement made by the monopolistic competitor. Such lawyer specialised in intellectual property matters shall also file some counterclaims against such abusive competitor, on behalf of its client, for like-for-like breaches of its client’s IPRs, invoking free riding and unfair competition (if in front of French courts) or passing off (if in front of UK courts).

The second priority, for the new entrant being wrongfully sued for alleged IPRs infringement by its dominant competitor, is to simultaneously file a claim against that abusive competitor with the national authorities responsible for reviewing and investigating the competitive effects of conduct related to the exercise of IPRs.

In France, the French Competition Authority (“FCA“) is the independent administrative body that specialises in analysing and regulating the operation of competition on markets to protect the economic public order. Its goal is to supervise the free play of competition in France. It can issue an opinion on the investigations it carries out, which can be subject to appeal only to the Paris Court of appeal. The rulings of the Court of appeal can also be the subject of recourse to the French Supreme court (“cour de cassation”). However, any judicial action relating to an infringement concerning the application of competition law can be taken before the Marseilles, Bordeaux, Lille, Fort-de-France, Lyon, Nancy, Paris and Rennes Commercial tribunals on the first instance jurisdictions.

Therefore, our Spanish and Chinese clients should not only fight the patent infringement allegations lodged by their German dominant competitor in front of the Paris Tribunal judiciaire, but also file some claims against that German competitor with either the FCA, or the Paris Commercial tribunal, for abuse of dominant position and anti-competitive behaviour. The claimants will try to obtain a judgment against these anti-competitive practices, as well as some paid damages for the prejudice suffered.

In the UK, the competition authority is the Competition and Markets Authority (“CMA“), which reviews and investigates compliance with competition law. The CMA’s remit includes the review and control of the exercise of IPRs insofar as they affect competition. The Competition Appeal Tribunal (“CAT“) is a specialist competition tribunal and hears appeals against the decisions of the CMA. An appeal from the CAT can be made to the Court of Appeal. Follow-on and standalone claims for competition law damages can be raised in the High court and in the CAT.

As you might have inferred from the above, the new entrant who is subjected to these various IPRs infringement claims by the abusive and dominant competitor, better have very deep pockets and unlimited wells of patience and resilience, in order to not only fight off an IPRs infringement lawsuit against its monopolistic competitor, but also drive through to completion some well-evidenced abuse of dominant position and anti-competitive behaviour claims in front of the competent competition authorities or courts, in either France or the UK.

It may all be worth it in the long term, though, as the recent high-profile cases dealing with the intersection of competition law and IPRs detailed below attest.

In 2014, the FCA ruled against Nespresso, the market leader for machines and capsules. Nespresso linked the purchase of its capsules with that of its coffee machines, thereby excluding manufacturers of competing capsules. Such exclusionary practices were reported by its competitors DEMB and Ethical Coffee to the FCA, as abuse of dominant position. In the decision issued by the FCA dated 4 September 2014, Nespresso was required to make several commitments intended to remove the obstacles to the entry and development of other manufacturers of capsules that would work with the brands’ coffee machines.

In 2016, the CMA fined GSK and two other pharmaceutical companies (the generic companies) in relation to anticompetitive patent settlement agreements. The CMA also found that GSK abused its dominant position in the UK market, by seeking to delay the generic companies’ entry into the market.

3. What can you do to protect yourself against some the acts of denigration and smearing perpetrated by a competitor?

A new form of abusive conduct has been identified, namely the practice of dominant companies excluding or reducing competition from competitors, by identifying exactly what non-price parameters are important for competition, and setting up some strategic campaigns to influence the purchasing behaviour of customers, typically by portraying competing products or services as unsafe and/or inefficient or of significantly lower quality.

These practices are usually referred to as “denigration” and “smearing campaigns”. Denigration means to criticize a competitor’s products or services in a derogatory manner, ultimately with a view to influencing customers purchasing patterns.

While such practices are usually dealt with under the unfair marketing rules in national legislations, some very serious cases found their way into the competition law arena.

Indeed, in several cases, the denigrating conduct has been part of dominant companies’ communication strategies with the clear object of disseminating information to customers about a competitor in order to create an air of uncertainty and/or doubt regarding either the competitor’s ability to carry out certain activities or putting a question mark on the quality, safety or efficacy of their products and services.

Denigrating conduct is most often seen in the form of dissemination of negative information based on false or misleading assertions in regard to competing products with the intention of having an impact on customers’ purchasing decisions.

Denigration of competitors’ products have long-lasting effects in the market because the unjustified doubts or fears can only be overcome with a significant effort by the target company to (re)educate and (dis)prove the denigrating statements in front of end-customers, distributors, etc.

Whilst at the European level, the European Commission has not yet had the opportunity to take a decision on a dominant company denigrating competitor products, there is considerable body of law at national level under article 102 TFEU, in particular in France.

The French cases have covered not only the pharmaceutical sector, but also the telecoms, electricity and pay-TV industries. Common to all these cases is that the dominant player has attempted to hinder market entry and product switch through denigrating competitor products in a number of different ways. Typically, the dominant company conducted a consistent, widespread strategy of misinformation to people who took or influenced purchasing decisions.

For example, in the matter with my Chinese and Spanish clients, their German dominant competitor would spread the word, before each trade show, that they had been sentenced to paying some counterfeiting damages to such German competitor, by a German court, and that their China-made sea scooters were of inferior quality and breaking all the time. This false information was diffused to the trade fair organisers, by the German competitor, in order to push the trade fairs to refuse access to their show to my clients, who were branded “counterfeiters” by their German competitor. But this denigration was also done with each one of the European potential distributors my clients, with threats made by the German competitor that it would stop trading with the distributor if the latter started any business with the Chinese manufacturer and its Spanish representative.

In France, the FCA has thus in its more than 10 denigration cases consistently held that denigration of competitors or their products, does not constitute competition on the merits and as as result, denigration can constitute an abuse of dominant position in certain circumstances. In French case law, for denigration to infringe article 102 TFEU, four clear elements have to be proven:

  • there is denigration of a competitor’s product with a view to obtaining a commercial advantage;
  • a link between the dominance and the practice of denigration has to be established;
  • it has to be verified whether the statements put forward in the market by the dominant company are based on objective findings or assertions that are not verified, and
  • whether the commercial statements are liable to influence the structure of the market.

The denigration cases assessed by the FCA and other European competition authorities have so far turned on the dominant company identifying the most important non-price parameters to be able to compete in a market and concluding that the relevant customer decision process could be influenced by instilling fears or concerns that are then conveyed to decision makers and stakeholders in a systematic and consistent smearing campaign.

Therefore, it seems that abuse of a dominant position as a consequence of denigrating conduct is more likely to be sanctioned in sectors where non-price competition parameters are more relevant than price. The more important a given parameter is, the more critical it is when a dominant company tries to exclude competitors through either false or misleading information, or tries to make information credible in a covert manner.

To conclude, a new entrant in a market, which is subjected to an abuse of IPRs and/or a smearing campaign to systematically denigrate its products, by the dominant player in that particular industry, has more than one string to its bow in order to fight back. However, such new kid on the block must brace himself or herself for lengthy, draining and expensive legal battles, both as a defendant against the wrongful alleged claims of counterfeiting of its IPRs, raised by the dominant and abusive competitor, and as a claimant in front of the competent European competition authority, through which it will have raised some claims against such competitor for abuse of dominant position, in particular by way of denigration and smearing campaign.

These various legal battles will eventually neutralise the dominant competitor, while having a rigorous and well-organised IPR registration and maintenance strategy in place, for the new entrant in the market, is essential. All new models, products, brands, services should have their respective IPR registered, and then listed in a catalogue of IPRs maintained by the legal counsel of the new entrant. All evidence, and certificates, of registration should be kept and archived meticulously, to anticipate any IPRs infringement claim that the dominant competitor may bring. Non-disclosure and confidentiality clauses should be set out in all the contracts entered into with new employees, distributors, service providers who will assist the new entrant before and during the trade shows (PR agencies, hostesses’ agencies, logistics companies, etc).

Our law firm Crefovi specialises in dealing with these types of IPRs claims and IP antitrust claims, so don’t hesitate to give us a buzz.




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Why the valuation of intangible assets matters: the unstoppable rise of intangibles’ reporting in the 21st century’s corporate environment

Crefovi : 15/04/2020 8:00 am : Articles, Banking & finance, Capital markets, Consumer goods & retail, Copyright litigation, Emerging companies, Entertainment & media, Fashion law, Hospitality, Information technology - hardware, software & services, Insolvency & workouts, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, Life sciences, Litigation & dispute resolution, Mergers & acquisitions, Music law, News, Private equity & private equity finance, Technology transactions, Trademark litigation

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It is high time France and the UK up their game in terms of accounting for, reporting and leveraging the intangible assets owned by their national businesses and companies, while Asia and the US currently lead the race, here. European lenders need to do their bit, too, to empower creative and innovative SMEs, and provide them with adequate financing to sustain their growth and ambitions, by way of intangible assets backed-lending. [hr]

Back in May 2004, I published an in-depth study on the financing of luxury brands, and how the business model developed by large luxury conglomerates was coming out on top. 16 years down the line, I can testify that everything I said in that 2004 study was in the money: the LVMH, Kering, Richemont and L’Oreal of this word dominate the luxury and fashion sectors today, with their multibrands’ business model which allows them to both make vast economies of scale and diversify their economic as well as financial risks.

However, in the midst of the COVID 19 pandemic which constrains us all to work from home through virtual tools such as videoconferencing, emails, chats and sms, I came to realise that I omitted a very important topic from that 2004 study, which is however acutely relevant in the context of developing, and growing, creative businesses in the 21st century. It is that intangible assets are becoming the most important and valuable assets of creative companies (including, of course, luxury and fashion houses).

Indeed, traditionally, tangible and fixed assets, such as land, plants, stock, inventory and receivables were used to assess the intrinsic value of a company, and, in particular, were used as security in loan transactions. Today, most successful businesses out there, in particular in the technology sector (Airbnb, Uber, Facebook) but not only, derive the largest portion of their worth from their intangible assets, such as intellectual property rights (trademarks, patents, designs, copyright), brands, knowhow, reputation, customer loyalty, a trained workforce, contracts, licensing rights, franchises.

Our economy has changed in fundamental ways, as business is now mainly “knowledge based”, rather than industrial, and “intangibles” are the new drivers of economic activity, the Financial Reporting Council (“FRC“) set out in its paper “Business reporting of intangibles: realistic proposals”, back in February 2019.

However, while such intangibles are becoming the driving force of our businesses and economies worldwide, they are consistently ignored by chartered accountants, bankers and financiers alike. As a result, most companies – in particular, Small and Medium Enterprises (“SMEs“)- cannot secure any financing with money men because their intangibles are still deemed to … well, in a nutshell … lack physical substance! This limits the scope of growth of many creative businesses; to their detriment of course, but also to the detriment of the UK and French economies in which SMEs account for an astounding 99% of private sector business, 59% of private sector employment and 48% of private sector turnover.

How could this oversight happen and materialise, in the last 20 years? Where did it all go wrong? Why do we need to very swiftly address this lack of visionary thinking, in terms of pragmatically adapting double-entry book keeping and accounting rules to the realities of companies operating in the 21st century?

How could such adjustments in, and updates to, our old ways of thinking about the worth of our businesses, be best implemented, in order to balance the need for realistic valuations of companies operating in the “knowledge economy” and the concern expressed by some stakeholders that intangible assets might peter out at the first reputation blow dealt to any business?

 

1. What is the valuation and reporting of intangible assets?

1.1. Recognition and measurement of intangible assets within accounting and reporting

In the European Union (“EU“), there are two levels of accounting regulation:

  • the international level, which corresponds to the International Accounting Standards (“IAS“), and International Financial Reporting Standards (“IFRS“) issued by the International Accounting Standards Board (“IASB“), which apply compulsorily to the consolidated financial statements of listed companies and voluntarily to other accounts and entities according to the choices of each country legislator, and
  • a national level, where the local regulations are driven by the EU accounting directives, which have been issued from 1978 onwards, and which apply to the remaining accounts and companies in each EU member-state.

The first international standard on recognition and measurement of intangible assets was International Accounting Standard 38 (“IAS 38“), which was first issued in 1998. Even though it has been amended several times since, there has not been any significant change in its conservative approach to recognition and measurement of intangible assets.

An asset is a resource that is controlled by a company as a result of past events (for example a purchase or self-creation) and from which future economic benefits (such as inflows of cash or other assets) are expected to flow to this company. An intangible asset is defined by IAS 38 as an identifiable non-monetary asset without physical substance.

There is a specific reference to intellectual property rights (“IPRs“), in the definition of “intangible assets” set out in paragraph 9 of IAS 38, as follows: “entities frequently expend resources, or incur liabilities, on the acquisition, development, maintenance or enhancement of intangible resources such as scientific or technical knowledge, design and implementation of new processes or systems, licenses, intellectual property, market knowledge and trademarks (including brand names and publishing titles). Common examples of items encompassed by these broad headings are computer software, patents, copyrights, motion picture films, customer lists, mortgage servicing rights, fishing licences, import quotas, franchises, customer or supplier relationships, customer loyalty, market share and marketing rights“.

However, it is later clarified in IAS 38, that in order to recognise an intangible asset on the face of balance sheet, it must be identifiable and controlled, as well as generate future economic benefits flowing to the company that owns it.

The recognition criterion of “identifiability” is described in paragraph 12 of IAS 38 as follows.

An asset is identifiable if it either:

a. is separable, i.e. capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so; or

b. arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations“.

“Control” is an essential feature in accounting and is described in paragraph 13 of IAS 38.

An entity controls an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits. The capacity of an entity to control the future economic benefits from an intangible asset would normally stem from legal rights that are enforceable in a court of law. In the absence of legal rights, it is more difficult to demonstrate control. However, legal enforceability of a right is not a necessary condition for control because an entity may be able to control the future economic benefits in some other way“.

In order to have an intangible asset recognised as an asset on company balance sheet, such intangible has to satisfy also some specific accounting recognition criteria, which are set out in paragraph 21 of IAS 38.

An intangible asset shall be recognised if, and only if:

a. it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and 

b. the cost of the asset can be measured reliably“.

The recognition criteria illustrated above are deemed to be always satisfied when an intangible asset is acquired by a company from an external party at a price. Therefore, there are no particular problems to record an acquired intangible asset on the balance sheet of the acquiring company, at the consideration paid (i.e. historical cost).

1.2. Goodwill v. other intangible assets

Here, before we develop any further, we must draw a distinction between goodwill and other intangible assets, for clarification purposes.

Goodwill is an intangible asset that is associated with the purchase of one company by another. Specifically, goodwill is the portion of the purchase price that is higher than the sum of the net fair value of all of the assets purchased in the acquisition and the liabilities assumed in the process (= purchase price of the acquired company – (net fair market value of identifiable assets – net fair value of identifiable liabilities)).

The value of a company’s brand name, solid customer base, good customer relations, good employee relations, as well as proprietary technology, represent some examples of goodwill, in this context.

The value of goodwill arises in an acquisition, i.e. when an acquirer purchases a target company. Goodwill is then recorded as an intangible asset on the acquiring company’s balance sheet under the long-term assets’ account.

Under Generally Accepted Accounting Principles (“GAAP“) and IFRS, these companies which acquired targets in the past and therefore recorded those targets’ goodwill on their balance sheet, are then required to evaluate the value of goodwill on their financial statements at least once a year, and record any impairments.

Impairment of an asset occurs when its market value drops below historical cost, due to adverse events such as declining cash flows, a reputation backlash, increased competitive environment, etc. Companies assess whether an impairment is needed by performing an impairment test on the intangible asset. If the company’s acquired net assets fall below the book value, or if the company overstated the amount of goodwill, then it must impair or do a write-down on the value of the asset on the balance sheet, after it has assessed that the goodwill is impaired. The impairment expense is calculated as the difference between the current market value and the purchase price of the intangible asset. The impairment results in a decrease in the goodwill account on the balance sheet.

This expense is also recognised as a loss on the income statement, which directly reduces net income for the year. In turn, earnings per share (‟EPS”) and the company’s stock price are also negatively affected.

The Financial Accounting Standards Board (“FASB“), which sets standards for GAAP rules, and the IASB, which sets standards for IFRS rules, are considering a change to how goodwill impairment is calculated. Because of the subjectivity of goodwill impairment, and the cost of testing impairment, FASB and IASB are considering reverting to an older method called “goodwill amortisation” in which the value of goodwill is slowly reduced annually over a number of years.

As set out above, goodwill is not the same as other intangible assets because it is a premium paid over fair value during a transaction, and cannot be bought or sold independently. Meanwhile, other intangible assets can be bought and sold independently.

Also, goodwill has an indefinite life, while other intangibles have a definite useful life (i.e. an accounting estimate of the number of years an asset is likely to remain in service for the purpose of cost-effective revenue generation).

1.3. Amortisation, impairment and subsequent measure of intangible assets other than goodwill

That distinction between goodwill and other intangible assets being clearly drawn, let’s get back to the issues revolving around recording intangible assets (other than goodwill) on the balance sheet of a company.

As set out above, if some intangible assets are acquired as a consequence of a business purchase or combination, the acquiring company recognises all these intangible assets, provided that they meet the definition of an intangible asset. This results in the recognition of intangibles – including brand names, IPRs, customer relationships – that would not have been recognised by the acquired company that developed them in the first place. Indeed, paragraph 34 of IAS 38 provides that “in accordance with this Standard and IFRS 3 (as revised in 2008), an acquirer recognises at the acquisition date, separately from goodwill, an intangible asset of the acquiree, irrespective of whether the asset had been recognised by the acquiree before the business combination. This means that the acquirer recognises as an asset separately from goodwill an in-process research and development project of the acquiree, if the project meets the definition of an intangible asset. An acquiree’s in-process research and development project meets the definition of an intangible asset when it:

a. meets the definition of an asset, and 

b. is identifiable, i.e. separable or arises from contractual or other legal rights.

Therefore, in a business acquisition or combination, the intangible assets that are “identifiable” (either separable or arising from legal rights) can be recognised and capitalised in the balance sheet of the acquiring company.

After initial recognition, the accounting value in the balance sheet of intangible assets with definite useful lives (e.g. IPRs, licenses) has to be amortised over the intangible asset’s expected useful life, and is subject to impairment tests when needed. As explained above, intangible assets with indefinite useful lives (such as goodwill or brands) will not be amortised, but only subject at least annually to an impairment test to verify whether the impairment indicators (“triggers”) are met. 

Alternatively, after initial recognition (at cost or at fair value in the case of business acquisitions or mergers), intangible assets with definite useful lives may be revalued at fair value less amortisation, provided there is an active market for the asset to be referred to, as can be inferred from paragraph 75 of IAS 38:

After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated amortisation and any subsequent accumulated impairment losses. For the purpose of revaluations under this Standard, fair value shall be measured by reference to an active market. Revaluations shall be made with such regularity that at the end of the reporting period the carrying amount of the asset does not differ materially from its fair value.”

However, this standard indicates that the revaluation model can only be used in rare situations, where there is an active market for these intangible assets.

1.4. The elephant in the room: a lack of recognition and measurement of internally generated intangible assets

All the above about the treatment of intangible assets other than goodwill cannot be said for internally generated intangible assets. Indeed, IAS 38 sets out important differences in the treatment of those internally generated intangibles, which is currently – and rightfully – the subject of much debate among regulators and other stakeholders.

Internally generated intangible assets are prevented from being recognised, from an accounting standpoint, as they are being developed (while a business would normally account for internally generated tangible assets). Therefore, a significant proportion of internally generated intangible assets is not recognised in the balance sheet of a company. As a consequence, stakeholders such as investors, regulators, shareholders, financiers, are not receiving some very relevant information about this enterprise, and its accurate worth.

Why such a standoffish attitude towards internally generated intangible assets? In practice, when the expenditure to develop intangible asset is incurred, it is often very unclear whether that expenditure is going to generate future economic benefits. It is this uncertainty that prevents many intangible assets from being recognised as they are being developed. This perceived lack of reliability of the linkage between expenditures and future benefits pushes towards the treatment of such expenditures as “period cost”. It is not until much later, when the uncertainty is resolved (e.g. granting of a patent), that an intangible asset may be capable of recognition. As current accounting requirements primarily focus on transactions, an event such as the resolution of uncertainty surrounding an internally developed IPR is generally not captured in company financial statements.

Let’s take the example of research and development costs (“R&D“), which is one process of internally creating certain types of intangible assets, to illustrate the accounting treatment of intangible assets created in this way. 

Among accounting standard setters, such as IASB with its IAS 38, the most frequent practice is to require the immediate expensing of all R&D. However, France, Italy and Australia are examples of countries where national accounting rule makers allow the capitalisation of R&D, subject to conditions being satisfied. 

Therefore, in some circumstances, internally generated intangible assets can be recognised when the relevant set of recognition criteria is met, in particular the existence of a clear linkage of the expenditure to future benefits accruing to the company. This is called condition-based capitalisation. In these cases, the cost that a company has incurred in that financial year, can be capitalised as an asset; the previous costs having already been expensed in earlier income statements. For example, when a patent is finally granted by the relevant intellectual property office, only the expenses incurred during that financial year can be capitalised and disclosed on the face of balance sheet among intangible fixed assets.

To conclude, under the current IFRS and GAAP regimes, internally generated intangible assets, such as IPRs, can only be recognised on balance sheet in very rare instances.

 

2.Why value and report intangible assets?

As developed in depth by the European Commission (“EC“) in its 2013 final report from the expert group on intellectual property valuation, the UK intellectual property office (“UKIPO“) in its 2013 “Banking on IP?” report and the FRC in its 2019 discussion paper “Business reporting of intangibles: realistic proposals”, the time for radical change to the accounting of intangible assets has come upon us. 

2.1. Improving the accurateness and reliability of financial communication

Existing accounting standards should be advanced, updated and modernised to take greater account of intangible assets and consequently improve the relevance, objectivity and reliability of financial statements.

Not only that, but informing stakeholders (i.e. management, employees, shareholders, regulators, financiers, investors) appropriately and reliably is paramount today, in a corporate world where companies are expected to accurately, regularly and expertly manage and broadcast their financial communication to medias and regulators.

As highlighted by Janice Denoncourt in her blog post “intellectual property, finance and corporate governance“, no stakeholder wants an iteration of the Theranos’ fiasco, during which inventor and managing director Elizabeth Holmes was indicted for fraud in excess of USD700 million, by the United States Securities and Exchange Commission (“SEC“), for having repeatedly, yet inaccurately, said that Theranos’ patented blood testing technology was both revolutionary and at the last stages of its development. Elizabeth Holmes made those assertions on the basis of the more than 270 patents that her and her team filed with the United States patent and trademark office (“USPTO“), while making some material omissions and misleading disclosures to the SEC, via Theranos’ financial statements, on the lame justification that “Theranos needed to protect its intellectual property” (sic).

Indeed, the stakes of financial communication are so high, in particular for the branding and reputation of any “knowledge economy” company, that, back in 2002, LVMH did not hesitate to sue Morgan Stanley, the investment bank advising its nemesis, Kering (at the time, named “PPR“), in order to obtain Euros100 million of damages resulting from Morgan Stanley’s alleged breach of conflicts of interests between its investment banking arm (which advised PPR’s top-selling brand, Gucci) and Morgan Stanley’s financial research division. According to LVMH, Clare Kent, Morgan Stanley’s luxury sector-focused analyst, systematically drafted and then published negative and biased research against LVMH share and financial results, in order to favor Gucci, the top-selling brand of the PPR luxury conglomerate and Morgan Stanley’s top client. While this lawsuit – the first of its kind in relation to alleged biased conduct in a bank’s financial analysis – looked far-fetched when it was lodged in 2002, LVMH actually won, both in first instance and on appeal.

Having more streamlined and accurate accounting, reporting and valuation of intangible assets – which are, today, the main and most valuable assets of any 21st century corporation – is therefore paramount for efficient and reliable financial communication.

2.2. Improving and diversifying access to finance

Not only that, but recognising the worth and inherent value of intangible assets, on balance sheet, would greatly improve the chances of any company – in particular, SMEs – to successfully apply for financing.

Debt finance is notoriously famous for shying away from using intangible assets as main collateral against lending because it is too risky.

For example, taking appropriate security controls over a company’s registered IPRs in a lending scenario would involve taking a fixed charge, and recording it properly on the Companies Registry at Companies House (in the UK) and on the appropriate IPRs’ registers. However, this hardly ever happens. Typically, at best, lenders are reliant on a floating charge over IPRs, which will crystallise in case of an event of default being triggered – by which time, important IPRs may have disappeared into thin air, or been disposed of; hence limiting the lender’s recovery prospects.

Alternatively, it is now possible for a lender to take an assignment of an IPR by way of security (generally with a licence back to the assignor to permit his or her continued use of the IPR) by an assignment in writing signed by the assignor (1). However, this is rarely done in practice. The reason is to avoid “maintenance”, i.e. to prevent the multiplicity of actions. Indeed, because intangibles are incapable of being possessed, and rights over them are therefore ultimately enforced by action, it has been considered that the ability to assign such rights would increase the number of actions (2).

Whilst there are improvements needed to the practicalities and easiness of registering a security interest over intangible assets, the basic step that is missing is a clear inventory of IPRs and other intangible assets, on balance sheet and/or on yearly financial statements, without which lenders can never be certain that these assets are in fact to hand.

Cases of intangible asset- backed lending (“IABL“) have occurred, whereby a bank provided a loan to a pension fund against tangible assets, and the pension fund then provided a sale and leaseback arrangement against intangible assets. Therefore, IABL from pension funds (on a sale and leaseback arrangement), rather than banks, provides a route for SMEs to obtain loans.

There have also been instances where specialist lenders have entered into sale and licence-back agreements, or sale and leaseback agreements, secured against intangible assets, including trademarks and software copyright. 

Some other types of funders than lenders, however, are already making the “intangible assets” link, such as equity investors (business angels, venture capital companies and private equity funds). They know that IPRs and other intangibles represent part of the “skin in the game” for SME owners and managers, who have often expended significant time and money in their creation, development and protection. Therefore, when equity investors assess the quality and attractiveness of investment opportunities, they invariably include consideration of the underlying intangible assets, and IPRs in particular. They want to understand the extent to which intangible assets owned by one of the companies they are potentially interested investing in, represent a barrier to entry, create freedom to operate and meet a real market need.

Accordingly, many private equity funds, in particular, have delved into investing in luxury companies, attracted by their high gross margins and net profit rates, as I explained in my 2013 article “Financing luxury companies: the quest of the Holy Grail (not!)“. Today, some of the most active venture capital firms investing in the European creative industries are Accel, Advent Venture Partners, Index Ventures, Experienced Capital, to name a few.

2.3. Adopting a systematic, consistent and streamlined approach to the valuation of intangible assets, which levels the playing field

If intangible assets are to be recognised in financial statements, in order to adopt a systematic and streamlined approach to their valuation, then fair value is the most obvious alternative to cost, as explained in paragraph 1.3. above.

How could we use fair value more widely, in order to capitalise intangible assets in financial statements?

IFRS 13 “Fair Value Measurements” identifies three widely-used valuation techniques: the market approach, the cost approach and the income approach.

The market approachuses prices and other relevant information generated by market transactions involving identical or comparable” assets. However, this approach is difficult in practice, since when transactions in intangibles occur, the prices are rarely made public. Publicly traded data usually represents a market capitalisation of the enterprise, not singular intangible assets. Market data from market participants is often used in income based models such as determining reasonable royalty rates and discount rates. Direct market evidence is usually available in the valuation of internet domain names, carbon emission rights and national licences (for radio stations, for example). Other relevant market data include sale/licence transactional data, price multiples and royalty rates.

The cost approachreflects the amount that would be required currently to replace the service capacity of an asset“. Deriving fair value under this approach therefore requires estimating the costs of developing an equivalent intangible asset. In practice, it is often difficult to estimate in advance the costs of developing an intangible. In most cases, replacement cost new is the most direct and meaningful cost based means of estimating the value of an intangible asset. Once replacement cost new is estimated, various forms of obsolescence must be considered, such as functional, technological and economic. Cost based models are best used for valuing an assembled workforce, engineering drawings or designs and internally developed software where no direct cash flow is generated.

The income approach essentially converts future cash flows (or income and expenses) to a single, discounted present value, usually as a result of increased turnover of cost savings. Income based models are best used when the intangible asset is income producing or when it allows an asset to generate cash flow. The calculation may be similar to that of value in use. However, to arrive at fair value, the future income must be estimated from the perspective of market participants rather than that of the entity. Therefore, applying the income approach requires an insight into how market participants would assess the benefits (cash flows) that will be obtained uniquely from an intangible asset (where such cash flows are different from the cash flows related to the whole company). Income based methods are usually employed to value customer related intangibles, trade names, patents, technology, copyrights, and covenants not to compete.

An example of IPRs’ valuation by way of fair value, using the cost and income approaches in particular, is given in the excellent presentation by Austin Jacobs, made during ialci’s latest law of luxury goods and fashion seminar on intellectual property rights in the fashion and luxury sectors.

In order to make these three above-mentioned valuation techniques more effective, with regards to intangible assets, and because many intangibles will not be recognised in financial statements as they fail to meet the definition of an asset or the recognition criteria, a reconsideration to theConceptual Framework to Financial Reporting” needs being implemented by the IASB.

These amendments to the Conceptual Framework would permit more intangibles to be recognised within financial statements, in a systematic, consistent, uniform and streamlined manner, therefore levelling the playing field among companies from the knowledge economy.

Let’s not forget that one of the reasons WeWork cofounder, Adam Neumann, was violently criticised, during WeWork’s failed IPO attempt, and then finally ousted, in 2019, was the fact that he was paid nearly USD6 million for granting the right to use his registered word trademark “We”, to his own company WeWork. In its IPO filing prospectus, which provided the first in-depth look at WeWork’s financial results, WeWork characterised the nearly USD6 million payment as “fair market value”. Many analysts, among which Scott Galloway, begged to differ, outraged by the lack of rigour and realism in the valuation of the WeWork brand, and the clearly opportunistic attitude adopted by Adam Neumann to get even richer, faster.

2.4. Creating a liquid, established and free secondary market of intangible assets

IAS 38 currently permits intangible assets to be recognised at fair value, as discussed above in paragraphs 1.3. and 2.3., measured by reference to an active market.

While acknowledging that such markets may exist for assets such as “freely transferable taxi licences, fishing licences or production quotas“, IAS 38 states that “it is uncommon for an active market to exist for an intangible asset“. It is even set out, in paragraph 78 of IAS 38 that “an active market cannot exist for brands, newspaper mastheads, music and film publishing rights, patents or trademarks, because each such asset is unique“.

Markets for resale of intangible assets and IPRs do exist, but are presently less formalised and offer less certainty on realisable values. There is no firmly established secondary transaction market for intangible assets (even though some assets are being sold out of insolvency) where value can be realised. In addition, in the case of forced liquidation, intangible assets’ value can be eroded, as highlighted in paragraph 2.2. above.

Therefore, markets for intangible assets are currently imperfect, in particular because there is an absence of mature marketplaces in which intangible assets may be sold in the event of default, insolvency or liquidation. There is not yet the same tradition of disposal, or the same volume of transaction data, as that which has historically existed with tangible fixed assets.

Be that as it may, the rise of liquid secondary markets of intangible assets is unstoppable. In the last 15 years, the USA have been at the forefront of IPRs auctions, mainly with patent auctions managed by specialist auctioneers such as ICAP Ocean Tomo and Racebrook. For example, in 2006, ICAP Ocean Tomo sold 78 patent lots at auction for USD8.5 million, while 6,000 patents were sold at auction by Canadian company Nortel Networks for USD4.5 billion in 2011.

However, auctions are not limited to patents, as demonstrated by the New York auction, successfully organised by ICAP Ocean Tomo in 2006, on lots composed of patents, trademarks, copyrights, musical rights and domain names, where the sellers were IBM, Motorola, Siemens AG, Kimberly Clark, etc. In 2010, Racebrook auctioned 150 American famous brands from the retail and consumer goods’ sectors.

In Europe, in 2012, Vogica successfully sold its trademarks and domain names at auction to competitor Parisot Group, upon its liquidation.

In addition, global licensing activity leaves not doubt that intangible assets, in particular IPRs, are, in fact, very valuable, highly tradable and a very portable asset class.

It is high time to remove all market’s imperfections, make trading more transparent and offer options to the demand side, to get properly tested.

 

3. Next steps to improve the valuation and reporting of intangible assets

3.1. Adjust IAS 38 and the Conceptual Framework to Financial Reporting to the realities of intangible assets’ reporting

Mainstream lenders, as well as other stakeholders, need cost-effective, standardised approaches in order to capture and process information on intangibles and IPRs (which is not currently being presented by SMEs).

This can be achieved by reforming IAS 38 and the “Conceptual Framework to Financial Reporting”, at the earliest convenience, in order to make most intangible assets capitalised on financial statements at realistic and consistent valuations.

In particular, the reintroduction of amortisation of goodwill may be a pragmatic way to reduce the impact of different accounting treatment for acquired and internally generated intangibles.

In addition, narrative reporting (i.e. reports with titles such as “Management Commentary” or “Strategic Report”, which generally form part of the annual report, and other financial communication documents such as “Preliminary Earnings Announcements” that a company provides primarily for the information of investors) must set out detailed information on unrecognised intangibles, as well as amplify what is reported within the financial statements. 

3.2. Use standardised and consistent metrics within financial statements and other financial communication documents

The usefulness and credibility of narrative information would be greatly enhanced by the inclusion of metrics (i.e. numerical measures that are relevant to an assessment of the company’s intangibles) standardised by industry. The following are examples of objective and verifiable metrics that may be disclosed through narrative reporting:

  • a company that identifies customer loyalty as critical to the success of its business model might disclose measures of customer satisfaction, such as the percentage of customers that make repeat purchases;
  • if the ability to innovate is a key competitive advantage, the proportion of sales from new products may be a relevant metric;
  • where the skill of employees is a key driver of value, employee turnover may be disclosed, together with information about their training.

3.3. Make companies’ boards accountable for intangibles’ reporting

Within a company, at least one appropriately qualified person should be appointed and publicly reported as having oversight and responsibility for intangibles’ auditing, valuation, due diligence and reporting (for example a director, specialist advisory board or an external professional adviser).

This would enhance the importance of corporate governance and board oversight, in addition to reporting, with respect to intangible assets.

In particular, some impairment tests could be introduced, to ensure that businesses are well informed and motivated to adopt appropriate intangibles’ management practices, which should be overseen by the above-mentioned appointed board member.

3.4. Create a body that trains about, and regulates, the field of intangible assets’ valuation and reporting

The creation of a professional organisation for the intangible assets’ valuation profession would increase transparency of intangibles’ valuations and trust towards valuation professionals (i.e. lawyers, IP attorneys, accountants, economists, etc).

This valuation professional organisation would set some key objectives that will protect the public interest in all matters that pertain to the profession, establish professional standards (especially standards of professional conduct) and represent professional valuers.

This organisation would, in addition, offer training and education on intangibles’ valuations. Therefore, the creation of informative material and the development of intangible assets’ training programmes would be a priority, and would guarantee the high quality valuation of IPRs and other intangibles as a way of boosting confidence for the field.

Company board members who are going to be appointed as having accountability and responsibility for intangibles’ valuation within the business, as mentioned above in paragraph 3.3., could greatly benefit from regular training sessions offered by this future valuation professional organisation, in particular for continuing professional development purposes.

3.5. Create a powerful register of expert intangible assets’ valuers

In order to build trust, the creation of a register of expert intangibles’ valuers, whose ability must first be certified by passing relevant knowledge tests, is key. 

Inclusion on this list would involve having to pass certain aptitudes tests and, to remain on it, valuers would have to maintain a standard of quality in the valuations carried out, whereby the body that manages this registry would be authorised to expel members whose reports are not up to standard. This is essential in order to maintain confidence in the quality and skill of the valuers included on the register.

The entity that manages this body of valuers would have the power to review the valuations conducted by the valuers certified by this institution as a “second instance”. The body would need to have the power to re-examine the assessments made by these valuers (inspection programme), and even eliminate them if it is considered that the assessment is overtly incorrect (fair disciplinary mechanism).

3.6. Establish an intangible assets’ marketplace and data-source

The development most likely to transform IPRs and intangibles as an asset class is the emergence of more transparent and accessible marketplaces where they can be traded. 

In particular, as IPRs and intangible assets become clearly identified and are more freely licensed, bought and sold (together with or separate to the business), the systems available to register and track financial interests will need to be improved. This will require the co-operation of official registries and the establishment of administrative protocols. 

Indeed, the credibility of intangibles’ valuations would be greatly enhanced by improving valuation information, especially by collecting information and data on actual and real intangibles’ transactions in a suitable form, so that it can be used, for example, to support IPRs asset-based lending decisions. If this information is made available, lenders and expert valuers will be able to base their estimates on more widely accepted and verified assumptions, and consequently, their valuation results – and valuation reports – would gain greater acceptance and reliability from the market at large.

The wide accessibility of complete, quality information which is based on real negotiations and transactions, via this open data-source, would help to boost confidence in the validity and accuracy of valuations, which will have a very positive effect on transactions involving IPRs and other intangibles.

3.7. Introduce a risk sharing loan guarantee scheme for banks to facilitate intangibles’ secured lending

A dedicated loan guarantee scheme needs being introduced, to facilitate intangible assets’ secured lending to innovative and creative SMEs.

Asia is currently setting the pace in intangibles-backed lending. In 2014, the intellectual property office of Singapore (“IPOS“) launched a USD100 million “IP financing scheme” designed to support local SMEs to use their granted IPRs as collateral for bank loans. A panel of IPOS-appointed valuers assess the applicant’s IPR portfolio using standard guidelines to provide lenders with a basis on which to determine the amount of funds to be advanced. The development of a national valuation model is a noteworthy aspect of the scheme and could lead to an accepted valuation methodology in the future.

The Chinese intellectual property office (“CIPO“) has developed some patent-backed debt finance initiatives. Only 6 years after the “IP pledge financing” programme was launched by CIPO in 2008, CIPO reported that Chinese companies had secured over GBP6 billion in IPRs-backed loans since the programme launched. The Chinese government having way more direct control and input into commercial bank lending policy and capital adequacy requirements, it can vigorously and potently implement its strategic goal of increasing IPRs-backed lending. 

It is high time Europe follows suit, at least by putting in place some loan guarantees that would increase lender’s confidence in making investments by sharing the risks related to the investment. A guarantor assumes a debt obligation if the borrower defaults. Most loan guarantee schemes are established to correct perceived market failures by which small borrowers, regardless of creditworthiness, lack access to the credit resources available to large borrowers. Loan guarantee schemes level the playing field.

The proposed risk sharing loan guarantee scheme set up by the European Commission or by a national government fund (in particular in the UK, who is brexiting) would be specifically targeted at commercial banks in order to stimulate intangibles-secured lending to innovative SMEs. The guarantor would fully guarantee the intangibles-secured loan and share the risk of lending to SMEs (which have suitable IPRs and intangibles) with the commercial bank. 

The professional valuer serves an important purpose, in this future loan guarantee scheme, since he or she will fill the knowledge gap relating to the IPRs and intangibles, as well as their value, in the bank’s loan procedure. If required, the expert intangibles’ valuer provides intangibles’ valuation expertise and technology transfer to the bank, until such bank has built the relevant capacity to perform intangible assets’ valuations. Such valuations would be performed, either by valuers and/or banks, according to agreed, consistent, homogenised and accepted methods/standards and a standardised intangible asset’s valuation methodology.

 

To conclude, in this era of ultra-competitiveness and hyper-globalisation, France and the UK, and Europe in general, must immediately jump on the saddle of progress, by reforming outdated and obsolete accounting and reporting standards, as well as by implementing all the above-mentioned new measures and strategies, to realistically and consistently value, report and leverage intangible assets in the 21st century economy.

 

Annabelle Gauberti

Founding and managing partner of Crefovi

(1) “Lingard’s bank security documents”, Timothy N. Parsons, 4th edition, LexisNexis, page 450 and seq.

(2) “Taking security – law and practice”, Richard Calnan, Jordans, page 74 and seq.

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How to restructure your creative business in France | Restructuring & insolvency law firm Crefovi

Crefovi : 02/09/2019 11:01 am : Antitrust & competition, Art law, Articles, Banking & finance, Consumer goods & retail, Emerging companies, Employment, compensation & benefits, Entertainment & media, Fashion law, Gaming, Hospitality, Information technology - hardware, software & services, Insolvency & workouts, Internet & digital media, Law of luxury goods, Litigation & dispute resolution, Outsourcing, Real estate, Restructuring, Tax

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Almost any medium-sized and large creative business has overseas operations, in order to maximise distribution opportunities and take advantage of economies of scale. This is especially true for fashion & luxury businesses, which need strategically-located brick & mortar retail outlets to thrive. However, such overseas boutiques may need to be restructured, from time to time, in view of their annual turnover results, compared to their fixed costs. What to do, then, when you want to either reduce, or even close down, your operations set up in France? How to proceed, in the most time and cost efficient manner, to restructure your creative business in France? [hr]

restructure your creative business in FranceOne thing that needs to be clear from the outset is that you must follow French rules, when you proceed onto scaling back or even winding up your operations set up in France.

Indeed, in case you have incorporated a French limited liability company for your business operations in France, which is a wholly-owned subsidiary of  your foreign parent-company, there is a risk that the financial liability of the French subsidiary be passed onto the foreign parent-company. This is because the corporate veil is very thin in France. Unlike in the UK or the US for example, it is very common, for French judges who are assessing each matter on its merits, to decide that a director and/or shareholder of a French limited liability company should become jointly liable for the loss suffered by a third party. The judge only has to declare that all the following conditions are cumulatively met, in order to pierce the corporate veil and hold its directors and/or shareholders liable for the wrongful acts they have committed:

  • the loss has been caused by the wrongful act of a director or a shareholder;
  • the wrongful act is intentional;
  • the wrongful act is gross misconduct and
  • the wrongful act is not intrinsically linked to the performance of the duties of a director or is incompatible with the normal exercise of the prerogatives attached to the status of the shareholder.

The specific action of liability for shortfall of assets is generally the route that is chosen, to pierce the corporate veil and trigger the director and/or shareholder liability of a French limited liability company. However, there is numerous French case law, showing that French courts do not hesitate to hold French and foreign parent companies liable for the debts of French subsidiaries, especially in case of abuse of corporate veil, by way of intermingling of estates, either by intermingling of accounts or abnormal financial relations. This usually leads to the extension of insolvency proceedings, in case of intermingling of estates, but could also trigger the director and/or shareholder liability in tort for gross misconduct.

Indeed, if a shareholder has committed a fault or gross negligence that contributed to the insolvency of, and subsequent redundancies in, the French subsidiary, that shareholder may be liable to the employees directly. Pursuant to recent French case law, the shareholder could be held liable in the event its decisions:

  • hurt the subsidiary;
  • aggravate the already difficult financial situation of the subsidiary;
  • have no usefulness for the subsidiary, or
  • benefit exclusively to the shareholder.

Of course, any French court decisions are relatively easily enforceable in any other European Union (“EU“) member-state, such as the UK, thanks to the EU regulation 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters. This regulation allows the enforcement of any court decision published in a EU member-state without any prior exequatur process. Therefore, the foreign parent-company will not be protected by the mere fact that it is located in the UK, for example, as opposed to France: it will be liable anyway, and the French courts’ judgments will be enforceable in the UK against it. Moreover, a new international convention, the Hague convention on the recognition and enforcement of foreign judgments in civil or commercial matters was concluded, on 2 July 2019, which will become a ‘game changer’ once it becomes ratified by many countries around the world, included the EU. It will therefore become even easier to enforce French court decisions in third-party states, even those located outside the EU.

So what is the best route to restructure or wind up the French operations of your creative business, if so much is at stake?

 

1. How to lawfully terminate your French lease

Most French commercial operations are conducted from commercial premises, be it a retail outlet or some offices. Therefore, leases of such commercial spaces were entered into with French landlords, at the inception of the French operations.

How do you lawfully terminate such French leases?

Well, it is not easy, since the practice of “locking commercial tenants in” has become increasingly common in France, through the use of pre-formulated standard lease agreements which impose some onerous obligations on commercial tenants, that were not subject to any negotiation or discussion between the parties.

This evolution is rather surprising since France has a default regime for commercial leases, set out in articles L. 145-1 and seq. of the French commercial code, which is rather protective of commercial tenants (the “Default regime”). It defines the framework, as well as boundaries between, the landlord and its commercial tenant, as well as their contractual relationship.

For example, article L. 145-4 of the French commercial code sets out that, in the Default regime, the term of the lease cannot be lower than nine years. Meanwhile, articles L. 145-8 and seq. of the French commercial code describe with minutia the Default regime to renew the lease after its termination, declaring null and void any clause, set out in the lease agreement, which withdraws the renewal right of the tenant, to the lease agreement.

But what does the Default regime say about the right of a tenant to terminate the lease? Nothing, really, except from articles L. 145-41 and seq. of the French commercial code, which provide that any clause set out in the lease agreement in relation to the termination of the lease will only apply after one month from the date on which a party to the lease agreement informed the other party that the latter had to comply with all its obligations under the lease agreement and, should such request to comply with its contractual obligations be ignored, the former party will exercise its right to terminate the lease agreement within a month. However, in practice, it is very difficult for French commercial tenants to invoke such articles from the French commercial code, and subsequently prove that their landlords have not complied with their contractual obligations under the lease. This is because such French lease agreements often set out clauses that exonerate the landlords from any liability in case the premises are defective, obsolete, suffer from force majeure cases, etc.

To summarise, the Default regime does not provide for any automatic right for a commercial tenant to terminate the lease agreement, for any reason. It is therefore advisable, when you negotiate the clauses set out in such lease agreement, to ensure that your French entity (be it a branch or a French limited liability company) has an easy way out of the 9 years’ lease. However, since the balance of power is heavily skewed in favour of commercial landlords – especially for sought-after retail locations such as Paris, Cannes, Nice, and other touristic destinations – there is a very high probability that the landlord will dismiss any attempts made by the prospective commercial tenant to insert a clause allowing such tenant to terminate the lease on notice, for any reason (i.e. even in instances when the commercial landlord has complied with all its obligations under the lease).

Still included in the Default regime, on the topic of termination of leases, is article L. 145-45 of the French commercial code, which sets out that the institutionalised receivership or liquidation (i.e. “redressement ou liquidation judiciaires”) do not trigger, in their own right, the termination of the lease relating to the buildings/premises affected to the business of the debtor (i.e. the tenant). Any clause, set out in the lease agreement, which is contradictory to this principle, is null and void, under the Default regime. While this article sounds protective for commercial tenants, it also infers that there is no point in placing the tenant’s business in receivership or liquidation, to automatically trigger the termination of the lease. Such a situation of court-led receivership or liquidation of the French entity will not automatically terminate the lease of its premises.

Consequently, the most conservative way out may be to wait the end of the nine years’ term, for a commercial tenant.

In order to have more flexibility, many foreign clients that set up French commercial operations prefer to opt out of the Default regime, which imposes a nine years’ term, and instead enter into a dispensatory lease (“bail dérogatoire”) which is not covered by the Default regime.

Indeed, article L. 145-5 of the French commercial code sets out that “the parties can (…) override” the Default regime, provided that the overall duration of the commercial lease is not longer than three years. Dispensatory leases, which have an overall duration no longer than 3 years, are therefore excluded from, and not governed by, the Default regime set out in articles L. 145-1 and seq. of the French commercial code, and are instead classified in the category of “contrats de louage de droit commun” i.e. civil law ordinary law contracts of lease, which are governed by the provisions set out in the French civil code, relating, in particular, to non-commercial leases (article 1709 and seq. of the French civil code).

Therefore, if a foreign parent negotiates a dispensatory lease for its French operations, it will be in a position to call it a day after three years, instead of nine years. However, it will not be able to benefit from the tenants’ protections set out in the Default regime and will therefore need to negotiate very astutely the terms of the commercial lease with the French landlord. It is therefore essential to seek appropriate legal advice, prior to signing any lease agreement with any French landlord, in order to ensure that such lease agreement offers options, in particular, for the tenant to terminate it, in case of contractual breaches made by the landlord, and, in any case, upon the end of the three years’ term.

The tenant should keep a paper trail and evidence of any contractual breaches made by the landlord during the execution of the lease, as potential “ammunition” in case it decides to later trigger the termination clause under the lease agreement, for unremedied breach of contract.

2. How to lawfully terminate your French staff

Once the termination of the lease agreement is agreed, it is time for the management of the French operations to focus their attention on termination the employment agreements of French staff members (the “Staff“), which can be a lengthy process.

An audit of all the employment agreements in place with the Staff  should be conducted, confidentially, before making a move, in order to assess whether such agreements are “contrats à durée indéterminée”, or “CDI” (i.e. indeterminate duration employment agreements) or “contrats à durée déterminée”, or “CDD” (i.e. fixed term employment agreements).

As part of this audit, the legal and management team should clarify the amount of the sums due to each member of the Staff, relating to:

  • any paid leave period owed to her;
  • in case of CDDs, if no express agreement is signed by the member of Staff and the employer upon termination, all outstanding remunerations due during the minimum duration of the CDD;;
  • in case of CDDs, an end of contract indemnity at a rate of 10% of the total gross remuneration;
  • in case of CDIs, any notice period salary owed to her;
  • in case of CDIs, any severance pay owed to her and
  • any outstanding social contributions on salary.

This audit will therefore enable the French business, and its foreign parent-company, to assess how much this Staff termination process may cost.

In France, you cannot terminate Staff at will: you must have a “lawful” reason to do so.

Justifying the termination of a CDD ahead of its term may be pretty complex and risky, in France, especially if the relevant members of Staff have behaved in a normal manner during the execution of such CDD, so far. It may therefore be worth for the employer to pay all outstanding remunerations due during the minimum duration of the CDD, in order to avoid any risk of being dragged to any employment tribunal, by such members of Staff.

As far as CDIs are concerned, there are three types of termination of CDIs, as follows:

  • “licenciement pour motif économique” (i.e. layoff for economic reasons);
  • “rupture conventionnelle du CDI” (i.e. mutually agreed termination of the employment agreement);
  • “rupture conventionnelle collective” (i.e. collective mutually agreed termination of the employment agreement).

A “licenciement pour motif économique” must occur due to a real and serious economic cause, such as job cuts, economic difficulties of the employer or the end of the activity of the employer.

This option would therefore be a good fit for any French entity that wants to stop operating in France. It does come with strings attached, though, as follows:

  • the employer must inform and consult the “représentant du personnel”, or the “Comité d’entreprise”;
  • the employer asks the relevant Staff to attend a preliminary meeting and notifies them of the termination of their CDIs as well as the reasons for such termination;
  • the employer sends a termination letter to the relevant Staff, at least 7 business days from the date of the preliminary meeting, or at least 15 business days from the date of the preliminary meeting if such member of Staff is a “cadre” (i.e. executive), which sets out the economic reason which caused the suppression of the job occupied by the employee, the efforts made by the employer to reclassify the employee internally, the option for the employee to benefit from reclassification leave and
  • the employer informs the French administration, i.e. the relevant ‘Direction régionale des entreprises, de la concurrence, de la consommation, du travail et de l’emploi’ (“DIRECCTE“) of the redundancies.

Another route to lawfully terminate the Staff is via a “rupture conventionnelle du CDI”, i.e. mutually agreed termination of the employment agreement. This is only open to French operations where the Staff is ready to cooperate and mutually agree to the termination of its employment agreements. This situation is hard to come by, in reality, to be honest, by why not?

If the French entity manages to pull this off, with its Staff, then the “convention de rupture conventionnelle” must be signed, then homologated by the DIRECCTE, before any employment agreement is officially terminated.

If the DIRECCTE refuses to homologate the convention, the relevant Staff must keep on working under normal conditions, until the employer makes a new request for homologation of the convention and … obtains it!

Finally, in case an “accord collectif”, also called “accord d’entreprise”, was concluded in the French company, then a “rupture conventionnelle collective” can be organised. If so, only the Staff who has agreed in writing to the “accord collectif” can participate to this collective mutually agreed termination of its employment agreements.

It’s worth noting that French employees are rather belligerent and often file claims with employment tribunals, upon termination of their employment agreements. However, the Macron ordinances, which entered into force in September 2017, have set up a scale that limits the maximum allowances which could be potentially be paid to employees with minimal seniority, in such employment court cases. Thus, employees having less than one year’s seniority are allowed to collect a maximum of one month of salary as compensation. Afterwards, this threshold is grossed up by more or less one month per year of seniority up to eight years. However, such scale does not apply to unlawful dismissals (those related to discrimination or harassment) or to dismissals which occurred in violation of fundamental freedoms. While many French lower courts have published judgments rejecting such Macron scale, the “Cour de cassation” (i.e. the French supreme court) validated such Macron scale in July 2019, forcing French employment tribunals to comply with such scale.

While this should come as a relief to foreign parent companies, it is worth noting that the more orderly and negotiated the departure of the Staff, the better. Having to fight employment lawsuits in France is no fun, and can be cost and time intensive. They therefore must be avoided at all cost.

 

3. How to restructure your creative business in France: terminate other contracts with third parties and clean the slate with French authorities

Of course, other contracts with third parties, such as suppliers, local service providers, must be lawfully terminated before the French operations are shut down. The takeaway is that the French entity and its foreign parent company cannot leave a chaotic and unresolved situation behind them, in France.

They must terminate and lawfully sever all their contractual ties with French companies and professionals, before closing shop, in compliance with the terms of any contracts entered into with such French third parties.

Additionally, French companies must pay off any outstanding balances due to French authorities, such as the French social security organisations, the URSSAF, and the French tax administration, before permanently closing down.

 

4. How to restructure your creative business in France: you must properly wind up your business

Once all the ongoing obligations of the French operations are met, by lawfully terminating all existing agreements such as the commercial lease, the employment agreements, the suppliers’ agreements and the service providers’ agreements, as discussed above, it is time to wind up your business in France.

French limited liability companies have two options to terminate their business as an ongoing concern due to economic grounds, i.e. proceed to a “cessation d’activité”.

The first branch of the alternative is to execute a voluntary and early termination of the French business as an ongoing concern. It can be exercised by the French company, its shareholders and its board of directors, when it can still exercise its activity and pay back its debts. If the articles of association of such French company provide for the various cases in which the company may be wound up, such as the end of the term of the French company, or upon the common decision made by its shareholders, then it is possible for the French limited liability company and its directors to execute a voluntary and early termination of the business as an ongoing concern.

The second branch to the alternative, opened to French limited liability companies, occurs when a company cannot pay its debts anymore, and is in a situation of “cessation de paiements” i.e. it cannot pay its debts with its assets, in cessation of payments. In this instance, the French company must file a notification of cessation of payments with the competent commercial courts within 45 days from the date on which it stopped to make payments. Also, within that time frame of 45 days, the board of directors of the French company must open a “procédure de redressement ou de liquidation judiciaire” (i.e. receivership or liquidation institutionalised process, monitored by French courts) with the competent commercial court. This court will decide, further to examining the various documents filed with the “déclaration de cessation des paiements”, which institutionalised process (receivership? liquidation?) is the most appropriate, in view of all the interests that need being taken into account (debts, safeguarding employments, etc.).

If you want to exit the French territory in a graceful manner, you do not want to find yourself in a situation of cessation of payments, and then receivership or liquidation monitored by French courts. Not only this guarantees a protracted and painful judiciary process to terminate your French operations, but this may lead to situations where the money claims made against the French company would be escalated to its shareholders, directors and/or parent company, as explained in our introduction above.

Not only the parent company, and any other shareholder, could be dragged in the mud and found liable, but its directors, and in particular its managing director, too. French commercial courts have no patience for sloppy and irresponsible management, and many managing directors (“associes gerants”) have seen their civil liability triggered because their actions had caused some prejudices to the French company or a third party. Even criminal liability of an “associe gerant” can be triggered, in case the French court discovers fraud. In particular, it is frequent that in collective insolvency proceedings, if the judicial liquidation of a French limited liability company shows an asset shortfall (“insuffisance d’actif”), the courts order its managing director to pay, personally, for the company’s social liability, if she has committed a management error.

 

To conclude, the French company acts as a shield for its managing director, except if such director commits a personal mistake detachable from her mandate, in case the company is still solvent. However, if the company is in receivership, both the shareholders’, and the directors’ liability may be triggered in many ways, by French courts, the French social security contributions entity URSSAF and the French tax administration.

It is therefore essential to leave France with a clean slate, because any unfinished business left to fester may hit your foreign company and the management like a boomerang, by way of enforceable and very onerous French court decisions.

Don’t worry, though, we are here, at Crefovi, to service you to achieve this, and you can tap into our expertise to leave French territories unscathed and victorious.

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How to break into the French film music market: leveraging available film rebates and tax credits in France to your advantage

Crefovi : 03/06/2019 8:00 am : Articles, Banking & finance, Copyright litigation, Emerging companies, Employment, compensation & benefits, Entertainment & media, Gaming, Intellectual property & IP litigation, Internet & digital media, Music law

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Many music composers want to break into the French film market, which is known the word over for its steady production stream of art films, as well as its “cultural exception”, aimed at protecting films with a French touch.

What is the state of play? What avenues can music composers explore, in order to be retained as part of the below-the-line crew on French film productions? [hr]

French film music market, film music composers, Crefovi

1. Understanding the dynamics of the French film market: a “how-to” guide for film music composers

In 2012, Vincent Maraval, one of the founders of top dog French production and distribution company Wild Bunch, published a column in Le Monde entitled “French actors are paid too much!“, which got a lot of attention. In substance, Maraval decried a doomed system, in which the French above-the-line personnel (such as the director, the screenwriter and the producers) and, in particular, French actors, were benefiting from inflated salaries and remunerations, while the receipts made by French theaters on such French film productions had gone down 10 times in the last year or so.

To prove his point, he cited the payment scale for French film stars (such as Vincent Cassel, Jean Reno, Marion Cotillard, Gad Elmaleh, Guillaume Canet, Audrey Tautou, Léa Seydoux), ranging from 500,000 to 2 millions euros on French film productions, while the same actors command salaries of only 50,000 to 200,000 euros when they work on American film productions. Apparently, French actors are among the best paid in the world, even ahead of most American movie stars. Maraval cited as culprit the direct subsidy system (pre-sales by public TV channels, advances on receipts, regional funding), to which French cinema is eligible, but most importantly the indirect subsidy system (mandatory investment by private TV channels). 

Seven years down the line, Maraval’s statement still rings true as nothing has changed: the above-the-line crew, in particular French actors, still syphons most of the available budget of French film productions. Indeed, in order to obtain financing from TV channels – which upper middle class managements despise the pleb’s taste for reality TV shows such as “La Star Ac”, yet remain slaves to it – French film producers must belly dance in front of, and prove to, the likes of France Télévisions and TF1, that bankable and locally popular French actors are attached to their film productions.

The takeaway for film music composers, who are all part of the below-the-line crew, and therefore come after French actors in the pecking order, is that the financial pot is tight, on French film productions, as far as they are concerned.

Therefore, what is the margin of negotiation of film music composers, when schmoozing their way with French film directors and producers, to get a job on set?

2. Being able to sell yourself as a film music composer aspiring to do work on French film projects

As brilliantly explained by Anita Elberse in her book “Blockbusters”, the entertainment business works around a “winners take all” economic model, where only the 1% thrive. The situation described by Maraval above is a gleaming example of that, where French actors command salaries which are even higher than those paid to most American movie stars on Hollywood film projects. As a result, French film projects are uber costly, because not only do producers have to allocate at least 70% of their budget to salaries paid to fickle French film stars, but also production costs in France are very high (due to labour costs, in particular prohibitively expensive social security contributions, a 20% standard VAT rate, stiffly work regulations, etc.). 

As a result, music composers are left to fend for themselves when pitching for work on French film productions. They can only count on their standout back catalogues of music compositions and recordings, to advertise their skillsets, as well as their own gifts of the gab, to become part of the chosen few.

Indeed, while all French actors, with the notable exception of Jean Dujardin who is managed by his own brother and lawyer, are represented by a handful of French agents, who have total and absolute control on the talent acting pool in France, film music composers struggle to get representation in other European countries and/or in Hollywood, let alone in France. Indeed, only a handful of French music composers, such as Alexandre Desplat, Nathaniel Méchaly and Evgueni Galperine have proper representation, with agents located both in Paris and Los Angeles. However, 99% of music composers, active on the French film market, are unrepresented and can only rely on their inner capabilities and charm, to befriend a rising French film director and/or shrewd French film producer, and hence be given the top music job.

This is a hard task for most, but especially for music composers who are often introverted and socially-shy people.

The attitude of French music supervisors, who work on behalf of French film production companies such as EuropaCorp, in order to get them original music scores commissioned and made per film project, does not help either. Indeed, upon receiving a new assignment, their first port of call is to contact French agents and tap their internal roster of music talent, using such agents as gatekeepers and “quality controllers” of the French film music market.

As a result, only 1% of the film music composers’ pool available on the French film music market gets to participate in tenders for French film productions, leaving the remaining 99% out of reach … and out of their depth.

3. The winning formula: leveraging the French state subsidy system to your advantage, as a film music composer aspiring to work on French film productions

When approaching French film producers, film music composers – especially foreign ones – need being completely on top-of-things, soft funding wise.

As explained in my daily-read article “How to finance your film production?“, many nations have attractive tax and investment incentives for filmmakers, whereby individual regional and country legislation unables film producers to subsidise spent costs for production.

France is no exception to that, with tax finance structured in the following manner:

  • for non-French film productions, the Tax Rebate for International Productions (TRIP) is a tax rebate which applies to projects wholly or partly made in France. It it selectively granted by the French national centre for cinema (CNC) to a French production services company. TRIP amounts up to 30% of the qualifying expenditures incurred in France: it can total a maximum of Euros 30m per project. The French government refunds the applicant company, which must have its registered office in France. “Thor” (Marvel Studios), “Despicable Me” and “the Minions” (Universal Animation Studios), as well as “Inception” (Warner Bros), have benefited from TRIP.
  • for European film co-productions, the Crédit d’impôt cinéma et audiovisuel (CICA) is a tax credit that benefits French producers for expenses incurred in France for the production of films or TV programmes. The CICA tax credit is equal to 20% of eligible expenses – increased to 30% for films for which the production budget is less than Euros 4m.

3.1. TRIP: making sure to get the points needed to pass the cultural test

To qualify into the TRIP, a film project must:

  • be a fiction film (live action or animation, feature film, TV, web, VR, short film TV special, single or several episodes of a series, or a whole season, etc.)
  • pass a cultural test and
  • shoot at least 5 days in France for live-action production (unless VFX/post).

For film music composers, the aspect of TRIP relevant to them is the cultural test: they want to make sure that, should the film producer and director select them as music composer and author on the project, they will fulfil the criteria to pass that TRIP cultural test.

The document entitled “9. Grille de critères de sélection pour une oeuvre de fiction” sets out that, in order to be eligible, a project must obtain at least 18 points. Criteria n. 10, on page 2, sets out that at least one of the music composers must be:

  • a French citizen;
  • a citizen of a European country (that includes all citizens of EU member-states) or
  • a French resident,

for the film project to score 1 point out of the 18 necessary for eligibility.

Therefore, film music composers who are really serious about getting into the French film sector must meet one of the above criteria, to secure this 1 point for the TRIP’s cultural test, which is the maximum amount of points even a French citizen music composer could ever contribute towards the film project.

3.2. Co-productions: making sure to get the points needed on the French and European scales

European co-productions can benefit from France’s film financing system, notably the French selective schemes, such as, inter alia:

  • CICA, the automatic support for the French producer and distributor from French TV channels and Free-to-air networks (as Canal +, TF1, France Televisions, ARTE and M6 must invest a percentage of their annual revenues on French and European films);
  • automatic subsidies referred to in French as “compte de soutien” or “soutien automatique”, where each qualifying movie producer or distributor receives automatic subsidies in proportion to the film’s success at the French box office, and also in video stores (a percentage of DVD bluray sales revenues) and in TV sales (a percentage of broadcasting rights sales);
  • French regional funds and
  • Sofica funds (private equity).

To qualify into the French tax credit and subsidies system, as an official co-production, the French co-producer will submit the project to the CNC.

The CNC is responsible for assessing applications for qualifications of a feature film, and uses the following criteria:

  • two scales are used to determine whether it is European enough and whether it is French enough (European scale and French scale). Films must score enough points on both scales;
  • when the co-production is made within the framework of a bilateral treaty, the citizens of the other country qualify as European. On this note, France has entered into bilateral co-production agreements with many countries.

Film music composers must therefore check whether employing them as a music composer on the film co-production would allow the project to get some points on the French and European scales above-mentioned.

Under the European scale, it is necessary for the authors (including the music composer), primary actors, technicians and collaborators to the creation of the film be:

  • French citizens;
  • Citizens from a EU member-state;
  • Citizens from the country with which France has a bilateral co-production agreement in place, or
  • Residents in France, in another EU member-state.

Therefore, film music composers who are serious about getting their foot in the door, must meet at least one of the criteria above. If they do, and out of the 18 points in the European scale, they will provide 1 point as a qualifying music composer in the European official co-production.

Under the French scale (“barème du soutien financier”), it is necessary for the project to score 100 points; except for the notable cases of Franco-Spanish, Franco-Italian and Franco-British co-productions, which do not have to comply with any minimum number of points to be eligible for “financial support” (“soutien financier”).

Music composers can bring up to 1 point, on this French scale, for fiction films, and up to 5 points, for a documentary, for example.

In order to obtain those points, under the French scale, it is necessary that the assignment agreements of the copyright, as well as the employment agreement of the film director, be governed by French law.

Therefore, film music composers will qualify under the French scale, for financial support (“soutien financier”) of the official European co-production, if the assignment agreement of copyright on the songs and tracks that they write and produce are governed by French law.

From a business standpoint, and in order to bolster the chances of getting the tax credit CICA, which comes from French TV channels and Free-to-air networks (as Canal +, TF1, France Televisions, ARTE and M6 must invest a percentage of their annual revenues on French and European Films), it is really worth highlighting and playing up any TV experience and clout that a film music composer may have. This should appeal to any French film producer, since they face a lot of competition from other French film producers, in order to get the best tax credit support from French TV channels, when pitching their film projects to them.

3.3. French regional funds: agreeing to assigning your copyright under a French language, French law-governed assignment agreement

As mentioned above, European official co-productions, but also – of course – French film productions, can benefit from the support and subsidies of French regional funds, such as:

There is no points system in place, for any of these four French regional funds. However, Ile de France Authority Cinema and audiovisual support and Provence Alpes Côte d’Azur Creation and production film fund, documentary support (all stages), animation support, do have a cultural test in place.

As far as film music composers are concerned, the only requirement under these two cultural tests are that the film music composer would enter into a French language, French law-governed agreement, relating to the transfer of his/her copyright in the film soundtrack, to the France-based film production company. Film music composers do not need to have French citizenship, or be a French resident, to contribute towards the film project successfully passing the cultural test of either of these two French regional funds.

Therefore, the best way film music composers can ensure that their contributions to the film project will be weighting in a positive manner towards securing regional funding for the film production, is by having a polished and up-to-date CV listing all their musical compositions, awards and achievements, a catalogue of their best artistic work in good order, both online (soundcloud, Spotify, Deezer, etc.) and on CDs; and by contributing with the film director and producer in compiling the information and necessary data for each regional funding submissions.

For example, for the submission to the CNC Support for creation of original music/score (“aides à la création de musiques originales”), film music composers merely have to work with the film director and producer to ensure that they provide together all the deliverables required by the special commission of the CNC, such as the “note d’intention”, their respective CVs, and the CDs and DVDs requested.

The CNC, Ile de France Authority and Provence Alpes Côte d’Azur Authority, each request film music composers to enter into a French language, French law-governed agreement, relating to the assignment of copyright on the film soundtrack, with the French film production company.

 

To conclude, film music composers need to perfectly master the intricacies of the French soft funding system, and therefore skillfully demonstrate to French film producers and directors that, not only do they bring all possible qualifying points in any cultural tests put in place by the French film authorities, but also that they are willing to assign their copyright in their musical compositions and tracks’ masters, to the French film production company, under a French language, French law-governed assignment agreement.

To hit the ground running, and facilitate the work of any French film producers, film music composers should already be registered as members of French copyright collecting society SACEM, and French neighbouring rights collecting societies ADAMI and/or SPEDIDAM, if applicable.

Another major bonus would be for film music composers to already be registered with the French Centre des impôts des non-résidents, Inspection TVA, which is responsible for VAT registration of non-resident tax payers, and open a French VAT account. That way, if film music composers are paid service fees and/or a “prime de commande” by the French film production company, they can set out their VAT intra-community number, as well as the French production company’s VAT intra-community number, on their invoices. 

Finally, since royalties, commissions, consultancy fees and fees for services performed or used in France, which are paid to a non-resident (either a company or an individual), are subject to a domestic 33.33% withholding tax, film music composers need to check whether any double-taxation treaty may be in place, between the country in which they are tax-resident, and France, which would provide full or partial relief of withholding tax on such income sources generated in France.

Be bold, do your homework, and your musical passion, skills and enthusiasm should become a great asset to any French film project and production!

 

 

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Brexit: How to protect your creative business when the UK will crash out of the EU on 30 March 2019

Crefovi : 03/02/2019 8:00 am : Antitrust & competition, Art law, Articles, Banking & finance, Capital markets, Consumer goods & retail, Copyright litigation, Emerging companies, Employment, compensation & benefits, Entertainment & media, Fashion law, Gaming, Hospitality, Hostile takeovers, Information technology - hardware, software & services, Insolvency & workouts, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, Life sciences, Litigation & dispute resolution, Mergers & acquisitions, Music law, Outsourcing, Private equity & private equity finance, Product liability, Real estate, Restructuring, Tax, Technology transactions, Trademark litigation, Unsolicited bids

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On 30 March 2019, the UK will crash out of the EU without a withdrawal deal in place, and without a request for an extension of the 2 years’ notification period of its decision to withdraw. No second referendum will be organised by the current UK government. Therefore, what’s in the cards, for the creative industries, in order to do fruitful business with, and from, the UK in the near future? [hr]

Brexit: How to protect your creative businessMy previous article on the road less travelled & Brexit legal implications, published just after the Brexit vote, on Saturday 25 June 2016, delivered the main message that it was worth monitoring the negotiation process that would ensue the notification made by the United Kingdom (UK) to the European Union (EU) of its intention to withdraw from the EU within 2 years.

We have therefore been monitoring those negotiations for you, in the last couple of years, and came to the following predictions, which will empower your creative business to brace itself for, and make the most of the imminent changes triggered by, the crashing of the UK out of the EU, on 30 March 2019. 

1. End of freedom of movement of UK and EU citizens coming in and out of the UK

On 30 March 2019, UK citizens will lose their EU citizenship, i.e. the citizenship, subsidiary to UK citizenship, that provide rights such as the right to vote in European elections, the right to free movement, settlement and employment across the EU, and the right to consular protection by other EU states’ embassies when a person’s country of citizenship does not maintain an embassy or consulate in the country in which they require protection.

Since no withdrawal agreement will be signed by 29 March 2019, between the EU and the UK, UK nationals living in one of the 27 EU member-states will be on their own, as no reciprocal arrangements will have been put in place, in particular in relation to reciprocal healthcare and social security coordination, work permits, right to stand and vote in local elections.

UK nationals living in one of the states which are members of the European Free Trade Association (EFTA), i.e. Iceland, Liechtenstein, Norway and Switzerland, will also have no safety net, as the UK will also crash out of the EU bilateral agreements with EFTA members, such as the EEA Agreement which ties Iceland, Liechtenstein, Norway and the EU together, on 29 March 2019. Meanwhile, “the UK is seeking citizens’ rights agreement with the EFTA states to protect the rights of citizens“, as set out on the policy paper published by the UK Department for exiting the EU.

It therefore makes sense for UK nationals living in a EU member-state, or in one of the EFTA states, to reach out to the equivalent of the UK Home Office in such country, and inquire how they can secure either a visa or national citizenship in this country. Since negotiating some new bilateral agreements with EU member-states and EFTA states will take years, for the UK to finalise such negotiations, UK nationals cannot rely on these protracted talks to get any leverage and obtain permanent right to remain in a EU member-state or an EFTA state.

For example, France is ready to pass a decree after 30 March 2019, to organise the requirement to present a visa to enter French territory, and to obtain a residency permit (“carte de séjour”) to justify staying here, for UK citizens already living, or planning to live for more than three months, in France. Therefore, soon after 30 March 2019, British nationals and their families who do not have residency permits may have an “irregular status” in France.

While applying for a “carte de séjour” is free in France, and applying for French citizenship triggers only a 55 euros stamp duty to pay, EU nationals living in the UK, or planning to live in the UK, won’t be so lucky.

Indeed, it will set EU nationals back GBP1,330 per person, from 6 April 2018, to obtain UK citizenship, including the citizenship ceremony fee. However, there may be no fee to enrol into the EU Settlement Scheme, which will open fully by 30 March 2019, in particular if a EU citizen already has a valid “UK permanent residence document or indefinite leave to remain in or enter the UK”. The deadline for applying in the EU Settlement Scheme will be 31 December 2020, when the UK leaves the EU without a withdrawal deal on 30 March 2019.

Business owners and creative companies working in and from the UK will be impacted too, if they have some employees and staff. It will be their responsibility to ensure and be able to prove that their staff who are EU citizens, have all obtained a settled status: in a display of largesse, the UK government has therefore published an employer toolkit, to “support EU citizens and their families to apply to the EU Settlement Scheme“.

For short term stays of less than three months per entry, the UK government currently promises that “arrangements for tourists and business visitors will not look any different“. “EU citizens coming for short visits will be able to enter the UK as they can now, and stay for up to three months from each entry“.

To conclude, leaving the EU without a withdrawal agreement is going to create a lot of red tape, and be a massive time and energy hassle for EU citizens living in the UK, their UK employers who need to ensure that their staff are all enrolled into the EU Settlement Scheme, and for UK citizens living in one of the remaining 27 EU member-states. There will be no certainty of obtaining settled status from the UK Home Office, until EU citizens have actually obtained it further to enrolling into the EU Settlement Scheme. This is going to be a very anxiety-inducing process for EU citizens living in the UK, and for their UK employers who rely on these members of their staff to get the job done.

Contingency plans should therefore be put in place by UK employers who have EU citizens on their payroll, in particular by setting up offices and subsidiaries in one of the remaining 27 EU member-states, so that EU citizens whose settled status was refused by the UK Home Office may keep on working for their UK employers by relocating to this EU member-state where they will have freedom of movement thanks to their EU citizenships. Besides the Home Office and immigration lawyers’ fees, UK employers need to take into account the legal, accounting, IT and real estate costs of setting up additional offices and subsidiaries in a EU member-state, after 30 March 2019.

2. Removal of free movement of goods, services and capital

The EU internal market, or single market, is a single market that seeks to guarantee the free movement of goods, capital, services and people – the “four freedoms” – between the EU 28 member-states.

After 30 March 2019, the single market will no longer count the UK, as it will cease to be a EU member-state.

While it was an option for the internal market to remain in place, between the UK and the EU, as such market has been extended to EFTA states Iceland, Liechtenstein and Norway through the agreement on the European Economic Area (EEA), and to EFTA state Switzerland through bilateral treaties, this alternative was not pursued by the UK government. Indeed, the EEA Agreement and EU-Swiss bilateral agreements are both viewed by most as very asymmetric (Norway, Iceland and Liechtenstein are essentially obliged to accept the internal single market rules without having much if any say in what they are, while Switzerland does not have full or automatic access but still has free movement of workers). The UK, as well as EFTA members who were less than keen to have the UK join their EFTA club, ruled out such option, not seeing the point of still contributing to the EU budget while not having a seat at the table to take any decisions in relation to how the single market is governed and managed.

2.1. Removal of free movement of goods and new custom duties and tariffs

As far as the removal of the free movement of goods is concerned, it will be a – hopefully temporary – hassle, since the UK does not have any bilateral customs and trade agreements in place with the EU (because no withdrawal agreement will be entered into between the EU and the UK by 30 March 2019) and with non-EU countries (because the 53 trade agreements with non-EU countries were secured by the EU directly, on behalf of its then 28 member-states, including with Canada, Singapore, South Korea).

On 30 March 2019, the UK will regain its right to conclude binding trade agreements with non-EU countries, and with the EU of course.

While the UK government laboriously launches itself into the negotiation of at least 54 trade agreements, including with the EU, customs duties will be reinstated between the UK and all other European countries, including the UK. This is going to lead to a very disadvantageous situation for UK businesses, as the cost of trading goods and products with foreign countries will substantially increase, both for imports and exports.

Creative companies headquartered in the UK, which export and import goods and products, such as fashion, design and tech companies, are going to be especially at risk, here, with the cost of imported raw material increasing, and the rise or appearance of custom duties on exports of their products to the EU and non-EU countries. Fashion and luxury businesses, in particular, are at risk, since they export more than seventy percent of their production overseas.

Since the UK has most of its trade (57% of exports and 66% of imports in 2016) done with countries bound by EU trade agreements, both UK companies and UK consumers must brace themselves for a shock, when they will start trading after 30 March 2019. The cost of life is going to become more expensive in the UK (since most products and goods are imported, in particular from EU member-states), and operating costs are also going to increase for UK businesses.

While some Brexiters claim that the UK will be fine, by reverting to trading with the “rest of the world” under the rules of the World Trade Organisation (WTO), it is important to note that right now, only 24 countries are trading with the UK on WTO rules (like any one of the 28 member-states of the EU because no EU trade deal was concluded with these non-EU countries). After 30 March 2019, the UK will trade with the rest of the world under WTO rules, as long as the other state is also a member of the WTO (for example, Algeria, Serbia and North Korea are not WTO members). Moreover, some tariffs will apply to all UK exports, under those WTO rules.

It definitely does not look like a panacea to trade under WTO rules, so the UK government and its Bank of England will weaken the pound sterling as much as possible, to set off the financial burden represented by these custom duties and taxes.

Creative companies headquartered in the UK, which export goods and products, such as fashion and design companies, should now relocate their manufacturing operations to the EU or low wages and low tax territories, such as South East Asia, as soon as possible, to avoid the new customs duties and taxation of goods and products which will inevitably arise, after 30 March 2019.

While a cynical example, since James Dyson was a fervent Brexiter who called on the UK government to walk away from the EU without a withdrawal deal, UK creative businesses manufacturing goods and products must emulate vacuum cleaner and hair dryer technology company Dyson, that will be moving its headquarters from Wiltshire to Singapore this year.

Moreover, the UK will face non-tariff barriers, in the same way that China and the US trade with the EU. Non-tariff barriers are any measure, other than a customs tariff, that acts as a barrier to international trade, such as regulations, rules of origin or quotas. In particular, regulatory divergence from the EU will make it harder to trade goods, introducing non-tariff barriers: when the UK will leave the EU customs union, on 30 March 2019, any goods crossing the border will have to meet rules of origin requirements, to prove that they did indeed come from the UK – introducing paperwork and non-tariff barriers.

2.2. Removal of free movement of services and VAT changes

On 30 March 2019, UK services – accounting for eighty percent of the UK economy – will lose their preferential access to the EU single market, which will constitute another non-tariff barrier. 

The free movement of services and of establishment allows self-employed persons to move between member-states in order to provide services on a temporary or permanent basis. While services account for between sixty and seventy percent of GDP, on average, in all 28 EU member-states, most legislation in this area is not as developed as in other areas.

There are no customs duties and taxation on services, therefore UK creative industries which mainly provide services (such as the tech and internet sector, marketing, PR and communication services, etc) are less at risk of being detrimentally impacted by the exit of the UK from the EU without a withdrawal agreement.

However, since the UK will become a non-EU country from 30 March 2019 onwards, EU businesses and UK business alike will no longer be able to apply the EU rules relating to VAT, and in particular to intra-community VAT, when they trade with UK and EU businesses respectively. This therefore means that, from 30 March 2019 onwards, a EU business will no longer charge VAT to a UK company, but will keep on charging VAT to its UK client who is a natural person. Also, a UK business will no longer charge VAT to a EU company, but will keep on charging VAT to its EU client who is a natural person.

Positive changes on VAT are also in the works, because the UK will no longer have to comply with EU VAT law (on rates of VAT, scope of exemptions, zero-rating, etc.): the UK will have more flexibility in those areas.

However, there will no doubt be disputes between taxpayers and HMRC over the VAT treatment of transactions that predate 30 March 2019, where EU law may still be in point. Because the jurisdiction of the Court of Justice of the European Union (CJEU) will cease completely in relation to UK matters on 30 March 2019, any such questions of EU law will be dealt with entirely by the UK courts. Indeed, UK courts have stopped referring new cases to the CJEU in any event, since last year.

2.3. Removal of free movement of capital and loss of passporting rights for the UK financial services industry

Since the UK will leave the EU without a withdrawal agreement, free movement of capital, which is intended to permit movement of investments such as property purchases and buying of shares between EU member-states, will cease to apply between the EU and the UK on 30 March 2019.

Capital within the EU may be transferred in any amount from one country to another (except that Greece currently has capital controls restricting outflows) and all intra-EU transfers in euro are considered as domestic payments and bear the corresponding domestic transfer costs. This EU central payments infrastructure is based around TARGET2 and the Single Euro Payments Area (SEPA). This includes all member-states of the EU, even those outside the eurozone, provided the transactions are carried out in euros. Credit/debit card charging and ATM withdrawals within the Eurozone are also charged as domestic.

Since the UK has always kept the pound sterling during its 43 years’ stint in the EU, absolutely refusing to ditch it for the euro, transfer costs on capital movements – from euros to pound sterling and vice versa – have always been fairly high in the UK anyway.

However, as the UK will crash out of the EU without a deal on 30 March 2019, such transfer costs, as well as new controls on capital movements, will be put in place and impact creative businesses and professionals when they want to transfer money from the UK to EU member-states and vice-versa. While the UK government is looking to align payments legislation to maximise the likelihood of remaining a member of SEPA as a third country, the fact that it has decided not to sign the withdrawal agreement with the EU will not help such alignment process.

The cost of card payments between the UK and EU will increase, and these cross-border payments will no longer be covered by the surcharging ban (which prevents businesses from being able to charge consumers for using a specific payment method).

It is therefore advisable for UK creative companies to open business bank accounts, in euros, either in EU countries which are strategic to them, or online through financial services providers such as Transferwise’s borderless account. UK businesses and professionals will hence avoid being narrowly limited to their UK pound sterling denominated bank accounts and being tributary to the whims of politicians and bureaucrats attempting to negotiate new trade agreements on freedom of capital movements between the UK and the EU, and other non-EU countries.

Also, forging ties with banking, insurance and other financial services providers in one of the remaining 27 member-states of the EU may be really useful to UK creative industries, after 30 March 2019, because the UK will no longer be able to carry out any banking, insurance and other financial services activities through the EU passporting process. Indeed, financial services is a highly regulated sector, and the EU internal market for financial services is highly integrated, underpinned by common rules and standards, and extensive supervisory cooperation between regulatory authorities at an EU and member-state level. Firms, financial market infrastructures, and funds authorised in any EU member-state can carry out many activities in any other EU member-state, through a process known as “passporting”, as a direct result of their EU authorisation. This means that if these entities are authorised in one member-state, they can provide services to customers in all other EU member-states, without requiring authorisation or supervision from the local regulator.

The European Union (Withdrawal) Act 2018 will transfer EU law, including that relating to financial services, into UK statutes on 30 March 2019. It will also give the UK government powers to amend UK law, to ensure that there is a fully functioning financial services regulatory framework on 30 March 2019.

However, on 30 March 2019, UK financial services firms’ position in relation to the EU will be determined by any applicable EU rules that apply to non-EU countries at that time. Therefore, UK financial services firms and funds will lose their passporting rights into the EU: this means that their UK customers will no longer be able to use the EU services of UK firms that used to passport into the EU, but also that their EU customers will no longer be able to use the UK services of such UK firms.

For example, the UK is a major centre for investment banking in Europe, with UK investment banks providing investment services and funding through capital markets to business clients across the EU. On 30 March 2019, EU clients may no longer be able to use the services of UK-based investment banks, and UK-based investment banks may be unable to service existing cross-border contracts.

3. Legal implications of Brexit in the UK

On 30 March 2019, the European Union (Withdrawal) Act 2018 (the “Act“) will take effect, repeal the European Communities Act 1972 (the “ECA“) and retain in effect almost all UK laws which have been derived from the EU membership of the UK since 1 January 1973. The Act will therefore continue enforce all EU-derived domestic legislation, which is principally delegated legislation passed under the ECA to implement directives, and convert all direct EU legislation, i.e. EU regulations and decisions, into UK domestic law. 

Consequently, the content of EU law as it stands on 30 March 2019 is going to be a critical piece of legal history for the purpose of UK law for decades to come.

Some of the legal practices which are going to be strongly impacted by the UK crashing out of the EU are intellectual property law, dispute resolution, financial services law, franchising, employment law, product compliance and liability, as well as tax.

In particular, there is no clarity from the UK government, at this stage, on how EU trademarks, registered with the European Union Intellectual Property Office (EUIPO) are going to apply in the UK, if at all, after 30 March 2019. The same goes for Registered Community Designs (RCD), which are also issued by the EUIPO.

At least, some clarity exists in relation to European patents: the UK exit from the EU should not affect the current European patent system, which is governed by the (non-EU) European Patent Convention. Therefore, UK businesses will be able to apply to the European Patent Office (EPO) for patent protection which will include the UK. Existing European patents covering the UK will also be unaffected. European patent attorneys based in the UK will continue to be able to represent applicants before the EPO.

Similarly, and since the UK is a member of a number of international treaties and agreements protecting copyright, the majority of UK copyright works (such as music, films, books and photographs) are protected around the world. This will continue to be the case, following the UK exit from the EU. However, certain cross-border copyright mechanisms, especially those relating to collecting societies and rights management societies, and those relating to the EU digital single market, are going to cease applying in the UK.

Enforcement of IP rights, as well as commercial and civil rights, is also going to be uncertain for some time: the UK will cease to be part of the EU Observatory, and of bodies such as Europol and the EU customs’ databases to register intellectual property rights against counterfeiting, on 30 March 2019. 

The EU regulation n. 1215/2012 of 12 December 2012, on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, will cease to apply in the UK once it is no longer an EU member-state. Therefore, after 30 March 2019, no enforcement system will be in place, to enforce an English judgment in a EU member-state, and vice-versa. Creative businesses will have to rely on domestic recognition regimes in the UK and each EU member-state, if in existence. This will likely introduce additional procedural steps before a foreign judgment is recognised, which will make enforcement more time-consuming and expensive.

 

To conclude, the UK government seems comfortable with the fact that mayhem is going to happen, from 30 March 2019 onwards, in the UK, in a very large number of industrial sectors, legal practices, and cross-border administrative systems such as immigration and customs, for the mere reason than no agreed and negotiated planning was put in place, on a wide scale, by the UK and the EU upon exit of the UK from the EU. This approach makes no economic, social and financial sense but this is besides the point. Right now, what creative businesses and professionals need to focus on is to prepare contingency plans, as explained above, and to keep on monitoring new harmonisation processes that will undoubtedly be put in place, in a few years, by the UK and its trading partners outside and inside the EU, once they manage to find common ground and enter into bilateral agreements organising this new business era for the UK. 

 

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Registration of beneficial ownership: time to take action | Corporate law

Crefovi : 01/07/2018 8:00 am : Antitrust & competition, Articles, Banking & finance, Capital markets, Consumer goods & retail, Emerging companies, Entertainment & media, Fashion law, Gaming, Hospitality, Information technology - hardware, software & services, Internet & digital media, Life sciences, Mergers & acquisitions, Music law, Outsourcing, Private equity & private equity finance, Real estate, Tax, Technology transactions

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What are business owners obligations, in terms of registering beneficial ownership of their companies? How do these obligations differ, in France and the United Kingdom, even though such obligations stem from the same European legislation, i.e. the European Directive 2015/849 dated 20 May 2015 on money laundering? [hr]

registration of beneficial ownership1. What is this all about?

On 20 May 2015, the Directive (EU) 2015/849 of the European Parliament and of the Council on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council, was published (the “Directive“).

As set out in the recitals of the Directive, and in order to better fight against money laundering, terrorism financing and organised crime, “there is a need to identify any natural person who exercises ownership or control over a legal entity (…). Identification and verification of beneficial owners should, where relevant, extend to legal entities that own other legal entities, and obliged entities should look for the natural person(s) who ultimately exercises control through ownership or through other means of the legal entity that is the customer“.

In addition, “the need for accurate and up-to-date information on the beneficial owner is a key factor in tracing criminals who might otherwise hide their identity behind the corporate structure“.

Chapter III (Beneficial ownership information) of the Directive relates to such topic.

In particular, article 30 of the Directive provides that “member states shall ensure that the information (on beneficial ownership) is held in a central register in each member state, for example a commercial register, companies register or a public register (…). Member states shall ensure that the information on the beneficial ownership is adequate, accurate and current” and accessible “to competent authorities, without any restriction; (…) and to any person or organisation that can demonstrate a legitimate interest“.

These persons or organisations shall access at least the name, the month and year of birth, the nationality and the country of residence of the beneficial owner as well as the nature and extent of the beneficial interest held.

2. Registration of beneficial ownership in French companies

With typical Gallic nonchalance, and while the deadline to transpose the Directive in each member-state was 26 June 2017, France transposed the Directive almost one year later, through its Ordinance n. 2016-1635 of 1 December 2016 reinforcing the French mechanism against money laundering and the financing of terrorism and of the Decree n. 2017-1094 of 12 June 2017 relating to the registry of effective beneficiaries as defined in article L. 561-2-2 of the French monetary and financial code (the “Ordinance” and the “Decree” respectively), with a compliance deadline of 1 April 2018.

The Ordinance and Decree, which have now been incorporated in the French monetary and financial code, compel all companies operating in France to register their beneficial owners with the Registry of Commerce and Companies of the competent Commercial court (the “Registry“).

2.1. Beneficial ownership and filing with the Registry

The notion of beneficial ownership is not defined in the Decree, although is it defined in the Directive as including each natural person who either ultimately owns, directly or indirectly, more than 25% of the share capital or voting rights of the company, or exercises, by any other means, a supervisory power on the managing, administrative or executive bodies of the company or on the shareholders general assembly.

The information that must be filed is essentially identical to that required by financial institutions and other entities such as law firms, in order for them to carry out their mandatory Know-Your-Client (KYC) procedures.

2.2. The initial filings

The declaration of beneficial ownership must be filed at the Registry when a company is first registered with the Registry or, at the latest, within 15 days as of the date of issuance of the receipt of registration (article R. 561-55 of the French monetary and financial code) i.e. when it is created or opens a branch in France.

2.3. Corrective filings

For companies already registered, the deadline for the declaration is 1 April 2018. If subsequent updates are required, new filing must be made within 30 days as of the fact or the act giving rise to a required update (article R. 561-55 of the French monetary and financial code).

2.4. On the beneficial owner

The declaration must set out the owner’s name and particulars, as well as the means of control exercised by the beneficial owner and the date on which s/he became a beneficial owner (article R. 561-56, 2. of the French monetary and financial code).

2.5. Persons having access to the register of beneficial owners

Access to the register of beneficial owners is limited to magistrates of the civil courts and the Ministry of Justice; investigators working for the Autorité des Marchés Financiers (French financial markets regulator); agents of the Direction Générale des Finances Publiques (Directorate-General for Public Finances); qualifying credit institutions, insurance and mutual insurance companies and investment services providers; and any person authorised by a court decision to this effect.

2.6. Penalties for non-compliance

The new provisions of the French monetary and financial code provide remedial penalties with the possibility for any person having a legitimate interest to bring an action in order to force the defaulting company to fulfil its obligation to declare its beneficial owners (article R. 561-48 of the French monetary and financial code).

Punitive provisions have also been introduced: failure to declare the beneficial owners to the Registry or filing a declaration involving incomplete or inaccurate information is punishable by 6 months of imprisonment and a fine of Euros 7,500 (article 561-49 of the French monetary and financial code).

3. Registration of beneficial ownership in British companies

Well within the deadline to transpose the Directive in each member-state of 26 June 2017, the United Kingdom transposed the Directive on time, through its new paragraph 24(3) of Schedule 1A of the Companies Act 2006, as amended by Schedule 3 to the Small Business, Enterprise and Employment Act 2015 (the “Companies Act” and “Enterprise Act” respectively), with a compliance deadline of 30 June 2016.

The Companies Act and Enterprise Act, compel all companies operating in the United Kingdom to keep a register of Persons with Significant Control (“PSC register“) and to file this PSC information via their confirmation statements, upon the due filing date of their respective confirmation statements with Companies House, i.e. the British equivalent to the French Registry of Commerce and Companies of the competent Commercial court (“Companies House“).

3.1. Beneficial ownership and filing with Companies House

The notion of beneficial ownership, or significant influence or control, as set out in the Companies Act, is defined in the Companies Act as including each natural person who either ultimately owns, directly or indirectly, more than 25% of the share capital or voting rights of the company, or exercises, by any other means, a supervisory power on the managing, administrative or executive bodies of the company or on the shareholders general assembly.

UK companies, Societates Europae (SEs), Limited liability partnerships (LLPs) and eligible Scottish partnerships (ESPs), will be required to identify and record the people with significant control.

3.2. The initial filings

The PSC information must be filed with the central public register at Companies House when a company is first registered with Companies House, i.e. when it is created or opens a branch in the UK.

In addition, new companies, SEs, LLPs need to draft and keep a PSC register in relation to them, in addition to existing registers such as the register of directors and the register of members (shareholders).

3.3. Corrective filings

For companies already registered, on 6 April 2016, the Companies Act required all companies to keep a PSC register and, from 30 June 2016, companies started to file this PSC information via their confirmation statements.

As each company has a different filing date, based on the anniversary of their respective incorporation, it took up to 12 months (i.e. 30 June 2017) to develop a full picture of all UK companies’ PSCs.

3.4. On the beneficial owner

Before a PSC can be entered on the PSC register, you must confirm all the details with them.

The details you require are:

  • name;
  • date of birth;
  • nationality;
  • country, state or part of the UK where the PSC usually lives;
  • service address;
  • usual residential address (this must not be disclosed when making your register available for inspection of providing copies of the PSC register);
  • the date s/he became a PSC in relation to the company (for existing companies, the 6 April 2016 was used);
  • which conditions for being a PSC are met;
    • this must include the level of shares and/or voting rights, within the following categories:
      • over 25% up to (and including) 50%;
      • more than 50% and less than 75%;
      • 75% or more;
    • the company is only required to identify whether a PSC meets the condition relating to the control and significant influence, if they do not exercise control through the shareholding and voting rights conditions;
  •  whether an application has been made for the individual’s information to be protected from public disclosure.

3.5. Persons having access to the register of beneficial owners

A company’s PSC register should contain the information listed in paragraph 3.4 above, for each PSC of the company. However, that may not always be possible. Where, for some reason, the PSC information cannot be provided, other statements will need to be made instead, explaining why the PSC information is not available. The PSC register can never be blank and such information must be provided to Companies House.

Unlike in France PSC information is freely available, for each company, on Companies House’s website.

As the PSC register is one of the company’s statutory registers, each UK company must keep it at its registered office (or alternative inspection location). Anyone with a proper purpose may have access to the PSC register without charge or have a copy of it for which companies may charge GBP12.

If compared with the French situation, it is therefore much easier to obtain the PSC register for a UK company, than for a French company.

3.6. Penalties for non-compliance

Company officers who fail to take all reasonable steps to disclose their PSCs are liable to be fined or imprisoned (by way of a prison sentence of up to two years) or both. If an investigated person fails to respond to the company’s request for information, the company is allowed to “freeze” the relevant shares by stopping proposed transfers and dividends in relation to those shares.

 

Annabelle Gauberti is the founding partner of Crefovi, our London and Paris law firm specialised in advising the creative industries in general, in particular on their corporate and business law requirements. She is a solicitor of England & Wales, as well as an “avocat” with the Paris bar.

Annabelle is also the president of the International association of lawyers for the creative industries (ialci).

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Netflix vertical integration strategy: I was right on the money | Entertainment law

Crefovi : 01/04/2018 8:00 am : Antitrust & competition, Articles, Banking & finance, Copyright litigation, Emerging companies, Entertainment & media, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Litigation & dispute resolution, Mergers & acquisitions, Private equity & private equity finance, Technology transactions

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Where does Netflix stand, in terms of expanding its business model, content and distribution channels, worldwide? Where is it heading towards, in the current content distribution ecosystem? [hr]

Netflix vertical integration1. Netflix’s state of play in 2018

On 15 May 2015, during the “In conversation with Ted Sarandos” event at the Cannes Film Festival, I asked Netflix’s chief content officer why not acquiring some major film studios in order to have more power and clout, while negotiating the shortening, or even removal, of the “first theatrical window” to release audiovisual content into the public domain worldwide. Surely, through vertical integration, Netflix would be able to successfully convince countries’ governments and theatre owners, around the world, that adopting its day-and-date release strategy is a win-win solution for all?

Ted Sarandos was visibly annoyed by my question at the time, dismissed it entirely by saying something to the effect that buying independent or major studios would not work because Netflix would not get access to their back catalogue anyway, which was where the real cash was. I was baffled by the narrow-minded approach adopted by Sarandos in his reply to my points, but thought he may have snapped that back at me because I was putting him on the spot in front of an audience of more than 300 people, at the most prestigious film festival on earth!

Three years down the line, and my envisioned best strategy for Netflix to beef up its worldwide presence, not only online, but also in the brick and mortar space, is becoming a reality. I was dead on the money: Netflix reported yesterday that they are in advanced talks to acquire Luc Besson’s EuropaCorp studios.

This is the only way forward, for Netflix, as it has almost reached saturation as far as the distribution of its content on its website and online applications are concerned, worldwide. Indeed, Netflix members with a streaming-only plan can watch TV shows and movies instantly in over 190 countries (Netflix is only not yet available in China, nor is it available in Crimea, North Korea, or Syria due to US government restrictions on American companies there). Moreover, in key markets such as the US, Mexico, Brazil and Argentina, Netflix had a penetration rate as high as 72% in the second quarter of 2017.

While more and more consumers subscribe to Netflix streaming plans around the world, with a total number of 117.58 million streaming subscribers worldwide in the fourth quarter of 2017, the average length of subscription to Netflix is 43 months per US broadband households. Therefore, Netflix benefits from a loyal and dutifully paying customer base, which is growing at a 18% rate year-on-year. Fixed as well as operating costs, and overheads, are relatively low for Netflix, since it only counts approximately 5,400 employees (by comparison, Microsoft has 124,000 while Apple has 123,000) and since it does not need any plush real estate or other types of tangible assets as part of its successful business strategy. Meanwhile, Netflix’s revenues in 2017 were USD11.69 bn – increasing more than tenfold between 2005 and 2016 – and Netflix’s net income in 2017 was at a comfortable and cushy USD559 million.

Basically, Netflix is swimming in cash, having now successfully implemented its scaling-up strategy in the online space, worldwide. All this disposable income needs being reinvested back into the business, co-founders Reed Hastings and Marc Randolph not being the types of guys slaving for Netflix’s shareholders by splurging into annual dividends’ distributions. In fact, Netflix never paid dividends to its shareholders in the past 10 years!

2. First step of Netflix vertical integration strategy: leap into content creation and production

In the last 5 years, 1997 founded Netflix, which started out as a postal DVD rental company, successfully implemented the first steps to its vertical integration strategy, no matter what Sarandos has to say on the subject.

The real decision-maker, here, is co-founder, chairman and CEO Reed Hastings, who has fully grasped that Netflix must own every product or service of its supply chain, to make real money. In this context, vertical integration entails owning distribution as well as content. Hence, the leap into content creation and production for Netflix, as licensing existing content was merely enough to beef up its budding catalogue and render it attractive to a wider and ever more culturally-diversified customer base growing exponentially around the world.

Making beaucoup bucks comes from owning 100% of the content, without any licensing royalties to pay back to rightowners. Such fully-owned content can even be licensed back, opening up new revenue streams such as content licensing or even a branded channel with traditional distributors, for Netflix. Films can be easily snatched up at film markets in Sundance, Berlin, Cannes and the American Film Market in Santa-Monica all year round, and Netflix’s deep pockets let it pick the very best of the crop on offer from sales agents and distributors avid to ingratiate themselves with streaming video on-demand services (“SVoD services“). Film and show projects and productions are also brokered directly between the talent and Netflix, the most notable examples of that being Netflix’s production and commission of House of Cards, Orange is the new Black, The Crown, Making a Murderer, and Stranger Things. In 2018, Netflix Originals’ busy-bee content pipeline is made up of 80 films that the company has either acquired or commissioned, which sounds positively outlandish compared to the 12 films released by Disney, and 20 released by Warner Bros, in 2018.

Owning the content also solves the headache posed by the theatrical distribution model which, according to Ted Sarandos, “is pretty antiquated for the on-demand audiences we are looking to serve”. Netflix, he said, is not looking to kill windowing but rather to “restore choice and options” for viewers by moving to day-and-date releases. Indeed, Netflix has brokered many recent theatrical deals – it plans to release the sequel to Ang Lee’s Crouching Tiger, Hidden Dragon day-and-date online and in Inmax theatres. This (overdue) move into day-and-date release positively enrages theatre owners and exhibitors, especially further to the snafu triggered by Netflix managing to get two of its original films, Okja and The Meyerowitz Stories, chosen to compete in the official selection of the 2017 Cannes film festival.

3. Next step of Netflix vertical integration strategy: film studios’ acquisitions

Netflix’s vertical integration and expansion strategy does not stop here, though, because it still has so much disposable income to invest and, hey, why not acquiring more content, stakeholders, market share and clout in the films’ and shows’ sectors, if you can, right? SVoD services like Netflix have declared an open war on the fragmented audiovisual content industry which has prospered for decades, grazing on horizontally segmented industry models. Netflix is at the forefront of structuring end-to-end vertical SVoD services, going direct to consumers and ruthlessly bypassing theatres, broadcasters, networks, cable operators and even television manufacturers. This digital revolution transforms television and filmed entertainment, especially traditional broadcast TV, and is fostered by the big and fast-growing inroads of internet and over-the-top (“OTT“) video platforms such as Netflix, Amazon and Google’s YouTube.

Shaken at its core, a wave of consolidation is subsequently coming to the entertainment content delivery industry, with Netflix ready to snatch up any shaky yet prestigious film studio that comes along, such as Luc Besson’s EuropaCorp studio. Not only does the studio Besson co-founded in 1999 has a rich and high quality original content library and back catalogue (comprising Lucy, Taken, Le Grand Bleu, Valerian and the City of a Thousand Planets, among others), but striking an exclusive direction and production deal with seminal and highly creative Besson would reinforce the prestige of Netflix, while making the platform even more appealing to European, and Asian audiences, in particular.

I predict that, should the right opportunity comes along, Netflix will repeat this vertical expansion masterstroke and acquire more major and/or independent studios.

It is true that vertical expansion has boundaries, in particular due to the anti-competitive risks that it entails, and that the issue of vertical integration in the entertainment business has been the main focus of policy makers since the 1920s. For example, in the United States v Paramount Pictures Inc. case, the US Supreme court ordered on 3 May 1948 that the five vertically integrated major studios, MGM, Warner Bros, 20th Century Fox, Paramount Pictures and RKO, which not only produced and distributed films but also operated their own movie theatres, sell all their theatre chains. However, today, many media conglomerates already own television broadcasters (either over-the-air or on cable), the production companies that produce content for their networks, and also own the services that distribute their content to viewers (such as television and internet service providers). Bell Canada, Comcast, Sky plc and Roger Communications are vertically integrated in such a manner – operating media subsidiaries and providing “triple play” services on television, internet and phone services in some markets. Additionally, Bell and Rogers own wireless providers, Bell Mobility and Rogers Wireless, while Comcast is partnered with Verizon Wireless. Similarly, Sony has media holdings through its Sony Pictures division, including film and television content, as well as television channels, but is also a manufacturer of consumer electronics that can be used to consume content from itself and others, including televisions, phones and PlayStation video game consoles.

In this context, it is quite difficult imagining Netflix slapped with any anti-competition lawsuits or investigations, because it goes on a buying spree of film studios, even one of the “Big Six” majors.

4. Masterstroke of Netflix vertical integration plan: broadcasting networks and theatre chains

The next stage of the vertical integration and expansion strategy of Netflix, in addition to buying, producing and commissioning its own content, and in addition to acquiring film studios, is to delve into distributing its own content in the “real” world (i.e. offline sphere), either on other media distribution channels such as a broadcasting network, or in movie theatres.

I predict that, in 10 years, if TV is still a medium used by consumers, Netflix will have its own TV channels and broadcasting networks. In the future, if people still attend movie theatres from time to time, to watch special effects films there in particular, Netflix will also invest in buying back fledging exhibitors’ chains, causing direct competition to China’s Dalian Wanda-owned cinema group which is currently on a buying spree of theatre chains across Europe and the US.

This “online to offline strategy” is currently being implemented with brio by originally pure player Amazon, which is currently buying brick and mortar retail spaces all other the world, in order to continue its competitive assaults on traditional grocery stores and malls, increase its market share and get closer to its clients’ base worldwide. Amazon is at a way more mature growth point than Netflix, of course, but provides excellent footprint of the future roadmap that Netflix is undoubtedly going to implement.

5. No space for Apple in Netflix vertical integration strategy

Some commentators in the entertainment and finance industries pretend that Apple will buy Netflix but this is an oversight.

Firstly, Netflix has zilch incentive to accept an acquisition offer, even from a tech behemoth like Apple, because it is in such a strong strategical and financing position, and will be in that sweet spot for many more years to come in spite of its lesser-known SVoD competitors, such as Amazon Prime, Hulu and Vudu, tagging along.

Secondly, and thanks to such solid said vertical integration strategy and financials, Netflix’s valuation is simply too high, now. It is trading at all-time highs, with a USD94bn market cap.

Thirdly, co-founder Reed Hastings, who still very much keeps a tight rein on Netflix as its chairman and CEO and enjoys the ride, is unlikely to sell his business at a meagre premium of 6% or so (USD100bn).

Finally, Apple’s specialty and strength lie in its hardware and products, not so much in its software and services (apart, perhaps, from Apple’s video editing software, Final Cut Pro): the integration of Netflix into Apple will reinforce the latter’s positioning as a serious software and online applications’ provider, but will do absolutely nothing for the former’s vertical integration strategy, which now charges ahead towards film studios’ acquisitions, broadcasting networks’ acquisitions and theatre chains’ acquisitions.

 

 

Annabelle Gauberti is the founding partner of Crefovi, our London and Paris law firm specialised in advising the creative industries. She is a solicitor of England & Wales, as well as an “avocat” with the Paris bar.

Annabelle is also the president of the International association of lawyers for the creative industries (ialci).

 

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How to make your creative business GDPR compliant | General Data Protection Regulation

Crefovi : 16/10/2017 8:00 am : Antitrust & competition, Art law, Articles, Banking & finance, Capital markets, Consumer goods & retail, Emerging companies, Employment, compensation & benefits, Entertainment & media, Fashion law, Gaming, Hospitality, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, Life sciences, Litigation & dispute resolution, Mergers & acquisitions, Music law, Outsourcing, Private equity & private equity finance, Product liability, Real estate, Tax, Technology transactions

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The GDPR is upon us: what is it? How is it going to impact you and your business? What do you need to do in order to become GDPR compliant?

There is not a moment to waste, as the stakes are very high, and since becoming GDPR compliant will definitely bring competitive advantages to your business.[hr]

How to make your creative business GDPR compliant GDPR compliant; GDPR; Crefovi

On 27 April 2016, after more than 4 years of discussion and negotiation, the European parliament and council adopted the General Data Protection Regulation (“GDPR”).

  1. Why the GDPR?

The GDPR repeals Directive 95/46/EC on the protection of individuals with regards to the processing of personal data and on the free movement of such data (the “Directive”).

The Directive, which entered into force more than 20 years’ ago, was no longer fit for purpose, as the amount of digital information businesses create, capture and store has vastly increased.

Data, the bigger the better, is here to stay. Today’s data more and more greases our digital world. Control of data is ultimately about power and data ownership does seriously impact competition on any given market. By collecting more data, a firm has more scope to improve its products, which attracts more users, generating even more data, and so on. Data assets are, today, at least as important as other intangible assets such as trademarks, copyright, patents and designs, to companies[1]. The stakes are way higher, today, as far as data ownership, control and processing are concerned, and GDPR addresses that data flow in the 21st century, as we all engage with technology, more and more.

Moreover, many legal cases, brought up in various member-states of the European Union (“EU”), pinpointed the severe weaknesses and gaps in providing satisfactory, strong and homogeneous protection of personal data, relating to EU citizens, and controlled by companies and businesses operating in the EU. For example, the Costeja v Google judgment, from the Court of Justice of the European Union (“CJEU”), commonly referred to as the “right to the forgotten” ruling, was handed down on 26 November 2014. This ground-breaking judgment recognised that search engine operators, such as Google, process personal data and qualify as data controllers within the meaning of Article 2 of the Directive. As such, the CJEU ruling recognised that a data subject may “request (from a search engine) that the information (relating to him/her personally) no longer be made available to the general public on account of its inclusion in (…) a list of results”. Through this decision, the CJEU forced search engines such as Google to remove, when requested, URL links that are “inadequate, irrelevant or no longer relevant, or excessive in relation to the purposes for which they were processed and in the light of the time that has elapsed”. It was a huge step forward for personal data protection in the EU.

In addition, data breaches at, and cyber-attacks of, thousands of international businesses (Sony Pictures, Yahoo, Linkedin, Equifax, etc.) as well as EU national companies (Talktalk, etc.) make the news, consistently and on a very regular basis, dramatically affecting the financial and moral well being of millions of consumers whose personal data was hacked because of these data breaches. These attacks and breaches raise very serious concerns as to whether businesses managing personal data of EU consumers are actually “up to scratch”, in terms of proactively fighting against cyber-crime and protecting personal data.

Finally, the GDPR, which will be immediately enforceable in the 28 member-states of the EU without any transposition from 25 May 2018, unlike the Directive which had to be transposed in each EU member-state by way of national rules, standardises all national laws applicable in these member-states and therefore provides more uniformity across them. The GDPR levels the playing field.

  1. When will the GDPR enter into force?

The GDPR, adopted in April 2016, enters into force on 25 May 2018, ideally giving a 2-year preparation period to businesses and public bodies to adapt to the changes.

While many EU business owners take the view that the changes brought by the GDPR onto their businesses, will be of little or no importance or just as important as other compliance issues, there is not a minute to spare to prepare for  compliance with the new set of complex and lengthy rules set out in the GDPR.

  1. What is at stake? Which organisations are impacted by the GDPR?

A lot is at stake. All businesses, organisations or entities which operate in the EU or which are headquartered outside of the EU but collect, hold or process personal data of EU citizens must be GDPR compliant by 25 May 2018. Potentially, the GDPR may apply to every website and application on a global basis.

As most if not all multinationals have customers, employees and/or business partners in the EU, they must become GDPR compliant. Even start-ups and SMEs must be GDPR compliant, if their business model infer that they will collect, hold or process personal data of EU citizens (i.e. customers, prospects, employees, contractors, suppliers, etc).

The stakes are very high for most businesses and, for many companies, it is becoming a board-level conversation and issue.

To ensure compliance with the new legal framework for data protection, and the implementation of the new provisions, the GDPR introduced an enforcement regime of very heavy financial sanctions to be imposed on businesses that do not comply with it. If an organisation does not process EU individuals’ data in the correct way, it can be fined, up to 4% of its annual worldwide turnover, or Euros 20million – whichever is greater[2].

These future fines are way larger than the GBP500,000 capped penalty the UK Data Protection Authority (“DPA”), the Information Commissioner Office (“ICO”), or the maximum 300,000 euros capped penalty that the French DPA, the “Commission Nationale Informatique et Libertés” (“CNIL”), can currently inflict on businesses.

  1. What are the GDPR provisions about?

The GDPR provides 99 articles setting out the rights of individuals and obligations placed on organisations within the scope of the GDPR.

Compared to the Directive, here are the new key concepts brought by the GDPR.

4.1. Privacy by design

The principle of privacy by design means that businesses must take a proactive and preventive approach in relation to the protection of privacy and personal data. For example, a business that limits the quantity of data collected, or anonymises such data, does comply with the “privacy by design” principle.

This obligation of “privacy by design” implies that businesses must integrate – by all appropriate technical means – the security of personal data at the inception of their applications or business procedures.

4.2. Accountability

Accountability means that the data controller, as well as the data processor, must take appropriate legal, organisational and technical measures allowing them to comply with the GDPR. Moreover, data controllers and data processors must be able to demonstrate the execution of such measures, in all transparency and at any given point in time, both to their respective DPAs and to the natural persons whose data has been treated by them.

These measures must be proportionate to the risk, i.e. the prejudice that would be caused to EU citizens, in case of inappropriate use of their data.

In order to know whether a business is compliant, it is therefore necessary to execute an audit of the data processes made by such company. We, at Crefovi, often execute some audits certified by the CNIL or the ICO.

4.3. Privacy impact Assessment

The business in charge of treating and processing personal data, as well as its subcontractors, must execute an analysis, a Privacy Impact Assessment (“PIA”) relating to the protection of personal data.

Businesses must do a PIA, a privacy risk assessment, on their data assets, in order to track and map risks inherent to each data process and treatment put in place, according to their plausibility and seriousness. Next to those risks, the PIA sets out the list of organisational, IT, physical and legal measures implemented to address and minimise these risks. The PIA aims at checking the adequacy of such measures and, if these measures fail that test, at determining proportionate measures to address those uncovered risks and to ensure the business becomes GDPR compliant.

Crefovi supports companies in performing PIAs and in checking the efficiency of the security and protection measures, thanks to the execution of intrusion tests.

4.4. Data Protection Officer

The GDPR requires that a Data Protection Officer (“DPO”) be appointed, in order to ensure the compliance of treatment of personal data by public administrations and businesses which data treatments present a strong risk of breach of privacy. The DPO is the spokesperson of the organisation in relation to personal data: he or she is the “go to” point of contact, for the DPA, in relation to data processing compliance, but also for individuals whose data has been collected, so that they can exercise their rights.

In addition to holding the prerogatives of the “correspondant informatique et liberté” (“CIL”) in France, or chief privacy officer in the UK, the DPO must inform his/her interlocutors of any data breaches which may arise in the organisation, and analyse their impact.

4.5. Profiling

Profiling is an automated processing of personal data allowing the construction of complex information about a particular person, such as her preferences, productivity at work or her whereabouts.

This type of data processing can generate automated decision-making, which may trigger legal consequences, without any human intervention. In this way, profiling constitutes a risk to civil liberties. This is why those businesses doing profiling must limit its risks and guarantee the rights of individuals subjected to such profiling, in particular by allowing them to request human intervention and/or contest the automated decision.

4.6. Right to be forgotten

As explained above, the right to be forgotten allows an individual to avoid that information about his/her past interferes with his/her actual life. In the digital world, that right encompasses the right to erasure as well as the right to dereferencing. On the one hand, the person can have potentially harmful content erased from a digital network, and, on the other hand, the person can dissociate a keyword (such as her first name and family name) from certain web pages on a search engine.

Crefovi can support and advise a business facing a request of execution of the right to be forgotten.

4.7. Other individuals’ rights

The GDPR supplements the right to be forgotten by firmly putting EU citizens back in control of their personal data, substantially reinforcing the consent obligation to data processing, as well as citizens’ rights (right to access data, right to rectify data, right to limit data processing, right to data portability and right to oppose data processing), and information obligations by businesses about citizens’ rights.

  1. Is there a silver lining to the GDPR?

5.1. An opportunity to manage those precious data assets

Compliance with GDPR should be viewed by businesses as an opportunity, as much as an obligation: with data being ever more important in an organisation today, this is a great opportunity to take stock of what data your company has, and how you can get most advantage of it.

The key tenet of GDPR is that it will give you the ability to find data in your organisation that is highly sensitive and high value, and ensure that it is protected adequately from risks and data breaches.

5.2. Lower formalities and one-stop DPA

Moreover, the GDPR withdraws the obligation of prior declaration to one’s DPA, before any data processing, and replaces these formalities with mandatory creation and management of a data processing register.

In addition, the GDPR sets up a one-stop DPA: in case of absence of a specific national legislation, a DPA located in the EU member-state in which the organisation has its main or unique establishment will be in charge of controlling compliance with the GDPR.

Businesses will determine their respective DPA with respect to the place of establishment of their management functions as far as supervision of data processing is concerned, which will allow to identify the main establishment, including when a sole company manages the operations of a whole group.

This unique one-stop DPA will allow companies to substantially save time and money by simplifying their processes.

5.3. Unified regulation, easier data transfers

In order to favour the European data market and the digital economy, and therefore create a favourable economic environment, the GDPR reinforces the protection of personal data and civil liberties.

This unified regulation will allow businesses to substantially reduce the costs of processing data currently incurred in the 28 EU member-states: organisations will no longer have to comply with multiple national regulations for the collection, harvesting, transfer and storing of data that they use.

Moreover, since data will comply with legislations applicable in all EU countries, it will become possible to exchange it and it will have the same value in different countries, while currently data has different prices depending on the legislation it complies with, as well as different costs for the companies that collect it.

5.4. A geographical scope extended by fair competition

The scope of the GDPR extends to companies which are headquartered outside the EU, but intend to market goods and services in the EU market, as long as they put in place processes and treatments of personal data relating to EU citizens. Following these residents on internet, in order to create some profiles, is also covered by the GDPR scope.

Therefore, European companies, subjected to strict, and potentially expensive, rules, will not be penalised by international competition on the EU single market. In addition, they may buy from non-EU companies some data which is compliant with GDPR provisions, therefore making the data market wider.

5.5. Opening digital services to competition

The right to portability of data will allow EU citizens subjected to data treatment and processing to gather this data in an exploitable format or to transfer such data to another data controller if this is technically possible.

This way, the client will be able to change digital services provider (email, pictures, etc.) without having to manually retrieve all the data, during a fastidious and time-consuming process. By lifting such technical barriers, the GDPR makes the market more fluid, and offers to users enhanced digital mobility. Digital services providers will therefore evolve in a more competitive market, inciting them in providing better priced and higher quality services, as their clients will no longer be hostages to their initial provider.

5.6. Labels and certifications

The European committee on data protection, as well as EU institutions, will propose some certifications and labels in order to certify compliance with the GDPR of data processes performed by businesses.

Cashable recognition and true asset for the brand image of a company, labels and certifications will also become a strong commercial tool in order to gain prospects’ trusts and to win their loyalty.

  1. What are the actionable steps to take, right now, to become GDPR compliant?

There is not a moment to lose to implement the following steps, below:

  • Decide on the ownership of implementing the GDPR provisions in your organisation; assign ownership to the best suited department or team (Legal? Compliance? Technology?);
  • Liaise with your one-stop DPA, as several of them have prepared useful explanatory information or guidance to comply with GDPR, such as the ICO in the UK, the CNIL in France and the Data Protection Commissioner in Ireland (the latter being the DPA of many a digital giant, such as Google, Facebook and Twitter);
  • Draft a map of the data processes in your organisation, and identify the gaps in GDPR compliance in relation to these various processes – we, at Crefovi, have drafted some detailed documents on how to make this mapping of data processes and treatments and to support you on identifying the gaps in GDPR compliance;
  • Value the various data processes and treatments and assess which ones are high risk and make a list of your high-risk data assets;
  • Execute a PIA on those high-risk data assets (such as Human resources’ data, customers’ data) – Crefovi supports companies in performing PIAs and in checking the efficiency of the security and protection measures, thanks to the execution of intrusion tests;
  • Implement legal, technical, organisational and physical measures to lower risks on those data assets and become GDPR compliant;
  • Ensure that your contractors and sub-contractors have put compliant security measures in place, by sending them a list of points to check;
  • Do privacy awareness training for your employees as they must understand that personal data is anything that can be linked directly to an individual and that there will be some consequences if they break the GDPR provisions and steal personal data;
  • Develop a Bring Your Own Device policy (“BYOD”) and enforce it within your organisation and among your employees, since you are accountable for all data user information stored in the cloud and accessible from both corporate devices (tablets, smartphones, laptops) and personal devices. Also, when employees leave or are terminated, make sure that you have included BYOD in your off-boarding process, so that leaving staff lose access to company confidential data immediately on their devices;
  • Check and/or redraft the information notices or confidentiality policies in order that they set out the new information required by the GDPR;
  • Put in place automated mechanisms in order to obtain explicit consent from EU citizens, especially if your business deals with behavioural data collection, behavioural advertising or any other form of profiling;
  • Put in place a solid management plan in case personal data breaches happen, which will allow you to comply with the mandatory requirement to notify your DPA within 72 hours – our in-depth experience of alert, risk management, analytical and notification plans, in France and the United Kingdom, put us, at Crefovi, in a great position to support our clients to prepare for the demanding requirements set out in the GDPR.

 

[1] The world’s most valuable resource is no longer oil, but data”, The economist, 6 May 2017.

[2] Preparing for the general data protection regulation: a roadmap to the key changes introduced by the new European data protection regime”, Alexandra Varla, 2017.

 

Annabelle Gauberti is the founding partner of Crefovi, our London and Paris law firm specialised in advising the creative industries in general, in particular on their personal data and cybersecurity requirements. She is a solicitor of England & Wales, as well as an “avocat” with the Paris bar.

Annabelle is also the president of the International association of lawyers for the creative industries (ialci).

 

 

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Crefovi off to European Film Market EFM & Berlinale | Crefovi

Crefovi : 10/02/2017 8:00 am : Banking & finance, Consumer goods & retail, Copyright litigation, Entertainment & media, Events, Intellectual property & IP litigation, Internet & digital media, Music law, Trademark litigation

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London media and entertainment law firm Crefovi, hot on the heels of becoming an arbitrator on the arbitration panel of the Independent Film & Television Alliance (IFTA), will network, do deals and mingle at the 2017 Berlinale and European Film Market.[hr]

Crefovi off to European Film MarketLondon media and entertainment law firm Crefovi is taking an increasingly targeted approach to developing and strengthening its films and motion pictures practice. Further to a scouting trip to Los Angeles in January 2015, to joining the Beverly Hills Bar Association in March 2015, to attending the Cannes Film Festival 3 years in a row, London media and entertainment law firm Crefovi has received its professional accreditation to attend the Berlinale and European Film Market (EFM) from 13 to 19 February 2017. The expertise of Crefovi in advising clients on motion picture and films matters, such as film finance, production agreements and day-to-day management of the legal aspects of a film production, has also taken a new turn earlier this year when it became admitted to the panel of arbitrators of the Independent Film & Television Alliance (IFTA) in Los Angeles, California. London media and entertainment law firm Crefovi offers both contentious and non-contentious legal advice with respect to motion picture and film deals.

We will be there!

Its presence at the Berlinale and European Film Market is paramount, in order to catch up with Crefovi clients, network with prospects, other professionals working for the film industry and the organisers of the festival. Indeed, the European Film Market and Berlinale are among the most prestigious annual motion pictures and films tradeshows in the world. They have remained faithful to their founding purpose: to draw attention to and raise the profile of films with the aim of contributing towards the development of cinema, boosting the film industry worldwide and celebrating cinema at an international level. Many top talent, management and professionals from the film industry congregate in Berlin, every year, to talk shop and have fun.

Crefovi off to European Film Market and 2017 Berlinale

Annabelle Gauberti, founding partner of Crefovi, will be attending the Berlinale and European Film Market and their events. We have long seen the European Film Market and Berlinale as one of the key international events in the film industry calendar so it’s a real privilege to be accredited to attend this. As well as talks, discussions, workshops and amble networking opportunities at the Film Market, the Berlinale also has an interesting line up of features films and short films to showcase. With a diverse mix of genres we are particularly looking forward to discovering Django, with Reda Kateb and Cecile de France, and Richard Gere and Steve Coogan in The Dinner. If this all sounds like too good an opportunity to miss, you can book your accreditation and see the full official selection of the Berlinale, on the European Film Market website. One of the USPs of the Berlinale and European Film Market events is the focus on creating a real dialogue between attendees and speakers, so if you happen to attend the discussion Annabelle is participating in please don’t hesitate to ask her a question! You can also catch her afterwards if you have anything specific you would like to discuss. See you there!

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Film finance | How to finance your film production?

Crefovi : 26/06/2016 8:00 am : Articles, Banking & finance, Capital markets, Copyright litigation, Emerging companies, Entertainment & media, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Music law, Private equity & private equity finance, Tax

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While at the Cannes Film Festival in May 2016, we could not help noticing that one of the hottest topics discussed by all film professionals in attendance was film finance, or lack thereof. Also, Crefovi film clients regularly ask for our input on this touchy subject. How to finance your film production nowadays? What are the best strategies to get your film funded and produced, in this day and age? [hr]

How to finance your film production?; Film finance

Well, here is the lowdown: it’s not easy. You will have to work hard and in an efficient and professional manner to secure the trust and hard-won cash of all those stakeholders who can finance your film project or, at least, allow you to save money while producing your film.

1. What do you need film financing for exactly?

The cost items for a film project are vast, both in numbers and sizes, and can be divided according to the various stages of filmmaking, as follows.

1.1. The idea

All films start with a moment of inspiration. Good ideas and story concepts are the foundation of any solid film project. Screenwriters usually have the initial idea or story but producers, who are in charge of raising money for a film project, frequently come up with ideas as well.

Ideas for films can be original or adapted from plays, novels or real-life events, which make up approximately half of all Hollywood films.

Ideas cannot be protected by copyright – or any other intellectual property right for that matter – because copyright subsists only in the tangible expression of ideas. This is referred to as the idea/expression dichotomy.

Therefore, film makers must take all adequate measures to protect their ideas and stories, by only divulging them after having taken some prior protective measures (such as having the recipient of the information relating to the idea sign a non-disclosure and confidentiality agreement) and/or by even subscribing to producer errors and omissions insurance and multimedia risk insurance which cover legal liability and defence for the film production company against lawsuits alleging unauthorised uses, plagiarism or copying of titles, formats, ideas, characters, plots, as well as unfair competition or breach of privacy or contract.

1.2. Development finance

The next stage in the development of a film project is to turn a rough idea or story into a final script ready for production.

Development money is the financial sum that you need to invest in your idea, until it is in a form suitable for presenting to investors and capable of attracting production financing. Development money is used, for example, to pay the writer, while the script is being written or re-written, as well as the producer’s travel expenses to film markets to arrange pre-sales financing from investors, as well as location scouting and camera tests. It also covers the cost of administration and overheads until the film is officially in pre-production.

Producers typically pitch to secure the money for the development of the script, or, if they can afford it, put up development money themselves.

Indeed, development finance is the most expensive and financiers who put up development money typically expect a 50% bonus plus 5% from the producer’s fees. Bonus payment is usually scheduled to be paid on the first day of principal photography (i.e. the shoot or production), along with the 5% of the producer’s profits as the film starts to recoup.

1.3. Script development

Once development finance is secured, and once a story idea is firmly in place, the negotiation process between the screenwriter and the producer (or production company or film studio) begins.

The writer hires an agent who represents him and plays a critical role in ensuring that the writer’s interests are represented in the negotiation process. The agent also ensures that the writer is paid appropriately in accordance with what the writer’s intellectual property rights may be worth in the future.

The producer has an alternative, in order to move the film project forward on the script development front: either he can buy the rights to the story idea or the material (a novel or play) from which the script was adapted outright, or he can buy an option of the film rights. The first transaction is an assignment of copyright. Buying an option of the film rights means that the producer owns the right to develop the film but only for a certain amount of time, it is therefore an exclusive licence of copyright.

In either cases, the producer is the only person allowed to develop the film idea into a screenplay. He pays the writer in smaller, agreed-upon instalments throughout this period, and may also agree to pay such writer a significant higher amount for all film rights once shooting begins. After the terms are negotiated, the writer can finally start working on the screenplay.

The scriptwriter then enters into action and, if needed, may first write a screenplay synopsis, also called “concept”. Unlike a “treatment”, which is a narrative of everything that happens in a screenplay, a synopsis includes only the most important or interesting parts of the story. A synopsis is a short summary of the basic elements in your story. It describes the dramatic engine that will drive the story in no more than a few sentences.

If the producer likes the synopsis, then the writer will proceed onto drafting the treatment, which, as mentioned above, is a prose description of the plot, written in present tense, as the film will unfold for the audience, scene by scene. A treatment is a story draft where the writer can hammer out the basis actions and plot structure of the story before going into the complexities of realising fully developed scenes with dialogue, precise actions, and setting descriptions. The treatment is the equivalent of a painter’s sketch that can be worked and reworked before committing to the actual painting. It’s much easier to cut, add, and rearrange scenes in this form, than in a fully detailed screenplay.

The author’s draft is the first complete version of the narrative in proper screenplay format. The emphasis of the author’s draft is on the story, the development of characters, and the conflict, actions, settings and dialogue. The author’s draft goes through a number of rewrites and revisions on its way to becoming a final draft, which is the last version of the author’s draft before being turned into a shooting script. The aim of an author’s draft is to remain streamlined, flexible and “readable”. Therefore, technical information (such as detailed camera angles, performance cues, blocking, or detailed set description) is kept to an absolute minimum. It is important not to attempt to direct the entire film, shot-for-shot, in the author’s draft. The detailed visualisation and interpretation of the screenplay occur during later preproduction and production stages.

Once you have completed your rewrites and arrived at a final draft, you will be ready to take that script into production by transforming it into a shooting script. The shooting script is the version of the screenplay you take into production, meaning the script from which your creative team (cinematographer, production designer, etc.) will work and from which the film will be shot. A shooting script communicates, in specific terms, the director’s visual approach to the film. All the scenes are numbered on a shooting script to facilitate breaking down the script and organising the production of the film. This version also includes specific technical information about the visualisation of the movie, like camera angles, shot sizes, camera moves, etc.

1.4. Packaging

Once the script is completed, the producer sends it to film directors to gauge their interest and find the appropriate director for his film project.

The director and the producer then decide how they want to film the movie and who they will employ to support them in achieving this result.

One common way to make the film project more commercial is to attach well-known stars to the script.

In order to turn the film into a proper business proposition, the producer must know how much the film will actually cost to be made.

Potential investors would want to know how the producer plans to raise the money and how the producer plans to pay them back.

Agents and agencies are the lifeblood of the film business. They structure the deals, they hold the keys to each and every gate and often make or break projects. Having strong relationships in this space, for a film producer, is as important as having a strong story on which to base your project.

Agency packaging refers to the fact that an agency will assist in one/all of the following: talent packaging, financing, sales and international representation. Keep in mind that agencies earn their revenue based on a 10 to 15 percent commission of their client’s fees (not only talent, but also writers, producers, directors, etc) and therefore having an agency package an entire project as opposed to having them simply have a single member of their roster involved, will go a long way.

The underlying principle to remember is that agents are looking at each opportunity as a business transaction: regardless of the project, it still boils down to a decision based on the bottom line. As such, finding the right agency (the big agencies are not always the right fit for smaller projects) and incentivising agents by offering full packaging capacities will yield the best results both financially and strategically.

1.5. Financing

Filmmaking is an expensive business, and the producer must secure enough funding to make the film at the highest possible standards.

To obtain the investment needed to make the film, the producer must travel to, and meet with, potential investors and successfully pitch his project.

The producer’s lawyer will then draw up contracts to seal financing deals between the producer and investors or financiers. Indeed, there are departments of banks that specialise in film finance and offer film production loans.

The producer can also make money from pre-sales, selling the rights to the film before it has even been made. For example, during the Cannes film festival and market 2016, motion picture and television studio STX landed the big prize by plunking down roughly USD50m for international rights to Martin Scorsese’s next film project, “The Irishman”.

1.6. Pre-production

Once the financing is in place, the production company hires the full cast and crew and detailed preparation for the shoot begins.

A distinction is made between above-the-line personnel (such as the director, the screenwriter and the producers) who began their involvement during the film project’s development stage, and the below-the-line “technical” crew involved only with the production stage.

It is worth noting that, in France, most film directors do not only direct but also produce, co-produce and almost always write the screenplays for their films. Therefore, their income is made up of a salary, as director-technician, to which is added a minimum guarantee as director and another minimum guarantee as screenwriter of the film, with or without additional screenwriters.

All heads of department are hired, such as the location manager, director of photography, casting director, script supervisor, gaffer, production sound mixer, production designer, art director, set decorator, construction coordinator, property master, costume designer, key makeup artist, special effects supervisor, stunt coordinator, post-production supervisor, film editor, visual effects producer, sound designer. The shooting script is circulated to all of them as pre-production begins.

The casting director, director and producer begin to identify and cast the actors.

Storyboards are made, out of the final script. They are used as blueprints for the film where every shot is planned in advance by the director and director of photography. They have a sequence of graphic illustrations of shots visualising a video production. Most high budget films will have a very detailed storyboard. Those storyboards can really smooth out the post-production process too, when it is time for editing.

The production designer plans every aspect of how the film will look and hires people to design and build each part.

All other heads of department also go through this planning process and hiring process, for their respective department.

Effect shots are planned in much more detail than normal shots and could potentially take months to design and build.

1.7. The shoot or production

Filmmakers and producers must take a careful approach to green lighting the film project and moving forward with production, by requiring unanimous consent from producers, sales agents and board of directors of the film specially-incorporated company, before proceeding.

Shooting starts and funding is released, which is a key stage in filmmaking.

A large film production can involve hundreds of people, and it is a constant struggle to keep up with the shooting schedule and budget. Film productions are ran with strict precision. Production schedules are typically between 9 to 30 days, and you usually spend 12 to 14 hours on set, shooting from dawn to dusk. If film productions fall behind schedule, financiers and insurers may step in.

A 90 page script produced on a 24 day shooting schedule allows the director proper time on set, while keeping overall costs minimum – averaging under 4 pages per day.

The camera department is responsible for getting all the footage that the director and editor need, to tell the story.

Once lighting and sound are set up, and hair and make up have been checked, the shoot can begin.

Every special effect is carefully constructed and must be filmed with minimum risk of injury to cast and crew.

Production is a very intense and stressful process, especially for the producers and film director.

1.8. Post-production

Post production usually starts during the shoot, as soon as the first “rushes” – raw footage – and sound are available. As the processed footage comes in, the editor turns it into scenes and assembles it together, into a narrative sequence for the film.

The editor will read your script and storyboards, and look at the rushes, and from this information, cut the film according to their opinion of what makes the story better.

There are two ways of doing post-production:

  • the old way, i.e. celluloid film way. Shoot film and edit, or splice film on film editing equipment. There are few filmmakers who edit this way today;
  • the new way is the digital way. You get all your rushes digitised (if shot on film, you will need them telecined, or scanned to a digital format).

The normal schedule for editing a feature is 8 to 10 weeks. During this time, your editor will create different drafts of your film. The first is called the “rough cut”, and last is the “answer print”.

There are two conclusions to an edit, the first when you are happy with the visual images (locking picture) and the second when you are happy with the sound (sound lock).

Once the picture is “locked”, the sound department works on the audio track laying, creating and editing every sound.

Digital effects are added by specialist effects professionals and titles and credits are added.

The final stage of the picture edit is to adjust the colour and establish the final aesthetic of the film.

During that post-production phase, it is also usual to get:

  • a digital cinema package – a hard drive which contains the final copy of your film encoded so it can play in cinemas;
  • a dialogue script, so that foreign territories can dub or subtitle your film, which has the precise time code for each piece of dialogue so the subtitler or dubbing artist knows exactly where to place their dialogue;
  • a campaign image (with titles and credits), which is the first thing a prospective distributor or festival programmer will see of your film and which should let the viewer know exactly what your film is about;
  • a 90 to 120 second trailer that conveys the mood and atmosphere of your film, knowing that programming and distribution decisions will be often be based on the strength of your trailer.

1.9. Sales

While the film is still in post-production, the producer will try to sell it to distributors (if he has not already sold the rights at the financing stage).

Filmmakers and producers must have a pre-sales distribution and market strategy in place, that optimises back end profitability of the film. Targeting major film markets – Cannes, Berlin, Toronto, Sundance, Tribeca, Venice and emerging South by South West – is key to a successful B-to-B marketing strategy, while the same sales agent who packaged the film oversees the final sale.

The film sales world is split up as the domestic market and international market and there are specific sales companies for both specific markets.

Producers tend to work without sales assistance on the domestic deals as it is in the best interest of the producer to form these relationships and close the deal personally, to have an open door for future projects that will need similar distribution.

To help sell the film internationally to distributors, the producer secures the services of a sales agent and markets his film by sending it to film festivals. High profile screenings at top film festivals can be great to generate “clout” for the film.

The trailer is used to show buyers the most marketable aspects of the film.

Distributors are fickle in many senses. The business has changed (think of the recent growth of video on demand streaming services) and international versus domestic deals are becoming challenging. Indeed, being a distributor is still a risky business: if the film is a success, distributors only earn their commissions; while if it is a failure, they lose their minimum guarantees, prints and advertising expenses (P&A). This is why the best way to be a successful distributor, nowadays, is to be also the producer, or at least co-producer because you then earn money on the much higher residuals and international rights, compared to domestic theatrical rights only.

Finding the right distributor takes time. Example of boutique distributors are HBO, IFC, Magnolia, Focus Features or Miramax for broadcast, VOD and content streaming. The search process of the most appropriate distributor for your film project, will give you practice pitching it, as well as the ability to review many different sellers to gauge style, ability and creative fit.

Just as the agencies are self-motivated, so too are sales agents (international film brokers) and distributors (buyers and exhibitors) motivated by the bottom line economics of the deal. Yes, there are buyers and sellers who specialise in content-focused for the art-house driven markets, but they are becoming fewer and fewer.

1.10. Marketing

As the finishing touches are being made to the film, the distributors plan their marketing strategy to “sell” the movie to the public.

Knowing the audience is essential and the marketing team runs test screenings to see how the film is received.

Press kits, posters and other advertising materials are published, and the film is advertised and promoted. A b-roll clip may be released to the press, based on raw footage shot for a “making of” documentary, which may include making-of clips as well as on-set interviews.

1.11. Expedition

Cinema expedition, also called theatrical release, is still the primary channel for films to reach their audiences.

Indeed, box office success equals financial success.

Film distributors usually release a film with a launch party, a red-carpet premiere, press releases, interviews with the press, press preview screenings, and film festival screenings.

Most films are also promoted with their own special website separate from those of the production company or distributor.

For major films, key personnel are often contractually required to participate in promotional tours in which they appear at premieres and festivals, and sit for interviews with many TV, print and online journalists.

The largest productions may require more than one promotional tour, in order to rejuvenate audience demand at each release window.

1.12. Other windows

A successful run in cinemas makes the film a sought-after product, which can be sold through other more lucrative channels such as DVDs and games.

Since the advent of home video in the early 1980s, most major films have followed a pattern of having several distinct release windows. A film may first be released to a few select cinemas (limited theatrical), or if it tests well enough, may go directly into wide release.

A popular option, to develop the domestic sales potential of a film, is to have a first phase initial release on a limited theatrical platform, paired with a joint digital download release on iTunes and Amazon – sales are driven by major market theatre visits and digital downloads in smaller markets. The second phase release via VOD and pay cablers such as HBO, Showtime and potentially Hulu – sales are then driven by word of mouth built from first phase. This is often followed by a third phase, which pairs Netflix and Amazon Prime streaming with a wide DVD release to drive streaming view and build DVD purchases. Finally, in its fourth phase, the film builds upon steady sales and word of mouth audience reception, to gain network television sales and eventual syndication. In broadcasting parlance, syndication is the licensing of the right to broadcast television programs by multiple TV stations, without going through a broadcast network.

Next, the film is released, normally at different times several weeks (or months) apart, into different market segments like rental, retail, pay-per-view, in-flight entertainment, cable, satellite, or free-to-air broadcast television. Indeed, the film may be released in cinemas or, occasionally, directly to consumer media (DVD, VCD, VHS, Blu-ray) or direct download from a digital media provider. Hospitality sales for hotel channels and in-flight entertainment can bring in millions of additional revenues.

Indeed, today, residuals, or neighbouring rights, as those additional revenues are called, bring in most of the profit for the film, not theatrical rights. Those residuals are collected by collection agents, such as Fintage House and RightBack, which adds transparency to the process of collecting revenues generated by the film.

The distributor rights for the film are usually sold for worldwide distribution.

The distributors and the production company then share profits.

As a film producer, you should “trust the shuffler but cut the deck”, by ensuring that you have an audit clause inserted in the distribution agreement, which will allow you to audit the accounts of the distributor in order to check that all collected revenues, from all sources, are indeed included in the residuals statements that you received from such distributor.

It is worth noting that, in at least 10 countries from the European Union, including France, Germany, Spain, Belgium, distributors of pay-TV services and/or operators of VOD services are required by law to contribute to the funding of production, either through contributions to support funds or by means of direct investments in production. The arrangements are generally complimentary to and extend tax law provisions requiring contributions from exhibitors, broadcasters and video distributors: all distribution activities must contribute to the funding of production.

 

2. How do you finance a film nowadays?

First things first: have you made a business plan? Creating a business plan is almost as important as finding a terrific script. You need to prepare a plan of attack to get the money to shoot your film. Indeed, as a producer or filmmaker, you need to make creating a viable and realistic business plan your first priority. Many filmmakers create an outline business plan first, and then find a script that matches what they think they can raise.

2.1. The studio model

The strategy, here, is to get 3 to 5 films together of a similar genre, and approach investors with a slate of similar films. If one of these films is successful, it will pay off for itself and the other 2 to 4 other film projects on the slate.

While this strategy consisting in hedging your risks by having more than one egg in your basket sounds great, a reality check is necessary: do you really think that you can get more than one project together? You may want to collaborate with some like-minded filmmakers with similar projects.

2.2. Government funding

Many nations now have attractive tax and investment incentives for filmmakers. Individual state and country legislation unable producers to subsidise spent costs for production.

For example, Europe’s MEDIA programme has twenty-odd programmes for media and filmmakers. You need to apply for the funding and lobby decisions makers until you get your soft money.

Many European filmmakers design a business plan around the rules and regulations surrounding the MEDIA money. The same applies for soft money from other countries as well.

Another example is the UK government, which pumps tens of millions of pound sterling into British film every year (using National Lottery funds!). Following the heavily criticised demise of the UK Film Council, UK public money is now distributed by the British Film Institute (BFI). Film London has also put in place a Production Finance Market (PFM), its annual two-day film financing event, run in association with the BFI London Film Festival. PFM encourages new business relationships, between UK filmmakers, producers and investors, attaching international sales companies and securing various forms of investments in companies and film projects.

As soft public money funds are always heavily oversubscribed and lobbied for by competing filmmakers and producers, you should not be over-reliant on getting government funding. In addition, those funds will impose restrictions, that could easily compromise your creative integrity.

2.3. Equity

Hard cash investments made to your film project by a single investor, a group of investors and personal investments from colleagues, friends and family.

Equity investments require that investors own a stake in the film (i.e. the operating structure, special purpose vehicle incorporated for that particular film project). They also must be paid back (typically on  their principal investment plus 20 percent) before profit is seen on the side of the filmmakers and producers.

2.4. Tax finance

It’s all about de-risking your film package.

Through its Enterprise Investment Scheme (EIS) and Small Enterprise Investment Scheme (SEIS), the UK government has created one of the world’s best environments for de-leveraging the risk of investments made in small businesses up to 98 percent (depending on the investors profile). EIS is designed to support smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.

Film projects are qualifying business for EIS and SEIS, however we heard that the European Commission has audited the UK EIS and SEIS schemes and only wants long-term UK small businesses to benefit from such schemes, ruling out special purpose vehicles incorporated for each film project. With a Brexit in the works though, it is likely that EIS and SEIS will still be used to finance UK film projects, in the future.

To get all EIS or SEIS up and running, you need to get a strong business plan together with a budget and schedule. Fill in a few online tax forms and get your UK limited company registered for EIS. If you get stuck, phone a really nice lady in Wales who will make sure your secure the paperwork.

While investing in a film is seen as “sexy” by many private investors, the recent economic downturn, Brexit and the competitiveness of securing EIS and SEIS among filmmakers and producers, make investors shy and cautious. It may be worth speaking to UK film financiers, such as the Fyzz Facility (now merged with Tea Shop), who have a pool of private investors who are ready to invest, via gap funding (as this term is defined below in paragraph 2.6 (Gap financing)), through EIS and SEIS.

In France, Sociétés de financement de l’industrie cinématographique et de l’audiovisuel (SOFICAS) are the equivalent tax-wrappers to EIS and SEIS. They are equity funds financed with tax-related money and are allowed to invest in both films and TV productions, on a selective basis. Their money comes from banks which are allowed to collect, from French tax resident private investors who want to pay less income tax in France. As SOFICAS want their money back, they tend to do mostly gap funding (as this term is defined below at paragraph 2.6), providing producers with the last (and most expensive) money. SOFICAS generally stand behind the distributors in the recoupment order. Only part of the SOFICAS money is invested in independent film productions. Each SOFICA can invest 20 percent of its money in foreign-speaking (qualified) co-productions, as long as the film’s language matches the foreign co-producer’s country’s language. In 2015, SOFICAS invested Euros37m in 112 movies, 11 of which were majority foreign co-productions, mostly from British or Belgian producers. A top manager of SOFICAS for the media and entertainment sector in France, is Back-up Media.

Tax incentives require a producer to hire a certain number of local crew employees, rent from local vendors and run payroll through local services. Tax credits are based on an application process and are often lengthy (12 to 18 months) and difficult (as they may involve a substantial amount of tedious paperwork) to procure.

For example, UK film tax relief ensures that, for film spending GBP20m or less, production companies can claim a cash rebate of up to 25 percent of qualifying expenditure. For films spending more than GBP20m, production companies can claim a cash rebate of up to 20 percent of qualifying expenditure. The UK film tax relief is largely responsible for the recent influx of international blockbuster movies into the UK: “Star Wars: the force awakens” (LucasFilm), “Avengers: age of Ultron” (Marvel Studios) and the latest James Bond film “Spectre” (EON) have all been shot in the UK, mostly out of Pinewood Studios.

In France, the Tax Rebate for International Productions (TRIP) concerns projects wholly or partly made in France and initiated by a non-French film production company. It it selectively granted by the French national centre for cinema, CNC, to a French production services company. TRIP amount up to 30 percent of the qualifying expenditures incurred in France: it can total a maximum of Euros30m per project. The French government refunds the applicant company, which must have its registered office in France. “Thor” (Marvel Studios), “Despicable Me” and “the Minions” (Universal Animation Studios) and “Inception” (Warner Bros) have benefited from TRIP.

For French film productions, the Crédit d’impôt cinéma et audiovisuel (CICA) benefits French producers for expenses incurred in France for the production of films or TV programmes. The CICA tax credit is equal to 20 percent of eligible expenses – increased to 30 percent for films for which the production budget is less than Euros4m.

Certain tax credits are sellable, transferable and even trade-able based on the local legislation. US states such as New Mexico, North Carolina, Georgia, New York and Michigan offer the strongest solutions here.

It is really worth for film producers to organise a “competition” between various countries and territories as well, based on available tax rebates and government funding, before deciding in which country to produce and post-produce a film. Indeed, the UK and France are always in rivalry, Film France CEO Valerie Lepine-Karnik noting that “last year (in 2014), American blockbusters spent more than Euros1.6bn in the UK, which is half a million more than the total amount of money invested in French domestic film production in 2014″.

2.5. Pre sales and co-productions

The strategy, here, is to sell your film cheap up front (pre-sales) and hook up with producers in other countries to secure soft public money in other territories. Indeed, by co-producing, you can take advantage of soft money otherwise not normally accessible to your film production.

Pre-sales agreements are pre-arranged and executed contracts made with distributors before the film is produced. These agreements are based on the strength of the project’s marketability and sales potential in each given territory. A distributor will generate a value for your film project, given the script, the attached talent and crew, as well as the marketing approach, and then enable you to take out a bank loan using the pre-sales deal as collateral. Pre-sales can also result in direct payment (at a discounted rate) from the buyer themselves. Pre-sales investments require that the producer pay back the bank its loaned capital before profiting on their respective upside.

Both the UK and France have bilateral co-production treaties in place with certain countries such as:

  • Australia, Canada, China, India, Israel, France, Jamaica, Morocco, New Zealand, Occupied Palestinian Territories and South Africa, for the UK;
  • and Algeria, Argentina, Australia, Austria, Belgium, Bosnia-Herzegovina, Brazil, Bulgaria, Burkina Faso, Cambodia, Cameroon, Canada, Chile, China, Colombia, Croatia, Czech Republic, Denmark, Egypt, Finland, Georgia, Germany, Greece, Guinea, Holland, Hungary, Iceland, India, Israel, Italy, Ivory Coast, South-Korea, Lebanon, Luxemburg, Morocco, Mexico, New Zealand, Poland, Portugal, Palestinian Territories, Romania, Russia, Senegal, Serbia, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Tunisia, Turkey, Ukraine, United Kingdom, Venezuela, for France.

For example, Ken Loach’s films, mainly produced in the UK, benefit from French funds through French production company Why Not since “Looking for Eric” in 2009. “Mr Turner” by Mike Leigh was co-produced by Diaphana.

Moreover, the European Convention on cinematographic co-productions applies for now, in both countries, although this will cease to be the case for the UK after Brexit.

While co-production can work, it can be difficult to set up co-productions and you will now have financial partners in various territories who will probably all want to exercise creative control. Also, you, the producer, will have to share any revenues generated by your film not only with the distributors, but also with your co-producers scattered in various countries.

2.6. Gap financing

With partial equity raised, you are then able to procure a loan from a bank or a private lender on the unsold territories of the film (and additional elements of collateral, such as the intellectual property or corporate guarantees).

Gap financing is only available when other elements have been assembled and there is adequate security for the investor to “bridge” against.

2.7. Product placement

The strategy is to team up with brands and get cash for including their products on set.

For example, Heineken reportedly paid a third of “Skyfall” ‘s USD150mn budget to turn Daniel Craig’s James Bond into a lager drinker!

Not only do you get some of your film funding through product placement, but the product exposure the brand enjoys may have a far greater value than the cost of the product placement and is generally seen to be cheaper than comparative advertising on TV or print.

However, having a product placement in a film means that you will always be under the scrutiny of brand managers, which may hamper the film creative process. Moreover, few independent filmmakers have the polling power of James Bond! Brands will always want to know what the marketing strategy of your film is, before they invest in, or even allow their products to be used.

2.8. Crowdfunding

Crowdfunding (Kickstarter, IndieGoGo, Ulule, Kiss Kiss Bank Bank, etc.) is now a serious contender to raising finance for your film projects. It enables a contributions-based model for capital to be raised without selling equity.

For example, the “Veronica Mars” Movie project and Spike Lee’s latest film project “Da sweet blood of Jesus”, were all financed through Kickstarter in 2013. Spike Lee raised USD1.4m for his horror flick on contemporary vampires, not a negligible amount by any means.

The strategy is that you get some rewards (such as DVDs, t-shirts, sharing dinner with the famous film director) together and offer them to friends, family and fools, as well as to the crowd, hoping to entice them into making a contribution to your film project. The idea, here, is to build a community who adheres to your story.

Even the studio biggies are using crowdfunding nowadays: Charlie Kaufman, an American screenwriter, producer, director famous for writing “Being John Malkovich” and “Eternal sunshine of the spotless mind”, raised over USD400k for his new project Anomalisa.

This is crowding the pitch and makes it even tougher to get enough noise directed your way. Therefore, you need a really good business plan in order to successfully approach crowd funding.

2.9. Deferrals

The strategy is to get everybody to work and be paid later, out of profits if any. Indeed, producers are able to avoid nearly all costs on a project if they are able to negotiate a deferred deal.

Convince everyone that in order to get the film made now, you cannot wait for investment. In exchange, you offer up a percentage of the share of profit, meaning that everyone’s salary could potentially increase depending on the success of the film.

Deferred agreements basically state that crew, cast, vendors, locations and services are all rendered upfront at no cost, until the film generates money upon release.

Deferrals may work but are reliant on the trust the producer has with his team. Often, deferrees are unpaid, even though the film goes on to commercial success. There is also the temptation to overstate the value of the deferment which can lead to bitter arguments if the box office returns do not meet expectations. Moreover, deferred financing is difficult because experienced cast and crew are unwilling to work under these types of structures.

2.10. Self-financed film projects

Self-financed movies mean you do not have to deal with investors. It also does mean that you have to be very careful with the money, which is yours.

For example, Tangerine’s director, Sean Baker, shot his feature film entirely on 2 iPhones and went on to become one of the most hyped film directors in 2015, as Tangerine was reviewed by many critics as one the the best films of 2015. In an interview with Bret Easton Ellis in 2015, 45 years old Sean Baker confessed to still be heavily in debt and reliant on the goodwill and empathy of his parents, to make ends meet.

While getting your film done immediately with your own resources is an enticing prospect and very achievable in today’s digital world, it is worth noting that most of these thousands of self-financed movies fail, mostly due to the fact that their scripts are not good enough. By going the self-financed indie route, filmmakers have side stepped the development cycle and no one has told them that their script sucks.

 

3. How do you make your film project stand out to financiers?

As mentioned in our introduction, it is tough to get films financed in today’s market. Of course, a strong script, a great team with experience and a game plan for success are prerequisites, but that’s not enough. The key factor to equity investors and debt lenders, is to remove risk, financial exposure and speculation – meaning, when are they going to start earning a return or their money back, and can you guarantee that? The more risk and speculation you remove, by utilising the steps below, the better chance you will have of securing capital in “hard money”.

3.1. Agencies

As mentioned above in paragraph 1.4. (Packaging) above, talent agencies are a difficult nut to crack. They are well-guarded, highly established and protected entities. They are the gatekeepers of taste, talent and possibility – and more than anything they are the lifeblood of the independent producer seeking to put projects together with financing.

Once you have a suitable piece of material, get an agent/agency excited about the project as well. The way forward is approaching the major five talent agencies – William Morris Endeavor, United Talent Agency, Creative Artists Agency, The Gersh Agency and International Creative Management – for the packaging of quality source material – script, paired with proven name talent – actors and directors, under the representation of a successful in-house sales agent.

As with most of the entertainment business, agents think in numbers – how much will my firm/I make from this deal? Incentivize the agency by offering them the ability to package the project – place multiple roles with their roster rather than just one or two roles – which gives them the ability to earn 10 to 15 percent of multiple deals across the board.

Furthermore, offer them the ability to have a first look opportunity for domestic sales representation – again, finding ways to incentivise. By packaging these elements early on, you will be able to bring strong talent to the project and gear up to be more ready to approach equity players.

3.2. Strength of team and experience

A first time producer/director/star is a tough sell for many in the film business. Sales teams are unable to project value (pre-sell), agents are unable to place large name talent (packaging) and financiers are unable to gauge project return on investment (ROI).

Therefore, your best bet is to find a director who has carried a project before, find an agency who is interested in packaging and will keep you/your project in the stratosphere of content that matters and you will be in a great starting position.

The team must bring a wealth of knowledge, experience and relationships to the production phase, in order to properly execute feature film’s full production schedule. All the while, the producers and filmmaker must mindfully nurture the creative necessity, without neglecting the overall commercial nature of the film’s back end.

If you have to utilise unknown talents to make your project, then surround them with experience on all fronts. An unknown star with a strong director, director of photography, producer and writer is a reasonable recipe.

3.3. Soft money options

With your packaged talent signed on, a strong team on board, and a well-developed script, you can now approach “soft money” options, i.e. tax incentives/pre-sales/debt financings.

Tax incentives offer a percentage of the in-state or in-country spend back in rebate form. This means that you can bankroll/cash-flow this piece of financing to offset your investors’ risk.

Pre-sales offer projections of value based on the elements you have brought together. This, in turn, also implies that you can bankroll/cash-flow this piece of financing to offset your investors’ risk.

The same goes for debt options.

As a filmmaker or producer, you need to find ways to cover 50 cent or pence of every euro or pound your investor is putting up before the cameras even turn on.

Shoot in tax incentive rich states, with a strong pre-sold package, and with a great sales team onboard to execute. You can then reduce the level of speculation and guarantee a return of X percent, based on Y investment in a tangible timeline.

3.4. Plan of execution

With these elements onboard, make your investment proposal personable, professional and tailored to your investors specifics. Do not pitch high level equity film financing to first-time entertainment investors. Keep it simple, honest, and remind equity investors that while smoke and mirrors often run throughout the business, you are putting together a basic structure returning X percent on Y investment over Z timeline.

Lastly, look into completion/guarantor insurance guarantees, as a way to assure your equity investors that the project will be completed on time, schedule and budget, and with the elements they have agreed to finance. The liability is now removed via an insurance company and investors’ return is partially guaranteed via tax incentives and additional soft-money.

Pitch smart, often and confidently knowing that you have done your homework and that the investment is well-structured for a return.

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