M&A, private equity & banking law blog

M&A, private equity & banking law blog

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, the sports sector & 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 the necessary experience to represent 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 sectorial 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. 

Crefovi regularly updates its social media channels, such as Linkedin, Twitter, Instagram, YouTube and Facebook. Check our latest news there!

Digital Services Act: the revolution will be televised

Crefovi : 20/03/2024 4:09 pm : Antitrust & competition, Art law, Articles, Banking & finance, Capital markets, Consumer goods & retail, Emerging companies, Entertainment & media, Fashion law, Gaming, Hospitality, Information technology - hardware, software & services, Internet & digital media, Law of luxury goods, Life sciences, Litigation & dispute resolution, Music law, News, Outsourcing, Private equity & private equity finance, Product liability, Real estate, Sports & esports, Technology transactions, Webcasts & Podcasts

The Digital Services Act is upon us and, with its bestie the Digital Markets Act, promises to force powerful changes in the digital ecosystem currently in place in the European Union and even globally. The power is shifting back to the people, with the Digital Services Act, and intermediary service providers better listen to its complaints about unclear and deceptive terms and conditions of service, its takedown notices for illegal content, products and services, as well as its concerns about bullying, breach of free speech, unfair targeting of minors, minorities, etc. Otherwise, the European Commission and national Digital Services Coordinators in the 27 European Union member-states, will take swift action to force online platforms, other types of intermediary service providers and search engines, to change their way and comply, with fines which can go up to 6 percent of worldwide annual turnover. Be warned, the Google, Apple, Microsoft and X/Twitter of this world: the revolution will be, is, televised.

1. What is the Digital Services Act?

Regulation (EU) 2022/2065 of the European Parliament and of the Council of 19 October 2022 on a Single Market for Digital Services and amending Directive 2000/31/EC (Digital Services Act) (‟DSA”) is a regulation from the European Union (‟EU”) that regulates online intermediaries and platforms such as marketplaces, social networks, content-sharing platforms, app stores and online travel and accommodation platforms.

The DSA is part of a ‟package” of new EU rules focused on achieving Europe’s digital targets for 2030 and the digital ecosystem ‟Shaping Europe’s digital future”, along with the Digital Markets Act, the passed AI Act, as well as the Data Act and Data Governance Act, which form a single set of rules that apply across the EU, to implement the two following goals:

  • create a safer digital space in which the fundamental rights of all users of digital services are protected by setting clear and proportionate rules, and

  • establish a level playing field to foster innovation, growth and competitiveness, both in the European single market and globally.

More specifically, the DSA creates an EU-wide uniform framework dealing with four issues as follows:

  • the handling of illegal or potentially harmful online content;

  • the liability of online intermediaries for third-party content;

  • the protection of users’ fundamental rights online, and

  • the bridging of information asymmetries between online intermediaries and their users.

2. Who is affected and/or impacted by the Digital Services Act? Providers of online intermediary services

2.1. Intermediary services

The DSA applies to all intermediary services offered to EU users (natural persons and legal entities), irrespective of where the providers of these intermediary services have their place of establishment.

‟Intermediary services” are defined as:

  • a ‟mere conduit” service, consisting of the transmission in a communication network of information provided by a recipient of the service, or the provision of access to a communication network (for example, ‟mere conduit” services include generic categories of services, such as internet exchange points, wireless access points, virtual private networks, DNS services and resolvers, top-level domain name registries, registrars, certificate authorities that issue digital certificates, voice over IP and other interpersonal communication services);

  • a ‟caching” service, consisting of the transmission in a communication network of information provided by a recipient of the service, involving the automatic, intermediate and temporary storage of that information, performed for the sole purpose of making the information’s onward transmission to other recipients more efficient, upon their request (for example, ‟caching” services include the sole provision of content delivery networks, reverse proxies or content adaptation proxies), and

  • a ‟hosting” service, consisting of the storage of information provided by, and at the request of, a recipient of the service (for example, cloud computing, web hosting, paid referencing services or services enabling sharing information and content online, including file storage and sharing).

Intermediary services may be provided in isolation, as part of another type of intermediary service, or simultaneously with other intermediary services. Whether a specific service constitutes a ‟mere conduit”, ‟caching” or ‟hosting” service depends solely on its technical functionalities, which might evolve in time, and should be assessed on a case-by-case basis.

2.2. Providers of intermediary services

Therefore, all companies providing online intermediary services on the EU single market, whether established in the EU or not, must comply with the DSA. These include:

  • intermediary service providers offering network infrastructure (internet access providers, caching operators);

  • hosting service providers;

  • online platforms (including social media platforms, social networks, app stores, online travel and accommodation websites, content-sharing websites, collaborative economy platforms and marketplaces), and

  • search engines.

In the DSA, companies are subject to obligations which are proportionate to their size, role, impact and audiences in the online ecosystem, in particular:

  • micro-companies and small businesses (with less than 50 employees and annual sales of less than 10 million Euros) are exempt from some of the DSA’s obligations, and

2.3. Very Large Online Platforms (VLOPs) and Very Large Online Search Engines (VLOSEs)

The European Commission (the ‟Commission”) has begun to designate VLOPs and VLOSEs based on user numbers provided by platforms and search engines, which, regardless of size (except micro and small enterprises), they were required to publish by 17 February 2023. Platforms and search engines will need to update these figures at least every six months.

Once the Commission designates a platform as a VLOP or search engine as a VLOSE, the designated online service has four months to comply with the DSA. The designation triggers specific rules that tackle the particular risks such large services pose to Europeans and society when it comes to illegal content, and their impact on fundamental rights, public security and wellbeing. For example, the VLOP or VLOSE needs to:

  • establish a point of contact for authorities and users;

  • report criminal offences;

  • have user-friendly terms and conditions, and

  • be transparent as regards advertising, recommender systems or content moderation.

The Commission will revoke its decision if the platform or search engine does not reach the threshold of 45 million monthly users anymore, during one full year.

So who are those VLOPs and VLOSEs, identified by the Commission as early as April 2023, so far? Some of the most notable are, inter alia:

  • Alibaba (Netherlands) B.V. is a VLOP under the DSA, for the designated service AliExpress;

  • Amazon Services Europe S.à.r.l. is a VLOP under the DSA, for the designated service Amazon Store;

  • Apple Distribution International Limited is a VLOP under the DSA, for the designated service App Store;

  • Aylo Freesites Ltd. is a VLOP under the DSA, for the designated service Pornhub;

  • Booking.com B.V. is a VLOP under the DSA, for the designated service Booking.com;

  • Google Ireland Ltd. is a VLOSE under the DSA, for the designated service Google Search, and a VLOP under the DSA, for the designated services Google Play, Google Maps, Google Shopping and YouTube;

  • LinkedIn Ireland Unlimited Company is a VLOP under the DSA, for the designated service LinkedIn;

  • Meta Platforms Ireland Limited (MPIL) is a VLOP under the DSA, for the designated services Facebook and Instagram;

  • Microsoft Ireland Operations Limited is a VLOSE under the DSA, for the designated service Bing;

  • Pinterest Europe Ltd. is a VLOP under the DSA, for the designated service Pinterest;

  • Snap B.V. is a VLOP under the DSA, for the designated service Snapchat;

  • TikTok Technology Limited is a VLOP under the DSA, for the designated service TikTok;

  • Twitter International Unlimited Company is a VLOP under the DSA, for the designated service X;

  • Wikimedia Foundation Inc 3*** is a VLOP under the DSA, for the designated service Wikipedia, and

  • Zalanda SE is a VLOP under the DSA, for the designated service Zalando.

On 18 December 2023, the Commission opened formal proceedings to assess whether X may have breached the DSA in areas linked to risk management, content moderation, dark patterns, advertising transparency and data access for researchers. This decision to open proceedings was motivated by the analysis of the risk assessment report submitted by X in September 2023, X’s transparency report published on 3 November, and X’s replies to a formal request for information, which, among others, concerned the dissemination of illegal content in the context of Hamas’ terrorist attacks against Israel.

3. What are the obligations that providers of online intermediary services have, under the DSA?

The DSA establishes a new liability framework for companies in the digital sector, meaning they are now subject to a multitude of obligations.

3.1. Key obligations for all intermediary service providers

Here is a summary of the key obligations imposed on different levels of digital intermediary service providers by the DSA:

  • Governance: all providers at all levels must establish two single points of contact, one for direct communication with supervisory authorities, and the other for the recipients of the services. Providers not established in the EU, but offering services in the EU, will be required to designate a legal representative in the EU. Online platforms will need to have an out-of-court alternative dispute resolution mechanism, publish annual reports on content moderation, including the number of orders received from the authorities and the number of notices received from other parties, for removal and disabling of illegal content or content contrary to their terms and conditions, and the effect given to such orders and notices. VLOPs and VLOSEs must perform systematic risk assessments, share data with regulators and appoint a compliance officer;

  • Obligations for VLOPs and VLOSEs to prevent abuse of their systems, by taking risk-based action, including oversight through independent audits of their risk management measures. Platforms must mitigate against risks such as disinformation or election manipulation, cyber violence against women or harm to minors online. These measures must be carefully balanced against restrictions of freedom of expression and are subject to independent audits;

  • Responsible online marketplaces: online platforms and VLOPs will have to strengthen checks on the information provided by traders and make efforts to prevent illegal content so that consumers can purchase safe products and services;

  • Measures to counter illegal content online, including illegal goods and services: the DSA imposes new mechanisms allowing users to flag illegal content online, and for platforms to cooperate with specialised ‟trusted flaggers” to identify and remove illegal content;

  • New rules to trace sellers on online marketplaces, to help build trust and go after scammers more easily; a new obligation for online marketplaces to randomly check against existing databases whether products or services on their sites are compliant; sustained efforts to enhance the traceability of products through advanced technological solutions;

  • Ban on dark patterns on the interface of online platforms, referring to misleading tricks that manipulate users into choices they do not intend to make; providers must not manipulate users (commonly known as ‟nudging”) into using their service, for example, by making one choice more prominent than the other. Cancelling a subscription to a service should also be as easy as subscribing;

  • Wide-ranging transparency measures for online platforms, including better information on terms and conditions, as well as transparency on the algorithms used for recommending content or products to users; Also enhanced transparency for all advertising on online platforms and influencers’ commercial communications;

  • Bans on targeted advertising on online platforms: targeted advertising to minors or targeted advertising based on special categories of personal data, such as ethnicity, political views or sexual orientation, is prohibited for online platforms and VLOPs;

  • Protection of minors on any platform in the EU: for services aimed at minors, the providers of intermediary services must provide an explanation on the conditions and restrictions of use in a way that is understandable to minors;

  • Recommender systems: VLOPs will be required to offer users a system for recommending content not based on profiling. Transparency requirements for the parameters of recommender systems will be included;

  • ‟Notice and action” procedure: providers of intermediary services must explicitly describe, in their terms and conditions, any restrictions that they may impose on the use of their services, such as the content moderation policies, and to act responsibly in applying and enforcing those restrictions. Users will be empowered to give notice of illegal online content. Online platforms and VLOPs will have to be reactive through a clearer ‟notice and action” procedure. Victims of cyber crime will see the content that they report removed momentarily;

  • Protection of fundamental rights: stronger safeguards must be put in place to ensure user notices are processed in a non-arbitrary and non-discriminatory way, and safeguards must protect fundamental rights, such as data protection and freedom of expression;

  • Effective safeguards for users, including the possibility to challenge platforms’ content moderation decisions based on the obligatory information platforms must now provide to users when their content gets removed or restricted; users have new rights, including a right to complain to the platform, seek out-of-court settlements, complain to their national authority in their own language, or seek compensation for breaches of the rules. Now, representative organisations are able to defend user rights for large scale breaches of the law;

  • Accountability: EU member-states and the Commission will be able to access the algorithms of VLOPs and VLOSEs;

  • Allow access to data to researchers of key platforms in order to scrutinise how platforms work and how online risks evolve;

  • A new crisis response mechanism in cases a serious threat for public health and security crises, such as a pandemic or a war;

  • A unique oversight structure: the Commission is the primary regulator of VLOPs and VLOSEs, while other intermediary service providers are under the supervision of member-states where they are established. Indeed, national Digital Service Coordinators (‟DSCs”), designed by each one of the 27 EU member-states, are responsible for supervising, enforcing and monitoring the DSA in that country. In France, the ‟Autorité de régulation de la communication audiovisuelle et numérique” (‟Arcom”) is the DSC. The Commission has enforcement powers similar to those it has under antitrust proceedings. An EU-wide cooperation mechanism is currently being established between national regulators, the DSCs, and the Commission.

While the DSA does not define what illegal content online is, it sets out EU-wide rules that cover detection, flagging and removal of illegal content, as well as a new risk assessment framework for VLOPs and VLOSEs on how illegal content spreads on their services.

What constitutes illegal content, though, is defined in other laws, either at EU level or at national level – for example, terrorist content or child sexual abuse material or illegal hate speech is defined at EU level. Where a content is illegal only in a given EU member-state, as a general rule it should only be removed in the territory where it is illegal.

The DSA stipulates that breaches must be subject to proportionate and dissuasive penalties, determined by each member-state. Intermediary service providers can be fined up to 6 percent of annual worldwide turnover for breaching the DSA and up to 1 percent of worldwide turnover for providing incorrect or misleading information.

3.2. Key obligations specific to VLOPs and VLOSEs

Once they are designated as such, VLOPs and VLOSEs must follow the rules that focus only on VLOPs and VLOSEs due to the potential impact they can have on society. This means that they must identify, analyse and assess systemic risks that are linked to their services. They should look, in particular, to risks related to:

  • illegal content;

  • fundamental rights, such as freedom of expression, media freedom and pluralism, discrimination, consumer protection and children’s rights;

  • public security and electoral processes, and

  • gender-based violence, public health, protection of minors and mental and physical wellbeing.

Once the risks are identified and reported to the Commission for oversight, VLOPs and VLOSEs are obliged to put measures in place that mitigate these risks. This could mean adapting the design or functioning of their services or changing their recommender systems. This could also consist of reinforcing the platform internally with more resources to better identify systemic risks.

Those designated as VLOPs and VLOSEs also have to:

  • establish an internal compliance function that ensures that the risks identified are mitigated;

  • be audited by an independent auditor at least once a year and adopt measures that respond to the auditors’ recommendations;

  • share their data with the Commission and national authorities so that they can monitor and assess compliance with the DSA;

  • allow vetted researchers to access platform data when the research contributes to the detection, identification and understanding of systemic risks in the EU;

  • provide an option in their recommender systems that is not based on user profiling, and

  • have a publicly available repository of advertisements.

To conclude, the DSA is a first-of-a-kind regulatory toolbox globally, and sets an international benchmark or a regulatory approach to online intermediaries. Designed as a single, uniform set of rules for the EU, these rules will give users new protections and businesses legal certainty across the whole single market. Moreover, the DSA will complement the distance selling regulations and EU consumer contract legislation well, empowering consumers and businesses in doing more business and deals online. While we are super glad to be Europeans and therefore to benefit from these wonderful protections, we highly recommend that providers of intermediary services take the DSA very seriously, and work their socks off to become immediately compliant with it, even when online platforms, such as Easyjet, have not yet been designated as VLOPs by the Commission.

Crefovi’s live webinar: Digital Services Act – the revolution will be televised – 29 March 2024

Crefovi regularly updates its social media channels, such as LinkedinTwitterInstagramYouTube and Facebook. Check our latest news there!

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    Farfetch: anatomy of a fall

    Crefovi : 20/12/2023 1:57 pm : Antitrust & competition, Articles, Banking & finance, Capital markets, Consumer goods & retail, Emerging companies, Fashion law, Hostile takeovers, Information technology - hardware, software & services, Insolvency & workouts, Internet & digital media, Law of luxury goods, Mergers & acquisitions, Private equity & private equity finance, Restructuring, Technology transactions, Unsolicited bids, Webcasts & Podcasts

    Farfetch was a lovely entrepreneurial adventure launched 16 years’ ago by thirty-something Jose Neves, but will probably not stand the test of time, in its current iteration. Let’s analyse what and who drove Farfetch, and how Farfetch was driven, into the ground, in less than 5 years. We all need to hear cautionary tales, and the Farfetch story definitely fits into this category. Future fashion entrepreneurs, saddle up!

    1. What is Farfetch?

    Farfetch was incorporated at Companies House in October 2007 as the private company limited by shares ‟Far-fetch.com Limited”, by Jose Neves, a Portuguese national, in London, United Kingdom (‟UK”).

    The company name was changed twice, in May 2010 and then June 2013, with the name ‟Farfetch UK Limited” still in existence, today.

    In 2007, Jose Neves’ vision was to create a business that would use the same technologies that were transforming other consumer sectors, such as the music and film sectors, for shopping fashion products. His plan was to ‟create a world-class infrastructure supported by a top-notch team, and then put all that to the service of the world’s most interesting retailers and their websites”.

    Since some of the best brick-and-mortar fashion boutiques around the world, despite having a powerful eye for curation, were not able to fund, set up and manage their own e-commerce operations to scale their businesses beyond their local markets, Farfetch seemed to bring them an appropriate solution.

    This, combined with the fact that Farfetch did not take on the risk of owning inventory made it a compelling business model that attracted the interest of venture capitalists, such as Advent Ventures (now Felix Capital) and its founder Frederic Court.

    Mr Neves and its venture capital investors pushed, over the years, Farfetch to expand and grow to realise the vision of becoming the Amazon of the fashion industry, a platform upon which the whole industry could operate its e-commerce businesses.

    Today, Farfetch, one of the few global online retailers for high-end merchandise from a range of labels, works with more than 1,400 fashion boutiques and sellers, in 190 countries.

    In 2015, Farfetch bought Browns, the London fashion boutique, which had a flagship store on Brook Street. Now, the brick-and-mortar location of this flagship store is disused and vacant, in Brook Street, London.

    As consumer appetite for buying luxury goods online began to grow, Farfetch also started working directly with fashion brands to build their websites and back-end operations. Through Farfetch Platform Solutions, the company also offers a host of e-commerce services to brands, like Burberry and Ferragamo, and department stores, like Harrods and Bergdorf Goodman.

    In 2017, Farfetch bought the intellectual property from Condé Nast’s failed e-commerce venture Style.com, a brand that the company has never used.

    In 2018, Farfetch became a public company listed on the New York Stock Exchange (‟NYSE”), via Farfetch Holdings plc, a public limited company organised under the laws of England and Wales and a wholly-owned direct subsidiary of Cayman Islands-based Farfetch Limited. At the USD20 Initial Public Offering (‟IPO”) price, Farfetch debuted its IPO with an approximate market capitalisation of USD5.8 billion.

    The same year, Farfetch acquired New-York based sneaker and streetwear reseller Stadium Goods, opting to pay USD250 million for the sneaker startup in a combination of cash and Farfetch stock.

    In 2019, Farfetch ramped up its shopping spree, with a USD675 million takeover of the Italian holding company New Guards Group, which manages the design, production and distribution, for a range of global brands, including Off White, Reebok and Palm Angels. This acquisitive move, doubled by a report of larger than expected losses, wiped out more than USD2 billion off Farfetch’s market value in a single day, in 2019.

    Unfettered, Jose Neves bought a USD200 million stake in American department store Neiman Marcus for Farfetch, and, in 2022, struck a deal to buy 47.50 percent of the shareholding of Yoox Net-a-Porter (‟YNAP”) – the underperforming e-commerce platform from the Richemont group – in exchange for the issuance of a 12 percent shareholding in Farfetch to Richemont. That partnership was cleared by the European Commission in October 2023.

    Meanwhile, Farfetch acquired Los Angeles-based luxury beauty retailer Violet Grey, at the beginning of 2022, only to put it up for sale barely a year and a half later, in October 2023, further to shuttering its beauty division in August 2023.

    And then, in November 2023, when Farfetch issued a press release backtracking on its initial intention to announce third quarter 2023 results, its shares started tumbling, losing more than 50 percent of their value. Mid-December 2023, two years after Farfetch’s peak valuation at a pandemic high of USD26 billion in February 2021, its market value shrunk to less than USD238 million, with its shares losing more than 97 percent of their market value since its IPO.

    In Mid-November 2023, British investment firm Baillie Gifford, formerly Farfetch’s largest investor, sold nearly half of its shares in the platform, keeping a 7.53 percent stake only.

    On 18 December 2023, Farfetch provided a business update, confirming that it had entered into an emergency and lifeline USD500 million bridge loan facility with Athena Topco LP, a Delaware limited partnership owned by South Korean e-commerce group Coupang, Inc (also listed on the NYSE and backed by SoftBank Group Corp). In exchange, Farfetch will delist from the NYSE and a partnership between Coupang and the investment firm Greenoaks Capital Partners will acquire Farfetch through a pre-pack administration in the UK, which is a quick process used to facilitate selling all or parts of the assets of an insolvent company.

    Via the same business update, Farfetch also informed the public that its partnership with Richemont, to purchase 47.50 percent of YNAP, the adoption of Farfetch Platform Solutions by YNAP and the Richemont Maison, as well as the launch of Richemont Maison e-concessions on the French marketplace, had terminated with immediate effect.

    Farfetch’s shares on the NYSE were suspended after slumping 35 percent in premarket US trading before the public announcement on 18 December 2023.

    2. How, and why, is Farfetch in such dire straits?

    A combination of factors have brought Farfetch to the brink of extinction, many of those self-inflicted.

    Firstly, Farfetch veered too far away from its cautious approach to fashion e-commerce, jumping with both feet, from 2015 to 2023, in overpriced, underprepared and badly-executed multiple acquisitions of brick-and-mortar fashion brands and retailers and etailers, as well as their inventories.

    Not only did this scattered M&A strategy massively increase the financial risks underpinning Farfetch’s business, but it also seriously emptied the coffers of this startup (whose current cash flow resources stand at USD630 million), and saddled it with debt (in particular, USD600 million of convertible notes, shared equitably between Richemont and Alibaba Group Holding Limited, to be converted into cash or shares in 2026).

    Also, Farfetch’s erratic growth approach, without a well-thought business plan, caused both the fashion industry and unforgiving financial markets such as the NYSE, to no longer understand the company’s increasingly complex vision.

    And, Farfetch never consistently made a profit, since its IPO. So, investors, stakeholders in the fashion industry and financial markets doubt that it may be able to get back on track.

    Moreover, clearly, the leadership at Farfetch, and in particular Jose Neves, is incompetent. Although Mr Neves currently owns only 15 percent of the company’s shareholding he founded in 2007, he still has 77 percent of the vote on Farfetch’s executive committee. While he sacked all independent members of Farfetch’s board and all committees of Farfetch, as confirmed in the business update dated 18 December 2023, the board still consists of … Jose Neves. It is probably the insistence, by Jose Neves, to keep on staying at the helm of Farfetch, despite his proven track record of incompetence and poor management, that has ultimately deterred the likes of Amazon, Alibaba, LVMH, Richemont and Kering, from rescuing Farfetch out of its misery: they know that, while Mr Neves is in charge at Farfetch, nothing good can come out of it.

    Finally, the economic conditions for etailers are tough, post-pandemic, as luxury e-commerce players such as Farfetch, Mytheresa and Matchesfashion currently experience. MyTheresa’s shares have lost 90 percent of their value since the pandemic boom of 2021, and Matchesfashion has just been acquired by the Frasers Group, for just GBP52 million, in a deal that signals heavy losses for its private equity backer Apax Partners. The longer-term challenge of luxury e-commerce platforms is a drive among fashion labels to seek greater control of their products, usually at their own retail boutiques – a strategy aimed at avoiding discounts that third party retailers like Farfetch and Mytheresa rely on to attract shoppers. Now that consumers are back to shopping in person, it is a trend that luxury brands prefer to control their own distribution.

    3. What’s next for Farfetch?

    The deal between Coupang and Farfetch, announced in December 2023, will be a catastrophe for Farfetch in the medium to long term. Indeed, while such a transaction gives Farfetch a bit of a breather in terms of keeping its network of brands, boutiques and consumers depending on the Farfetch marketplace up and running, for now, there are very few synergies (if any) between a basic, cheap, retail e-commerce platform like coupang.com, and a luxury e-commerce marketplace such as farfetch.com.

    There is no chance that the Korean management of Coupang will ‟get” the exclusive and elitist distribution strategy of its asset farfetch.com, with the risk of diluting the brand Farfetch by lowering the standards of selection of the boutiques selling on the Farfetch marketplace. When that happens, no fashionista or luxury shopper will ever buy anything on Farfetch again.

    Also, Farfetch can kiss goodbye to its glitzy deals with luxury partners such as Richemont, Ferragamo, Burberry, etc. The positioning of Farfetch, now that it is becoming an asset of Coupang, is veering from being ‟luxury”, to ‟mainstream retail”. Also, the top brass at Farfetch will be replaced by a team of South Koreans who not only understand very little about what constitutes the makeup of a luxury brand, but also do not have the appropriate connections and pazzaz, in the luxury spheres.

    While Jose Neves must go, since he continuously mismanaged and negligently drove Farfetch into the ground, the South Korean ‟new guard” who will eventually replace him will fail, if they do not quickly and efficiently buy extremely expensive knowhow and strategic advice about, and connections within, the luxury sectors in Europe and the USA, to turn Farfetch around and to keep it as a thriving going concern for the luxury fashion industry.

    Crefovi’s live webinar: Farfetch – anatomy of a fall – 22 December 2023

    Crefovi regularly updates its social media channels, such as LinkedinTwitterInstagramYouTube and Facebook. Check our latest news there!

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      How Chanel kissed goodbye to France and fully embraced the United Kingdom, for tax reasons

      Crefovi : 18/01/2023 8:07 am : Articles, Banking & finance, Consumer goods & retail, Fashion law, Hostile takeovers, Law of luxury goods, Mergers & acquisitions, Private equity & private equity finance, Restructuring, Tax, Unsolicited bids, Webcasts & Podcasts

      In the background, far from grabbing headlines and the limelights, the shareholders of Chanel – the Wertheimer family – have relentlessly restructured and reorganised the Chanel business, since Brexit. Sensing a massive tax opportunity, Chanel has completed its Frexit in September 2022, kissing goodbye to the nosy and invasive strategies and idiosyncrasies of the French tax administration and control systems. The United Kingdom, and in particular London, is reaffirming its position as a tax haven for the rich and powerful, post Brexit, while France has lost one of its crown jewels, and does not even understand its massive financial loss, blinded by the belly-dancing charm offensive put up by Chanel’s top management in France. How did this happen?

      1. Chanel: a corporate genesis

      Gabrielle Chanel, whose nickname was Coco Chanel, founded the couture ‟maison” ‟Chanel” in 1910, in Paris, France. She was financially backed by her boyfriend, Englishman Arthur ‟Boy” Capel, via a loan to rent her company’s offices at 21 rue Cambon, Paris. While, initially, the Chanel house was only selling hats, Coco Chanel quickly expanded into clothing, when she opened her first shop in Deauville, France, in 1912. In 1915, a second shop was opened in Biarritz, another French seaside resort town.

      At the end of the first world war, Gabrielle Chanel paid back Arthur Capel’s loan, and became financially independent. She opened a third shop at 31 rue Cambon, in Paris, in 1918.

      The 20s were a boom era for Chanel, and several new boutiques, ateliers and offices were set up, at 31 rue Cambon in Paris, and later at numbers 25, 27 and 23 rue Cambon in Paris. A boutique was also opened in Cannes, another seaside resort town on the French Riviera.

      French perfumer, Ernest Beaux, suggested to Coco Chanel to create her own perfume, ‟nº5”, which, in 1921, was sold solely in Chanel’s boutiques, but then became available in perfumes retail shops around the world. ‟Chanel nº5” is one of the most sold perfumes in the world, even today.

      In 1924, Gabrielle Chanel met, at the Longchamp horse racetracks, Pierre and Paul Wertheimer, two powerful French Jewish brothers who owned the Bourjois perfumes, among other businesses. Together, they created the company ‟Parfums Chanel” (or ‟Société des Parfums Chanel”), for the manufacturing of ‟Nº5” on 16 April 1924. This new business was financially-backed by the Wertheimer brothers, and the shareholding of ‟Parfums Chanel” was owned:

      • at a stake of 10 percent, by Gabrielle Chanel (in exchange for the transfer of ownership in her name, via a license, and a 2 percent share in the annual income on the perfume sales, i.e. around USD1 million in 1947);

      • at a stake of 70 percent, by the Wertheimers (who bear all financial risks), and

      In parallel, Ms Chanel started making makeup products, and in particular a “blood red” lipstick, from 1924 onwards.

      Many more perfumes are created, from 1924 onwards: Ernest Beaux creates Gardénia” in 1925, Cuir de Russie” in 1927 and ‟Bois des îles” in 1928.

      However, from 1928 onwards, Coco Chanel and the Wertheimer brothers starting having some disagreements. Ms Chanel considered that the Wertheimers were making money ‟on her back” and became vocal about it, publicly shaming the Wertheimer brothers by calling them “bandits”. She also snubbed the board meetings of ‟Parfums Chanel” and, consequently, in 1933, its shareholders decided to remove her from the management and board of their company. In 1934, she instructed a young lawyer, René de Chambrun, to defend her interests and renegotiate the 10-per-cent partnership she entered. But the lawyer-to-lawyer negotiations failed, and the partnership-percentages remained as established in the original business deal among the Wertheimers, Bader and Chanel.

      Then, the second world war started and Gabrielle Chanel shamelessly collaborated with the nazis, denouncing the Wertheimer brothers as Jewish, in order to attempt to gain full control over the ‟Parfums Chanel” business.

      Following the war declaration in 1939, Coco Chanel closed down her couture house in Paris, leaving only her perfumes boutique opened. She went to live in the South of France, where she owned the beautiful villa ‟La Pausa, but came back to Paris the following year.

      During the second world war, the Wertheimers fled to the United States. Gabrielle Chanel attracted the attention of the French Pétain collaborationist government, on the fact that the Bourjois and ‟Parfums Chanel” companies had majority shareholders who were Jewish, using the laws against Jews and foreigners during the Vichy regime. But the Wertheimer brothers had transferred their shareholding in ‟Parfums Chanel” and ‟Bourjois” into the hands of a trusted, and non-Jewish, friend (Félix Amiot), acting as proxy, so Coco Chanel’s attempts to take over the shareholding of all the other shareholders in ‟Parfums Chanel” failed.

      At the end of the second world war, the Wertheimers got their shareholders in ‟Parfums Chanel” and ‟Bourjois” back. The ‟war” with Coco Chanel continued until 1948, when the parties settled their dispute by renegotiating the 1924 contract that had established ‟Parfums Chanel”: Gabrielle Chanel got her share in the turnover of ‟Parfums Chanel” in 1948 (i.e. USD400,000 in cash (wartime profits from the sales of perfume ‟Nº5”)), a 2 per cent running royalty from the sales of ‟Nº5” ‟parfumerie”, and a perpetual monthly stipend that paid all of her expenses. In exchange, Gabrielle Chanel sold to ‟Parfums Chanel” the full rights to her name ‟Coco Chanel”.

      Coco Chanel decided to sell the ‟haute couture” business to ‟Parfums Chanel” in 1954 (following her failed attempt to return into the fashion world, post second world war), while keeping its direction and management until her death in 1971. To replace her, Karl Lagerfeld became artistic director of Chanel in 1983, reinvigorating the dwindling ‟haute couture” business, and creating its ‟prêt-à-porter” line. In 2019, when Mr Lagerfeld died, Virginie Viard, who had worked with him at the fashion house for over 30 years, became Chanel’s new creative director.

      Following this above-mentioned acquisition of the ‟haute couture” business by ‟Parfums Chanel”, the company took the new name ‟Chanel SA” (‟Chanel Société Anonyme”) and registered with the registrar of the Nanterre ‟greffe” of the commercial court, on 27 August 1954.

      In 1954, date of the reopening of the couture house, the perfume boutique located at rue Cambon is refurbished. The perfumer Henri Robert takes over: the first men’s ‟eau de toilette”, ‟Pour Monsieur”, is launched in 1955. Then, Jacques Polge becomes Chanel’s ‟nose”, in 1978, and ‟Egoiste Platinium” is launched in 1993, then ‟Allure” in 1996, then ‟Coco Mademoiselle” in 2001, then ‟Chance” in 2003, then ‟Bleu de Chanel” in 2010. In 2014, Jacques Polge’s son, Olivier, joins him, in order to succeed him as the ‟maison”’s perfumer. In February 2015, Olivier Polge becomes the new nose of Chanel, at 40 years’ old.

      Meanwhile, Paul Wertheimer died shortly after the second world war and his brother, Pierre, bought his stake in Bourjois and ‟Les Parfums Chanel”. Following Pierre Wertheimer’s death, in 1965, his only son, Jacques, aged 56 years’ old, took over the group’s management. However, it was not a good fit and Jacques was ousted in 1974, and replaced by his more-capable son, Alain Wertheimer.

      Alain’s mother, Eliane Fischer, divorced from Jacques (with whom she had Alain and Gérard), became a business lawyer working at the law firm of Samuel Pisar in Paris. Mr Pisar and Ms Fischer actively counselled Alain when he took over the management of the group, and ‟Chanel SA” in particular, in 1974. Since, Ms Fischer founded the law firm Salans (now Dentons) in 1978, and became the ongoing and longstanding private practice lawyer of Chanel.

      So Alain, with his brother Gérard Wertheimer, became the owner of ‟Chanel SA”, the Bourjois cosmetics, the hunting guns’ brand Holland & Holland (bought by ‟Chanel SA” in 1996), the swimming costume brand ‟Eres” (purchased by ‟Chanel SA” in 1996 too) and the book publishing house ‟La Martinière”. The Wertheimer brothers, whose wealth was ranked at number two in France in 2018, with USD40 billion, also own the wineries ‟Château Rauzan Ségla” in Margaux and ‟Château Canon” in Saint-Emilion.

      On 24 December 1998, ‟Chanel Société Anonyme” was transformed into ‟Chanel Société par Actions Simplifiée” (‟Chanel SAS”), which is a more flexible type of French companies than ‟sociétés anonymes”.

      2. Chanel: a recent change of corporate structure which puts the UK on the map, post Brexit

      Alain Wertheimer incorporated ‟Chanel International B.V.” in 1979, as the Netherlands-based financial holding company controlling ‟Chanel SA” and around 90 subsidiaries.

      A holding company is a company whose primary business is holding the controlling interest in the securities of other companies. A holding company does not usually produce goods or services itself. Its purpose is to own shares of other companies to form a corporate group.

      While the Chanel group’s corporate structure chart is extremely opaque, I understand that Chanel International B.V. was still the ultimate financial holding company for the Chanel group, until recently. The Chanel Group is still privately-held (i.e. not listed on the stock market). The Dutch entity held the group’s subsidiaries across the globe and consolidated its accounts. Chanel International B.V.’s main subsidiaries were, via a cloud of shell companies such as Mousse Investments Limited incorporated in the Cayman Islands:

      • Chanel SAS, a private company limited by shares, incorporated in France on 16 April 1924 (and transformed into a ‟SAS” on 24 December 1998), owned by a sole shareholder which name is kept secret by both Chanel’s management and the French authorities (!), which current president is Bruno Pavlovsky, and which current managing director and chief financial officer is Luc Dony, and

      • Chanel Limited, a private company limited by shares, incorporated in London, United Kingdom, on 6 February 1925 (and renamed from ‟Parfums Chanel Limited”, to ‟Chanel Limited” in 28 November 1957), wholly-owned by Mousse Investments Limited as sole shareholder, which current global executive chairman is Alain Wertheimer and current global CEO is Leena Nair.

      As set out in the 2021 annual accounts of ‟Chanel SAS, the tax integration group in place in which ‟Chanel SAS” was also the parent-company was terminated on 1 January 2021. A new tax integration group was set up, from 1 January 2021 onwards, preserving ‟Chanel SAS” as its top company.

      It is set out, in the 2021 annual accounts of ‟Chanel SAS”, that, according to the integration agreement, the parent-company is the sole beneficiary of the corporate tax credit and additional contributions’ credits, resulting from the application of the group’s tax regime, and is the sole company due to pay these taxes. The companies member of the integration group are however jointly liable to pay these taxes, within the limit of the amount which would be due by each one of them if they had not opted for the group’s tax regime. Each company member of the integration group is liable to pay to ‟Chanel SAS”, under its participating share of corporate tax owed by the latter, a sum equal to the corporate tax which would have been deducted from its turnover, if it had been taxed separately.

      It is further set out, in the 2021 annual accounts of ‟Chanel SAS”, that the French tax administration conducted a tax control on its 2016, 2017 and 2018 tax years’ results, and that ‟Chanel SAS” had to pay some additional taxes to the French taxman for the 2016 tax year, while it was still disputing the outcome of the tax investigations for the 2017 and 2018 tax years.

      Finally, it is mentioned, in the 2021 annual accounts of ‟Chanel SAS”, that UK-based Chanel Limited is the consolidating entity of the group, which ‟Chanel SAS” is a party of, as a subsidiary.

      Indeed, in the 2021 annual accounts of Chanel Limited, are set out the consolidated financial statements, which comprise the financial results for Chanel Limited and its subsidiaries (including ‟Chanel SAS”). ‟Subsidiaries included in the consolidation are all entities over which the Group (i.e. Chanel Limited and its subsidiaries) exercises control. The Group controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The concept of control generally implies owning more than half of the voting rights of an entity, although that is not a requirement to demonstrate power over an entity. The existence and effect of potential voting rights that are exercisable or convertible are taken into account in the assessment of control”.

      Then, in the notes to the 2021 consolidated financial statements of Chanel Limited, it is set out that, as far as the ultimate parent company is concerned, ‟the consolidated financial statements of Chanel Limited and its subsidiaries represent the largest group in which the financial statements of Chanel Limited and its subsidiaries are consolidated and publicly available. Chanel Limited’s, and its subsidiaries’, immediate and ultimate parent company is Litor Limited (now renamed Mousse investments Limited), a company incorporated and registered in the Cayman Islands”.

      So why has Chanel shifted its group’s control and financial power, away from France, and into the UK and, ultimately the Cayman Islands?

      Because France and its tax administration are too nosy and demanding, what with their constant tax investigations and controls, which imply that Chanel has to pay back taxes, and penalties, relating to its previous tax years’ results, all the time.

      The UK, post Brexit, has become a tax haven, where successful business groups and wealthy individuals can hide the exact shareholding of their holding companies and operating subsidiaries, as well as the exact ownership of their assets, via a flurry of shell companies usually incorporated in tax havens like the British Virgin Islands, the Cayman Islands, Bermuda, Jersey, Guernsey and the Isle of Man.

      Besides, the UK tax authorities are far less controlling and invasive than the French tax administration, by a wide margin. By consolidating its accounts within its UK entity, Chanel Limited, and shielding its global consolidated revenues in the UK, the Chanel business is ensuring that all this French state’s constant micromanagement is put to an alt. Additionally, the corporate tax rate is lower in the UK, compared to France, and in its 2021 annual report, Chanel Limited set out that its effective tax rate had fallen from 28 percent the previous year, to 25.70 percent.

      Moreover, Chanel’s management is spread between New York (where Alain Wertheimer is located, at the 40th floor of the Chanel tower, located at 9 West 57th Street), Cologny in Switzerland (the golden Genevan suburb where silent shareholder Gérard Wertheimer is located), London (where Chanel’s new global CEO, British citizen Leena Nair, is based) and Paris (where Bruno Pavlovsky is based). So it makes sense for London – an English-speaking place – to be the centre of control of Chanel, due to its easy access by plane and train and its cosmopolitan culture, when the management needs to meet up for board meetings.

      Speaking of the board of Chanel Limited, in addition to Leena Nair, Chanel has also named to its board entrepreneur Martha Fox Lane, who served as digital adviser to David Cameron during his time as British prime minister and who also sits in the House of Lords and on Twitter’s board. Alex Mahon, who chairs the British public broadcaster Channel 4, has also joined Chanel Limited’s board.

      This shift of power and control to London has been in the making for many years: after Brexit, in 2018, the Wertheimer brothers started relocating some of Chanel’s staff (in the legal, HR and finance divisions) from New York to London, into the head office of Chanel Limited, citing the need to ‟simply and rationalise the company’s structure.

      In September 2022, the long restructuring process was completed with the appointment of Alain Wertheimer as the head of the board of Chanel Limited, which has become the parent company of the group, controlling all of Chanel’s global subsidiaries and which financial results consolidate all of its accounts. ‟The decision to turn Chanel Limited into the operating holding, common to all Chanel companies, was taken in 2018, with the goal of simplifying and modernising Chanel’s administrative and legal organisation, as well as its decision centre which used to be in New York”.

      So the Netherlands-based financial holding, Chanel International B.V., is less prominent, today, since all the financial interests are now concentrated into Chanel Limited, the operating holding, as well as its sole shareholder, Mousse Investments Limited (previously named ‟Litor Limited”), the Cayman Islands-based family holding company of the Wertheimers. The family office that manages the Wertheimers’ stake in Chanel, Mousse Partners, is based in Bermuda, another British Crown territory. Both the Cayman Islands and Bermuda were listed on the European Union (‟EU”)’s list of fiscally uncooperative countries until 2020.

      In 2019, when the Cayman Islands were still on the EU’s blacklist, Chanel Limited paid dividends of USD1.6 billion to its parent company Mousse Investments Limited. In 2021, these dividends reached USD4.98 billion. During the same period, the Wertheimer brothers’ financial structure lent USD382 million to Chanel Limited, which repaid the loan in January 2021.

      Of course, the French tax authorities did not take it well that Chanel was doing a Frexit, but Chanel’s Bruno Pavlovsky and Chanel SAS went on an efficient charm offensive, especially with French president Emmanuel Macron and his minions. Mr Pavlovsky seats on the board of prestigious French luxury institutions, such as the ‟Comité Colbert” and ‟Fédération de la haute couture et de la mode”, which he presides. He centralises and coordinates relations between Chanel and the French state. On 20 January 2022, Mr Pavlovsky inaugurated with Mr Macron and his wife the building 19M, located on the borders of the 19th arrondissement and poor suburban two of Aubervilliers. 19M houses 11 specialised artisans, the majority of whom work for Chanel’s ‟haute couture”.

      Operationally, the group benefited greatly from the UK’s government’s funding opportunities for business during the Covid-19 pandemic. It received GBP600 million (Euros694 million) from the Bank of England’s and Treasury’s support programmes, in 2020. These short-term loans have since been repaid by Chanel Limited.

      This restructuring and reorganisation towards London is strategic, as it precedes the inevitable handover between Alain and Gérard Wertheimer, now 74 and 71 years old respectively, and the fourth generation of the shareholder’s family. Gérard’s children, Olivia and David Wertheimer, have taken little interest in the business, while Alain’s three offsprings, and in particular Nathaniel, have taken a closer interest. The changing of the guard will take place between London and the two British Crown dependencies which house the Wertheimer family’s holdings, Bermuda and the Caymans, and far away from France.

      If you think that your own company needs a similar restructuring, come to us, at Crefovi, we will be delighted to support you in your endeavours!

      Crefovi’s live webinar: How Chanel kissed goodbye to France & fully embraced the UK for tax reasons – 24 January 2023

      Crefovi regularly updates its social media channels, such as LinkedinTwitterInstagramYouTube and Facebook. Check our latest news there!

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        Private equity goes to Hollywood: when investing in media content production became hype

        Crefovi : 28/12/2022 8:00 am : Articles, Banking & finance, Capital markets, Emerging companies, Entertainment & media, Information technology - hardware, software & services, Internet & digital media, Mergers & acquisitions, Private equity & private equity finance, Real estate, Sports & esports, Webcasts & Podcasts

        Even in a downturn, private equity money picks Hollywood as a smart bet. Investment firms now view star-driven production banners (and major soundstages) as a long-term play in a crowded content marketplace. How did this happen? Why the sudden change of heart, since finance people had previously always viewed investing in media content production a very risky bet, at best? Is this ‟all in” investment strategy in media content production, implemented by private equity funds, financially sound?

        1. Private equity buys stakes in media content production entities

        Private equity (‟PE”) is doubling down on Hollywood.

        After dipping their toes in the water through the talent agencies (TPG owns a majority stake in CAA, while Silver Lake is the largest external shareholder in Endeavor), investment firms are on a spending spree, snapping up stakes in production entities, or financing new vehicles like former Disney execs Kevin Mayer’s and Tom Stagg’s Candle Media to do the buying for them. Candle Media, which is backed by billions of dollars from Blackstone, has already purchased stakes in Reese Witherspoon’s Hello Sunshine (for a reported USD900 million) and Will and Jada Pinkett-Smith’s Westbrook Media, and has bought outright ‟Cocomelon” owner Moonbug and ‟Fauda” producer Faraway Road.

        In June 2022, Shamrock Capital invested USD50 million into Religion of Sports, the studio co-founded by Gotham Chopra, Tom Brady and Michael Strahan.

        On 13 December 2022, The Hollywood Reporter reported that Redbird Capital Partners formed a joint-venture with Abu Dhabi-based private investment fund, International Media Investments, pouring an initial committed capital of USD1 billion into the new venture, called RedBird IMI, which will see former CNN and NBCUniversal CEO Jeff Zucker acquiring and building companies in the sports, media and entertainment sectors. Both companies are already heavily invested in the media content production sector, with RedBird owning stakes in entertainment ventures like diversified content-production studio Skydance Media, LeBron James’ SpringHill as well as Ben Affleck’s and Matt Damon’s Artists Equity. IMI, meanwhile, owns a stake in Euronews and Sky News Arabia (a joint venture with Sky News).

        Village Roadshow and Chernin Entertainment, sensing opportunity, have also begun to explore their options. The North Road Co., Peter Chernin’s production roll-up, is being financed by USD500 million from Providence Equity Partners and USD300 million in debt from Apollo through its managed affiliates. Chernin said, in July 2022, that he is now in the market for further acquisitions, leveraging the private equity cash to buy ‟pure-play” companies that focus solely on creating content.

        What is causing the gold rush? Look no further than the annual ‟Peak TV” data released by FX Networks in January 2022. The data showed that in 2021, broadcast and cable channels, as well as streaming services, presented 559 English-language scripted series, a new record, and a 13 percent jump from pandemic-impacted 2020.

        There is a high demand for supply of unique high-quality content to drive new eyeballs and subscriptions, and, at the same time, a lot of companies still need to program linear TV channels.

        Therefore, the bet from private equity is that original programming, especially programming from blue-chip talent or independent studios, will not abate anytime soon, and may even continue to increase as streaming services seek to stand out, and compete with each other, in this era of streaming consolidation. In other words, ‟Peak TV” has not peaked yet.

        2. Infrastructure purchases: soundstages and physical studios are feeling the love too!

        The thesis that demand for content will continue to surge has also led to investment firms buying up soundstages and physical studios. Los Angeles-based real estate investment and operating company Hackman Capital has purchased Kaufman-Astoria Studios and Silvercup Studios in New York, as well as Los Angeles’ CBS Studio City lot, and has purchased, or is developing, studio space in Scotland and Toronto, among other places.

        Meanwhile, TPG purchased Studio Babelsberg in Germany and Domain Capital Group is developing a new studio in Georgia.

        The private equity firms’ logic, with the studio and soundstage buys, is that the real estate will appreciate in value, while the non-stop demand in film and TV productions provide steady and stable cashflows.

        3. Private equity on the Croisette: investors are bullish on indie films, particularly in Europe

        Within this broader trend of so-called ‟smart money” placing its bets on content, the 2022 Cannes film market was the stage set for some of the biggest players packaging projects and inking deals, backed by private equity groups, last May.

        Indeed, very prominent on the Croisette were European mini-majors Leonine and Mediawan – both bankrolled by KKR – and Anton, the Anglo-French producer/financier/sales outfit run by Sebastien Raybaud, which has tapped private equity to fund productions such as Gerard Butler’s actioner ‟Greenland” and Cannes market projects ‟Canary Black” (a spy thriller from ‟Taken” director Pierre Morel starring Kate Beckinsale) and ‟Femme” (a LGBTQ+ revenge thriller featuring George MacKay and Nathan Stewart-Jarrett).

        Meanwhile, the teams from Vine Alternative Investments portfolio companies Village Roadshow, EuropaCorp and Lakeshore Entertainment were all sharing a tent in Cannes, last May 2022.

        Private equity investments are coming to Europe, riding the wave of European content consumption growth, driven by the explosion in streaming services and platforms offered to European customers, as well as the mandatory European Union (‟EU”) content quotas for SVOD platforms (imposing that 30 percent of all content on streaming services must be European-made) which guarantee demand for original, home-grown films and series which most streamers will be unable to fill on their own.

        So the opportunities for independent studios, based in Europe, with access to original intellectual property and private equity capital, have never been greater.

        Instead of inking an exclusive output deal with a single streamer – as Steven Spielberg’s Amblin Partners, Spike Lee’s 40 Acres and a Mule Filmworks, and Vanessa Kirby’s Aluna Entertainment have all done with Netflix – many creatives are now using private equity’s backing to stay independent and sell their wares to the highest bidder, in particular at film markets like Cannes.

        It is telling that the new Cannes Film Festival president, from 2023 onwards, will be Iris Knobloch, the head of I2PO, a private equity-backed Special Purpose Acquisition Company (‟SPAC”) set up in 2021 by François Pinault (of Kering fame), Iris Knobloch and Matthieu Pigasse (who owns many media outlets in France, such as Le Monde, Les Inrockuptibles, Radio Nova and Mediawan) for the purpose of acquiring entertainment companies across Europe.

        4. The distribution and downturn risks: heavy reliance on streamers and low valuations

        However, even flush with all their new PE cash, the indies – and other media content producers – remain dependent on the global streamers for distribution.

        Also, it is a known fact, in the movie business, that it is never been possible to scale a content business if you do not own your distribution. If streamers move away from licensing films and shows from third parties, in favor of producing the bulk of their content in-house, or if the influx of new private equity capital inflates the cost of production beyond profitability (due to fast-rising interest rates and heavy reliance on debt financing), the current growth market for indies and other media content producers, and their appeal as PE investments, may vanish.

        Talent like Witherspoon, Smith and James are on board with the private equity cash, knowing that their financial backers have deep pockets and are willing to sell to the TV channel or streaming service willing to cut the best deal.

        By contrast, every entertainment conglomerate is increasingly creating films and TV shows first and foremost for their owned services. Not only that but, with fears of a recession mounting, companies like Netflix, Warner Bros. Discovery and Disney have indicated that they will be more prudent with their content investments.

        However, their desire to work with name-brand talent or producers remains, ensuring that firms like SpringHill and Hello Sunshine stay in demand.

        Meanwhile, a potential economic downturn could force media firms to take a close look at their valuations. For companies that do not necessarily need the capital and are selling minority stakes, the lower valuations justified by the current market may not meet expectations, leading some founders to wait things out until conditions improve.

        But a downturn also could bring opportunities of its own: even if private entertainment and production companies get spooked by low valuations, the public markets could provide them with new opportunities. Could, for example, Lionsgate be in play once it completes its spinoff of Starz?

        This is the first time in at least five years where there are real opportunities in the public markets. For firms spending big to gobble up content and production companies, it could lead to bargains that are hard to pass up.

        Crefovi’s live webinar: Private equity goes to Hollywood – 4 January 2023

        Crefovi regularly updates its social media channels, such as LinkedinTwitterInstagramYouTube and Facebook. Check our latest news there!

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          How to enforce civil and commercial judgments after Brexit?

          Crefovi : 14/06/2021 10:45 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, Private equity & private equity finance, Product liability, Real estate, Sports & esports, Tax, Technology transactions, Trademark litigation, Unsolicited bids

          1. How things worked before Brexit, with respect to the enforcement of civil and commercial judgments between the EU and the UK

          Before the Transition date on which the UK ceased to be a EU member-state, there were, and there still are between the 27 remaining EU member-states, four main regimes that are applicable to civil and commercial judgments obtained from EU member-states, depending on when, and where, the relevant proceedings were started.

          Each regime applies to civil and commercial matters, and therefore excludes matters relating to revenue, customs and administrative law. There are also separate EU regimes applicable to matrimonial relationships, wills, successions, bankruptcy and social security.

          The most recent enforcement regime applicable to civil and commercial judgments is EU regulation n. 1215/2012 of the European parliament and of the council dated 12 December 2012 on the jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the ‟Recast Brussels regulation). It applies to EU member-states’ judgments handed down in proceedings started on or after 10 January 2015.

          The original Council regulation n. 44/2001 dated 22 December 2000 on the jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the ‟Original Brussels regulation”), although no longer in force upon the implementation of the Recast Brussels regulation on 9 January 2015, still applies to EU member-states’ judgments handed down in proceedings started before 10 January 2015.

          Moreover, the Brussels convention dated 27 September 1968 on the jurisdiction and the enforcement of judgments in civil and commercial matters (the ‟Brussels convention”), also continues to apply in relation to civil and commercial judgments between the 15 pre-2004 EU member-states and certain territories of EU member-states which are located outside the EU, such as Aruba, Caribbean Netherlands, Curaçao, the French overseas territories and Mayotte. Before the Transition date, the Brussels convention also applied to judgments handed down in Gibraltar, a British overseas territory.

          Finally, the Lugano convention dated 16 September 1988 on the jurisdiction and the enforcement of judgments in civil and commercial matters (the ‟Lugano convention”), which was replaced on 21 December 2007 by the Lugano convention dated 30 October 2007 on the jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the ‟2007 Lugano convention”), govern the recognition and enforcement of civil and commercial judgments between the EU and certain member-states of the European Free Trade Association (‟EFTA”), namely Iceland, Switzerland, Norway and Denmark but not Liechtenstein, which never signed the Lugano convention.

          The 2007 Lugano convention was intended to replace both the Lugano convention and the Brussels convention. As such, it was open to signature to both EFTA members-states and to EU member-states on behalf of their extra-EU territories. While the former purpose was achieved in 2010 with the ratification of the 2007 Lugano convention by all EFTA member-states (except Liechtenstein, as explained above), no EU member-state has yet acceded to the 2007 Lugano convention on behalf of its extra-EU territories.

          The UK has applied to join the 2007 Lugano convention after the Transition date, as we will explain in more details in section 2 below.

          b. Enforceability of remedies ordered by an EU court

          Before Brexit, the Recast Brussels regulation, the Original Brussels regulation, the Brussels convention, the Lugano convention and the 2007 Lugano convention (together, the ‟EU instruments”) provided, and still provide with respect to the 27 remaining EU member-states, for the enforcement of any judgment in a civil or commercial matter given by a court of tribunal of a EU member-state, whatever it is called by the original court. For example, article 2(a) of the Recast Brussels regulation provides for the enforcement of any ‟decree, order, decision or writ of execution, as well as a decision on the determination of costs or expenses by an officer of the court”.

          The Original Brussels regulation also extends to interim, provisional or protective relief (including injunctions), when ordered by a court which has jurisdiction by virtue of this regulation.

          c. Competent courts

          Before the Transition date, proceedings seeking recognition and enforcement of EU foreign judgments in the UK should be brought before the high court in England and Wales, the court of session in Scotland and the high court of Northern Ireland.

          Article 32 of the Brussels convention provides that the proceedings seeking recognition and enforcement of EU foreign judgments in France should be brought before the president of the ‟tribunal judiciaire”. Therefore, before the Transition date, a UK judgment had to be brought before such president, in order to be recognised and enforced in France.

          d. Separation of recognition and enforcement

          Before the Transition date, and for judgments that fell within the EU instruments other than the Recast Brussels regulation, the process for obtaining recognition of an EU judgment was set out in detail in Part 74 of the UK civil procedure rules (‟CPR”). The process involved applying to a high court master with the support of written evidence. The application should include, among other things, a verified or certified copy of the EU judgment and a certified translation (if necessary). The judgment debtor then had an opportunity to oppose appeal registration on certain limited grounds. Assuming the judgment debtor did not successfully oppose appeal registration, the judgment creditor could then take steps to enforce the judgment.

          Before the Transition date, and for judgments that fell within the Recast Brussels regulation, the position was different. Under article 36 of the Recast Brussels regulation, judgments from EU member-states are automatically recognised as if they were a judgment of a court in the state in which the judgment is being enforced; no special procedure is required for the judgment to be recognised. Therefore, prior to Brexit, all EU judgments that fell within the Recast Brussels regulation were automatically recognised as if they were UK judgments, by the high court in England and Wales, the court of session in Scotland and the high court of Northern Ireland. Similarly, all UK judgments that fell within the Recast Brussels regulation were automatically recognised as if they were French judgments, by the presidents of the French ‟tribunal judiciaires”.

          Under the EU instruments, any judgment handed down by a court or tribunal from an EU member-state can be recognised. There is no requirement that the judgment must be final and conclusive, and both monetary and non-monetary judgments are eligible to be recognised. Therefore, neither the UK courts, nor the French courts, are entitled to investigate the jurisdiction of the originating EU court. Such foreign judgments shall be recognised without any special procedures, subject to the grounds for non-recognition set out in article 45 of the Recast Brussels regulation, article 34 of the Original Brussels regulation and article 34 of the Lugano convention, as discussed in paragraph e. (Defences) below.

          For the EU judgment to be enforced in the UK, prior to the Transition date, and pursuant to article 42 of the Recast Brussels regulation and Part 74.4A of the CPR, the applicant had to provide the documents set out in above-mentioned article 42 to the UK court, i.e.

          • a copy of the judgment which satisfies the conditions necessary to establish its authenticity;

          • the certificate issued pursuant to article 53 of the Recast Brussels regulation, certifying that the above-mentioned judgment is enforceable and containing an extract of the judgment as well as, where appropriate, relevant information on the recoverable costs of the proceedings and the calculation of interest, and

          • if required by the court, a translation of the certificate and judgment.

          It was incumbent on the party resisting enforcement to apply for refusal of recognition of the EU judgment, pursuant to article 45 of the Recast Brussels regulation.

          Similarly, for UK judgments to be enforced in France, prior to the Transition date, the applicant had to provide the documents set out in above-mentioned article 42 to the French court, which would trigger the automatic enforcement of the UK judgment, in compliance with the principle of direct enforcement.

          e. Defences

          While a UK defendant may have raised merits-based defences to liability or to the scope of the award entered in the EU jurisdiction, the EU instruments contain express prohibitions on the review of the merits of a judgment from another EU member-state. Consequently, while a judgment debtor may have objected to the registration of a judgment under the EU instruments (or, in the case of the Recast Brussels regulation, which does not require such registration, appeal the recognition or enforcement of the foreign judgment), he or she could have done so only on strictly limited grounds.

          In the case of the Recast Brussels regulation, there are set out in above-mentioned article 45 and include:

          • if recognition of the judgment would be manifestly contrary to public policy;

          • if the judgment debtor was not served with proceedings in time to enable the preparation of a proper defence, or

          • if conflicting judgments exist in the UK or other EU member-states.

          Equivalent defences are set out in articles 34 to 35 of the Original Brussels regulation and the 2007 Lugano convention, respectively. The court may not have refused a declaration of enforceability on any other grounds.

          Another ground for challenging the recognition and enforcement of EU judgments is the breach of article 6 of the European Convention on Human Rights (‟ECHR”), which is the right to a fair trial. However, since a fundamental objective underlying the EU regime is to facilitate the free movement of judgments by providing a simple and rapid procedure, and since it was established in Maronier v Larmer [2003] QB 620 that this objective would be frustrated if EU courts of an enforcing EU member-state could be required to carry out a detailed review of whether the procedures that resulted in the judgment had complied with article 6 of the ECHR, there is a strong presumption that the EU court procedures of other signatories of the ECHR are compliant with article 6. Nonetheless, the presumption can be rebutted, in which case it would be contrary to public policy to enforce the judgment.

          To conclude, pre-Brexit, the EU regime (and, predominantly, the Recast Brussels regulation) was an integral part of the system of recognition and enforcement of judgments in the UK. However, after the Transition date, the UK left the EU regime as found in the Recast Brussels regulation, the Original Brussels regulation and the Brussels convention, since these instruments are only available to EU member-states.

          So what happens now?

          2. How things work after Brexit, with respect to the enforcement of civil and commercial judgments between the EU and the UK

          In an attempt to prepare the inevitable, the EU commission published on 27 August 2020 a revised notice setting out its views on how various conflicts of laws issues will be determined post-Brexit, including jurisdiction and the enforcement of judgments (the ‟EU notice”), while the UK ministry of justice published on 30 September 2020 Cross-border civil and commercial legal cases: guidance for legal professionals from 1 January 2021” (the ‟MoJ guidance”).

          a. The UK accessing the 2007 Lugano convention

          As mentioned above, the UK applied to join the 2007 Lugano convention on 8 April 2020, as this is the UK’s preferred regime for governing questions of jurisdiction and enforcement of judgments with the 27 remaining EU member-states, after the Transition date.

          However, accessing the 2007 Lugano convention is a four-step process and the UK has not executed those four stages in full yet.

          While step one was accomplished on 8 April 2020 when the UK applied to join, step two requires the EU (along with the other contracting parties, ie the EFTA member-states Iceland, Switzerland, Norway and Denmark) to approve the UK’s application to join, followed in step three by the UK depositing the instrument of accession. Step four is a three-month period, during which the EU (or any other contracting state) may object, in which case the 2007 Lugano convention will not enter into force between the UK and that party. Only after that three-month period has expired, does the 2007 Lugano convention enter into force in the UK.

          Therefore, in order for the 2007 Lugano convention to have entered into force by the Transition date, the UK had to have received the EU’s approval and deposited its instrument of accession by 1 October 2020. Neither have occurred.

          Since the EU’s negotiating position, throughout Brexit, has always been ‟nothing is agreed until everything is agreed”, and in light of the recent collision course between the EU and the UK relating to trade in Northern Ireland, it is unlikely that the UK’s request to join the 2007 Lugano convention will be approved by the EU any time soon.

          b. The UK accessing the Hague convention

          Without the 2007 Lugano convention, the default position after the Transition date is that jurisdiction and enforcement of judgments for new cases issued in the UK will be determined by the domestic law of each UK jurisdiction (i.e. the common law of England and Wales, the common law of Scotland and the common law of Northern Ireland), supplemented by the Hague convention dated 30 June 2005 on choice of court agreements (‟The Hague convention”).

          I. At common law rules

          The common law relating to recognition and enforcement of judgments applies where the jurisdiction from which the judgment relates does not have an applicable treaty in place with the UK, or in the absence of any applicable UK statute. Prominent examples include judgments of the courts of the United States, China, Russia and Brazil. And now of the EU and its 27 remaining EU member-states.

          At common law, a foreign judgment is not directly enforceable in the UK, but instead will be treated as if it creates a contract debt between the parties. The foreign judgment must be final and conclusive, as well as for a specific monetary sum, and on the merits of the action. The creditor will then need to bring an action in the relevant UK jurisdiction for a simple debt, to obtain judicial recognition in accordance with Part 7 CPR, and an English judgment.

          Once the judgment creditor has obtained an English judgment in respect of the foreign judgment, that English judgment will be enforceable in the same way as any other judgment of a court in England.

          However, courts in the UK will not give judgment on such a debt, where the original court lacked jurisdiction according to the relevant UK conflict of law rules, if it was obtained by fraud, or is contrary to public policy or the requirements of natural justice.

          With such blurry and vague contours to the UK common law rules, no wonder that many lawyers and legal academics, on both sides of the Channel, decry the ‟mess” and ‟legal void” left by Brexit, as far as the enforcement and recognition of civil and commercial judgments in the UK are concerned.

          II. The Hague convention

          As mentioned above, from the Transition date onwards, the jurisdiction and enforcement of judgments for new cases issued in England and Wales will be determined by its common law, supplemented by the Hague convention.

          The Hague convention gives effect to exclusive choice of court clauses, and provides for judgments given by courts that are designated by such clauses to be recognised and enforced in other contracting states. The contracting states include the EU, Singapore, Mexico and Montenegro. The USA, China and Ukraine have signed the Hague convention but not ratified or acceded to it, and it therefore does not currently apply in those countries.

          Prior to the Transition date, the UK was a contracting party to the Hague convention because it continued to benefit from the EU’s status as a contracting party. The EU acceded on 1 October 2015. By re-depositing the instrument of accession on 28 September 2020, the UK acceded in its own right to the Hague convention on 1 January 2021, thereby ensuring that the Hague convention would continue to apply seamlessly from 1 January 2021.

          As far as types of enforceable orders are concerned, under the Hague convention, the convention applies to final decisions on the merits, but not interim, provisional or protective relief (article 7). Under article 8(3) of the Hague convention, if a foreign judgment is enforceable in the country of origin, it may be enforced in England. However, article 8(3) of the Hague convention allows an English court to postpone or refuse recognition if the foreign judgment is subject to appeal in the country of origin.

          However, there are two major contentious issues with regard to the material and temporal scope of the Hague convention, and the EU’s and UK’s positions differ on those issues. They are likely to provoke litigation in the near future.

          The first area of contention relates to the material scope of the Hague convention: more specifically, what is an ‟exclusive choice of court agreement”?

          Article 1 of the Hague convention provides that the convention only applies to exclusive choice of courts agreements, so the issue of whether a choice of court agreement is ‟exclusive” or not is critical as to whether such convention applies.

          Exclusive choice of court agreements are defined in article 3(a) of the Hague convention as those that designate ‟for the purpose of deciding disputes which have arisen or may arise in connection with a particular legal relationship, the courts of one Contracting state or one or more specific courts of one Contracting state, to the exclusion of the jurisdiction of any other courts”.

          Non-exclusive choice of court agreements are defined in article 22(1) of the The Hague convention as choice of court agreements which designate ‟a court or courts of one or more Contracting states”.

          Although this is a fairly clear distinction for ‟simple” choice of court agreements, ‟asymmetric” or ‟unilateral” agreements are not so easily categorised. These types of jurisdiction agreements are a common feature of English law-governed finance documents, such as the Loan Market Association standard forms. They generally give one contracting party (the lender) the choice of a range of courts in which to sue, while limiting the other party (the borrower) to the courts of a single state (usually, the lender’s home state).

          There are divergent views as to whether asymmetric choice of court agreements are exclusive or non-exclusive for the purposes of the Hague convention. While two English high court judges have expressed the view that choice of court agreements should be regarded as exclusive, within the scope of the Hague convention, the explanatory report accompanying the Hague convention, case law in EU member-states and academic commentary all suggest the opposite.

          This issue will probably be resolved in court, if and when the time comes to decide whether asymmetric or unilateral agreements are deemed to be exclusive choice of court agreements, susceptible to fall within the remit of the Hague convention.

          The second area of contention relates to the temporal scope of the Hague convention: more specifically, when did the Hague convention ‟enter into force” in the UK?

          Pursuant to article 16 of the Hague convention, such convention only applies to exclusive choice of court agreements concluded ‟after its entry into force, for the State of the chosen court”.

          There is a difference of opinion as to the application of the Hague convention to exclusive jurisdiction clauses in favour of UK courts entered into between 1 October 2015 and 1 January 2021, when the UK was a party to the Hague convention by virtue of its EU membership.

          Indeed, while the EU notice states that the Hague convention will only apply between the EU and UK to exclusive choice of court agreements ‟concluded after the convention enters into force in the UK as a party in its own right to the convention” – i.e. from the Transition date; the MoJ guidance sets out that the Hague convention ‟will continue to apply to the UK (without interruption) from its original entry into force date of 1 October 2015”, which is when the EU became a signatory to the convention, at which time the convention also entered into force in the UK by virtue of the UK being a EU member-state.


          To conclude, the new regime of enforcement and recognition of EU judgments in the UK, and vice versa, is uncertain and fraught with possible litigation with respect to the scope of application of the Hague convention, at best.

          Therefore, and since these legal issues relating to how to enforce civil and commercial judgments after Brexit are here to stay for the medium term, it is high time for the creative industries to ensure that any dispute arising out of their new contractual agreements are resolved through arbitration.

          Indeed, as explained in our article ‟Alternative dispute resolution in the creative industries, arbitral awards are recognised and enforced by the Convention on the recognition and enforcement of foreign arbitral awards 1958 (the ‟New York convention”). Such convention is unaffected by Brexit and London, the UK capital, is one of the most popular and trusted arbitral seats in the world.

          Until the dust settles, with respect to the recognition and enforcement of EU judgments in the UK, and vice versa, it is wise to resolve any civil or commercial dispute by way of arbitration, to obtain swift, time-effective and cost-effective resolution of matters, while preserving the cross-border relationships, established with your trade partners, between the UK and the European continent.



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            Fashion law in France: a 2020 overview

            Crefovi : 15/04/2020 8:00 am : Antitrust & competition, Articles, Banking & finance, Capital markets, Consumer goods & retail, Copyright litigation, Emerging companies, Employment, compensation & benefits, Fashion law, Fashion lawyers, Hostile takeovers, Information technology - hardware, software & services, Intellectual property & IP litigation, Law of luxury goods, Litigation & dispute resolution, Mergers & acquisitions, Private equity & private equity finance, Product liability, Real estate, Tax, Trademark litigation, Unsolicited bids

            Since its inception in 2003, the law of luxury goods and fashion law have evolved, matured, and become institutionalised as a standalone area of specialisation in the legal profession. Here is Crefovi’s 2020 status update for fashion law in France, detailing each legal practice area relevant to such creative industry.

            1. Market spotlight & state of the market

            1 | What is the current state of the luxury fashion market in your jurisdiction?

            France is the number one player worldwide in the luxury fashion sector, as it is home to three major luxury goods conglomerates, namely:

            • LVMH Moet Hennessy-Louis Vuitton SE (full year (‟FY”) 2017 luxury goods sales US$27.995 billion and the number one luxury goods company by sales FY2017, with a selection of luxury brands, such as: Louis Vuitton, Christian Dior, Fendi, Bulgari, Loro Piana, Emilio Pucci, Acqua di Parma, Loewe, Marc Jacobs, TAG Heuer, Benefit Cosmetics);

            • Kering SA (FY2017 luxury goods sales US$12.168 billion and the number four luxury goods company by sales FY2017, with a selection of luxury brands, such as: Gucci, Bottega Veneta, Saint Laurent, Balenciaga, Brioni, Pomellato, Girard-Perregaux, Ulysse Nardin), and

            • L’Oreal Luxe (FY2017 luxury goods sales estimate US$9.549 billion and the number seven luxury goods company by sales FY2017, with a selection of luxury brands, such as: Lancome, Kiehl’s, Urban Decay, Biotherm, IT cosmetics).

            2. Manufacture and distribution

            2.1. Manufacture and supply chain

            2 | What legal framework governs the development, manufacture and supply chain for fashion goods? What are the usual contractual arrangements for these relationships?

            The French law on duty of vigilance of parent and outsourcing companies, dated 27 March 2017 (article L 225-102-4 inserted in the French commercial code), is the French response to the UK Modern Slavery Act and the California Transparency in Supply Chains Act.

            This is a due diligence measure that requires large French companies to create and implement a ‟vigilance plan” aimed at identifying and preventing potential human rights violations – including those associated with subsidiaries and supply chain members.

            The law applies to any company headquartered in France that has (i) 5,000 or more employees, including employees of any French subsidiaries; or (ii) 10,000 or more employees, including French and foreign subsidiaries.

            The law requires that the vigilance plan address activities by the company’s subcontractors and suppliers (‟supply chain entities”), where the company maintains an ongoing business relationship with these supply chain entities, and such activities involve its business relationship. The vigilance plan, as well as the minutes related to its implementation, must be made available to the public.

            As of February 2019, the enforceability of this new French law was mitigated, at best. Certain corporations had still not published a vigilance plan regardless of their legal obligation to do so (eg, Lactalis, Credit Agricole, Zara or H&M). Those that had published vigilance plans merely included them in their chapter on social and environmental responsibility within their company’s annual report. Such vigilance plans were vague and had gaps, the actions and measures were not detailed enough and only very partially addressed the risks mentioned in the risk mapping. There is, therefore, room for improvement.

            The usual contractual arrangements for the relationships relating to the development, manufacture and supply chain for fashion goods in France are standard French law-governed manufacturing agreements or supplier agreements.

            Such contractual arrangements are subject to the French civil code on contract law, and the general regime and proof of obligations, which was reformed in October 2016, thanks to Order No. 2016-131 of 10 February 2016. The order codified principles that had emerged from the case law of French courts, but also created a number of new rules applicable to pre-contractual, and contractual, relationships, such as:

            • new article 1104 of the French civil code, which provides that contracts must be negotiated, concluded and performed in good faith, and failure to comply with such obligation can not only trigger the payment of damages, but also result in the nullification of the contract;

            • new article 1112-1 provides that if a party to the contractual obligations is aware of information, the significance of which would be determinative for the consent of the other party, it must inform such other party thereof if such other party is legitimately unaware of such information, or relies on the first party;

            • new article 1119 provides that general conditions invoked by a party have no effect against the other party, unless they have been made known to such other party and accepted by it. In the event of a ‘battle of the forms’, between two series of general conditions (eg, general sales conditions and general purchase conditions), those conditions that conflict are without effect;

            • new article 1124, which provides that a contract concluded in violation of a unilateral promise, with a third party that knew of the existence thereof, is null and void, and

            • new article 1143 provides that violence exists when a party abusing the state of dependency in which its co-contracting party finds itself, obtains from such co-contracting party an undertaking which such co-contracting party would not have otherwise agreed to in the absence of such constraint, and benefits thereby from a manifestly excessive advantage.

            2.2. Distribution and agency agreements

            3 | What legal framework governs distribution and agency agreements for fashion goods?

            In addition to the reform of the French civil code on contract law and the general regime and proof of obligations explained in question 2 above, distribution and agency agreements for fashion goods need to comply with the following legal framework:

            • European regulation (‟EU”) No. 330/2010 dated 20 April 2010 on the application of article 101(3) of the Treaty on the Functioning of the European Union (‟TFEU”), which places limits on restrictions that a supplier could place on a distributor or agent (the ‟Regulation”);

            • article L134-1 of the French commercial code, which sets out what the agency relationship consists of;

            • article L134-12 of of the French commercial code, which sets out that a commercial agent is entitled to a termination payment at the end of the agency agreement;

            • books III and IV, and article L442-6 of the French commercial code, which set out that a relationship between two commercial partners needs to be governed by fairness and which prohibit any strong imbalance between the parties, and

            • the law No. 78-17 dated 6 January 1978 relating to IT, databases and freedom (the ‟French Data Protection Act”) and its implementation decree No. 2005-1309.

            French luxury houses often use selective distribution to sell their products. It is, indeed, the most-used distribution technique for perfumes, cosmetics, leather accessories or even ready-to-wear.

            The Regulation provides for an exemption system to the general prohibition of vertical agreements set out in article 101(1) of the TFEU. The lawfulness of selective distribution agreements is always assessed via the fundamental rules applying to competition law, in particular article 101 of the TFEU.

            Selective distribution systems may qualify for block exemption treatment under the vertical agreements block exemption set out in article 101(3) of the TFEU.

            4 | What are the most commonly used distribution and agency structures for fashion goods, and what contractual terms and provisions usually apply?

            Under French law, it is essential to avoid any confusion between a distribution agreement and an agency agreement.

            French law sets out that a distributor is an independent natural person or legal entity, who buys goods and products from the manufacturer or supplier and resells them to third parties, upon the agreed trading conditions, and at a profit margin set by such distributor.

            A distributor may be appointed for a particular territory, either on an exclusive, or non-exclusive, basis.

            Under French law, there is no statutory compensation for the loss of clientele and business due to the distributor upon expiry or termination of a distribution agreement. However, French case law has recently recognised that some compensation may be due when some major investments had been made by the distributor, on behalf of the manufacturer or supplier, in the designated territory.

            Moreover, there is no statutory notice period to terminate a distribution agreement under French law. However, most distribution agreements set out a three-to-six-month termination notice period. French law sets out a detailed legal framework relating to the role of commercial agent, which is of a ‘public policy’ nature (ie, one cannot opt out from such statutory legal provisions). In particular, commercial agents must be registered as such, on a special list held by the registrar of the competent French commercial court.

            Under French law, not only is it very difficult to terminate a commercial agent (except for proven serious misconduct), but also there is a statutory considerable compensation for the loss of clientele and business that is due to the terminated agent by the manufacturer or supplier.

            Selective distribution is the most commonly used distribution structure for luxury goods in France, as explained in question 3.

            Such selective distribution systems of luxury products can escape the qualification of anticompetitive agreements, pursuant to article 101(3) of the TFEU (individual and block exemption). However, in 2011, the European Court of Justice (‟ECJ”) held that the selective distribution agreement that has as its object the restriction of passive sales to online end-users outside of the dealer’s area excluded the application of the block exemption in its decision in Pierre Fabre Dermo-Cosmétique SAS v Président de l’Autorité de la concurrence and Ministre de l’Économie, de l’Industrie et de l’Emploi. The ECJ ruled that it was down to the French courts to determine whether an individual exemption may benefit such selective distribution agreement imposed by French company Pierre Fabre Dermo-Cosmétique SAS to its distributors. To conclude, it is clear that the ECJ set out that the prohibition of internet sales, in a distribution agreement, constitutes an anticompetitive restriction.

            2.3. Import and export

            5 | Do any special import and export rules and restrictions apply to fashion goods?

            A French company, upon incorporation, will be provided with the following numbers by the French authorities:

            • an intra-community VAT number, provided to all companies incorporated in a EU member state;

            • a SIRET number, which is a unique French business identification number, and

            • an EORI number, which is assigned to importers and exporters by the French tax authorities, and is used in the process of customs entry declaration and customs clearance for both import and export shipments, travelling to and from the EU and countries outside the EU.

            Fashion and luxury products manufactured outside of the EU, and brought into the EU, will be deemed to be imports, by French customs authorities.

            In case such fashion and luxury products are transferred from France, or another member state of the EU, to a third party country in the rest of the world (outside of the EU), then these products will be deemed to be exports by French customs authorities.

            For imports of fashion and luxury products, (ie, when they enter the EU), the French importer will have to pay some customs duties or other taxes when it imports these products from a third-party country to France or another member state of the EU.

            Such customs duties are the same in each of the 27 member states of the EU because they are set by EU institutions. The importer can compute such customs duties by accessing the RITA encyclopedia, which sets out the integrated referential to an automated tarif, for each luxury and fashion product.

            Through rather complex manipulations on the RITA encyclopedia, the importer can find out the relevant customs duties, additional taxes and any other fees (such as anti-dumping rights) payable for each type of fashion product and other imported merchandise.

            For example, if you are importing a man’s shirt in France or any other EU member state from China, there will be a 12 percent customs duty to pay (the ‟Customs duty”).

            Such Customs duty will be payable on the price paid to the Chinese manufacturer for the man’s shirt in China plus all transportation costs from China to France (or another EU member state).

            Therefore, if the man’s shirt has a manufacturing price (set out on the invoice of the Chinese manufacturer) of €100, and if there are €50 of transportation costs, the customs value basis will be €150 and the customs duty amount will be €18 (€150 multiplied by 12 per cent).

            The computation of Customs duties, additional taxes and other charges being such a complicated and specialised area, and the filling out of customs declarations being done only on the Delta software that is accessible only to legal entities that have received an authorisation to use such software, most EU companies that sell fashion and luxury goods use the services of registered customs representatives, also called customs brokers or customs agents.

            For exports of fashion and luxury products (ie, when they leave the EU to go to a third party in the rest of the world), a French company will not have to pay any Customs duties or other taxes. However, it is also important to check whether such third-party country will charge the French exporter some Customs duties, additional taxes and other charges, upon the luxury and fashion products entering its territory.

            In addition, it is important for the importers to double check whether the EU, and consequently France, may be giving preferential treatment to fashion and luxury products imported from certain developing countries, which names are set out on the list entitled ‟Système Généralisé de Préférence” (‟SPG”). SPG is a programme of trade preferences for goods coming from developing countries, such as Bangladesh, Vietnam, etc. It may be financially more advantageous to manufacture luxury and fashion products in the countries that are included on the SPG list, to ensure that lower tariffs and Customs duties will apply when importing these products to the EU.

            Finally, and especially if the goods are in the luxury bracket, it may be possible to put a ‟Made in France” label on them, provided that such products were assembled in France.

            2.4. Corporate social responsibility and sustainability

            6 | What are the requirements and disclosure obligations in relation to corporate social responsibility and sustainability for fashion and luxury brands in your jurisdiction? What due diligence in this regard is advised or required?

            As explained in question 2 above, the French law on duty of vigilance for parent and outsourcing companies, dated 27 March 2017 (article L 225-102-4 inserted in the French commercial code) is the legal framework that applies to disclosure obligations in relation to corporate social responsibility and sustainability for fashion and luxury brands in France.

            The vigilance plan made compulsory by such French law must set out a detailed risk mapping stating the risks for third parties (ie, employees, the general population) and the environment. French companies subject to this law must then publish their risk mapping, explicitly and clearly stating the serious risks and severe impacts on health and safety of individuals and on the environment. In particular, the vigilance plan should provide detailed lists of risks for each type of activity, product and service.

            It is these substantial risks (ie, negative impacts on third parties and the environment deriving from general activities) on which vigilance must be exercised and which the plan must cover. Moreover, the vigilance plan must include the evaluated severity criteria regarding the level, size and reversible or irreversible nature of the impacts, or the probability of the risk. This prioritisation should allow the French company to structure how it implements its measures to resolve the impacts or risks of impact.

            The vigilance plan, as well as the minutes related to its implementation, must be made available to the public.

            The French law on duty of vigilance of parent and outsourcing companies sets out some stringent enforcement mechanisms. Any person with a demonstrable interest may demand that a company comply with the due diligence requirements (i.e. creating and implementing a vigilance plan) and, if the French company fails to comply, a court may fine the offending company up to €10 million, depending on the severity of the breach and other circumstances. Additionally, if the activities of a French company – or the activities of its supply chain entities – cause harm that could have been avoided by implementing its vigilance plan, the size of the fine can be trebled (up to €30 million), depending on the severity and circumstances of the breach and the damage caused, and the company can be ordered to pay damages to the victims.

            7 | What occupational health and safety laws should fashion companies be aware of across their supply chains?

            As set out above in our answers to the questions set out in sub-paragraphs 2.2. and 2.4. above, the French law on duty of vigilance of parent and outsourcing companies, dated 27 March 2017 (article L 225-102-4 inserted in the French commercial code) is the legal framework that applies to disclosure obligations in relation to occupational health and safety across their supply chains, for fashion and luxury brands in France.

            In addition, the main legislation on occupational health and safety in France is set out in Part IV of the French labour code, entitled ‟Health and Safety at Work”. Health and safety at work legislation is supplemented by other parts of this labour code (ie, work time legislation, daily rest period, respect of fundamental freedoms, bullying, sexual harassment, discrimination, execution in good faith of the employment agreement, work council competencies, employee delegates’ abilities).

            Collective bargaining is also a source of health and safety legislation (via inter-branch agreements, branch agreements, company-level agreements) in France. These collective agreements regulate employer versus employee relationships, in particular as far as occupation health and safety are concerned.

            3. Online retail

            3.1. Launch

            8 | What legal framework governs the launch of an online fashion marketplace or store?

            The Hamon law dated 17 March 2014 (‟Hamon law”) transposes the provisions of the Directive 2011/83/EU on consumer rights, which aims at achieving a real business-to-consumer internal market, striking the right balance between a high level of consumer protection and the competitiveness of businesses. This law strengthened pre-contractual information requirements, in relation to:

            • the general duty to give information that applies to any sales of goods or services agreement entered into on a business-to- consumer basis (for on-premises sales, distance sales and off-premises sales), and

            • information specific to distance contracts about the existence of a withdrawal right.

            Thanks to this law, the withdrawal period has been extended from 7 to 14 days. It introduced the use of a standard form that can be used by consumers to exercise their withdrawal rights. Such form must be made available to consumers online or sent to them before the contract is entered into. If a consumer exercises this right, the business must refund the consumer for all amounts paid, including delivery costs, within a period of 14 calendar days.

            Also, the General Data Protection Regulation (‟GDPR”) and the French Data Protection Act with its implementation decree No. 2005- 1309, govern the launch of any online fashion marketplace or store in France. This is because e-commerce stores must have a data privacy policy, as well as a cookies policy, as well as some general terms and conditions of use of their e-commerce website, as well as some general terms and conditions of sale on their e-commerce website in place, which all comply with the GDPR and the French Data Protection Act. These online marketplaces must also appoint a data protection officer, to ensure that they comply with such data protection legal framework and so that the Commission Nationale Informatique et Libertes (‟CNIL”, the French data protection authority) has a point of contact within the French online fashion marketplace or store.

            With respect to the cookies policy, e-commerce stores must comply with the cookies and other tracking devices guidelines published by the CNIL in July 2019.

            3.2. Sourcing and distribution

            9 | How does e-commerce implicate retailers’ sourcing and distribution arrangements (or other contractual arrangements) in your jurisdiction?

            As explained in our answer to question 4, luxury and fashion brands (manufacturers, suppliers) cannot ban their distributors from selling their products online, through e-commerce, since this would be a competition law breach under article 101 of the TFEU, entitled an anticompetitive restriction.

            However, luxury and fashion brands may impose some criteria and conditions for their distributors to be able to sell their products online, in order to preserve the luxury aura and prestige of their products sold online, via the terms of their distribution agreements.

            3.3. Terms and conditions

            10 | What special considerations would you take into account when drafting online terms and conditions for customers when launching an e-commerce website in your jurisdiction?

            As explained in our answer to question 8, these terms and conditions for customers of an e-commerce website must comply with the GDPR, the French Data Protection Act and the cookies and other tracking devices guidelines from the CNIL.

            Therefore, those terms must comply with the following principles:

            • privacy by design, which means that fashion and luxury businesses must take a proactive and preventive approach in relation to the protection of privacy and personal data;

            • accountability, which means that data controllers, such as an e-commerce website, as well as its data processors, must take appropriate legal, organisational and technical measures allowing them to comply with the GDPR. They must be able to demonstrate the execution of such measures to the CNIL;

            • privacy impact assessment, which means that an e-commerce business must execute an analysis relating to the protection of personal data, on its data assets, to track and map risks inherent to each data process and treatment put in place, according to their plausibility and seriousness;

            • a data protection officer must be appointed, to ensure the compliance of treatment of personal data by fashion businesses whose data treatments present a strong risk of breach of privacy;

            • profiling, which is an automated processing of personal data allowing the construction of complex information about a particular person, such as his or her preferences, productivity at work and whereabouts. This type of data processing may constitute a risk to civil liberties; therefore, online businesses doing profiling must limit their risks and guarantee the rights of individuals subjected to such profiling, in particular by allowing them to request human intervention or contest the automated decision, and

            • right to be forgotten, which allows an individual to avoid that information about his or her past that interferes with their current, actual life. In the digital world, that right encompasses the right to erasure, as well as the right to dereferencing.

            3.4. Tax

            11 | Are online sales taxed differently than sales in retail stores in your jurisdiction?

            No, online sales are not taxed differently than sales executed in brick-and- mortar stores. They are all subjected to a 20 percent VAT rate, which is the standard VAT rate in France, and which is applicable on all fashion and luxury products.

            4. Intellectual property

            4.1. Design protection

            12 | Which IP rights are applicable to fashion designs? What rules and procedures apply to obtaining protection?

            French fashion designs are usually protected via the registration of a design right in France, with the Institut National de la Propriété Industrielle (‟INPI”). Articles L 512-1 et seq and R 511-1 et seq of the French intellectual property code govern the design application and registration process.

            Of course, this French design protection applies in addition to any registered or unregistered community design right that may exist.

            To qualify for protection through the French design right, the design must be novel and have individual character. Functional forms, as well as designs in breach of public policy or morality, are excluded from protection.

            French fashion designs are protected by copyright, as long as they meet the originality criteria. Indeed, article L 112-2 14 of the French intellectual property code provides that ‟the creations of the seasonal industries of garments and dresses” fall within the remit of copyright, as ‟works of the mind”.

            Copyright being an unregistrable intellectual property right in France, the existence of copyright on fashion products is often proven via the filing of an ‟enveloppe SOLEAU” with INPI, or by keeping all prototypes, drawings and research documents on file, to be able to prove the date on which such copyright arose.

            Indeed, under the traditional principle of unity of art, a creation can be protected by copyright and design law. Recent case law distinguishes between these IP rights, by stating that the originality required for copyright protection differs from the individual character required for design protection, and that both rights do not necessarily overlap.

            In the same way, the scope of copyright protection is determined by the reproduction of the creation’s main features; while in design law the same overall visual impression on the informed user is required.

            As far as the ownership of commissioned works is concerned, the default regime in France is that both an independent creator (i.e. a fashion freelancer, contractor, creative director) and an employee of any French fashion house is automatically deemed to be the lawful owner of all intellectual property rights on a fashion and luxury item that he or she has created during the course of his or her service or employment. Therefore, it is essential in all French law-governed service providers agreements entered into with third-party consultants, and in all French law-governed employment agreements entered into with employees, to set out that an automatic and irrevocable assignment of all intellectual property rights in any fashion creation will always occur, upon creation.

            13 | What difficulties arise in obtaining IP protection for fashion goods?

            France enjoys the most extensive and longstanding intellectual property rights in connection with fashion designs. As explained in our answer to question 12, copyright protection is extended to any original work of the mind.

            Even spare parts are protectable under French design law, which means that a design protecting only a spare part (eg, a bag clip) is valid without taking into consideration the product as a whole (ie, the bag).

            Therefore, IP protection for fashion goods is very achievable in France, and it is important for applicants to systematically register their designs (not rely simply on copyright law) to be on the safe side.

            4.2. Brand protection

            14 | How are luxury and fashion brands legally protected in your jurisdiction?

            Luxury and fashion brands are usually protected by a French trade mark registration filed with INPI.

            French trade marks are governed mainly by law 1991-7, which implements the EU first council directive related to trade marks (89/104/EEC) and is codified in the French intellectual property code. This code was amended several times, in particular by Law 2007-1544, which implements the EU IP rights enforcement directive (2004/48/EC).

            Ownership of a trade mark is acquired through registration, except for well-known trademarks within the meaning of article 6 bis of the Paris convention for the protection of industrial property dated 20 March 1883. Such unregistered well-known trademarks may be protected under French law if an unauthorised use of the trade mark by a third party is likely to cause damage to the trade mark owner or such use constitutes an unjustified exploitation of the trade mark.

            To be registered as a trademark, a sign must be:

            • represented in a way that allows any person to determine precisely and clearly the subject-matter of the trade mark protection granted to its owner;

            • distinctive;

            • not deceptive;

            • lawful, and

            • available.

            French trademarks, registered with INPI, may coincide with EU trademarks (filed with the European Union Intellectual Property Office (‟EUIPO”)) and international trademarks (filed with the Word Intellectual Property Office (‟WIPO”), through the Madrid protocol).

            Under French law, unauthorised use of a trade mark on the internet also constitutes trade mark infringement. The rights holder may sue those that unlawfully use its trade mark on the ground of trade mark infringement or unfair competition.

            Moreover, luxury and fashion brands are also protected by domain names, which may be purchased from domain name registrars for a limited period of time on a regular basis.

            French domain names finishing in .fr can only be purchased for one year, once a year, pursuant to the regulations of the French registry for .fr top level domains, Afnic.

            It is the responsibility of the person purchasing, or using, the domain name in .fr to ensure that he or she does not breach any third party rights by doing so.

            A dispute resolution procedure called Syreli is available for disputes relating to .fr domains, along with judiciary actions. This procedure is managed by Afnic and decisions are issued within two months from receipt of the complaint.

            With online ransom, a proliferation of websites being used for counterfeit sales, fraud, phishing and other forms of online trade mark abuse, most French luxury and fashion companies take the management and enforcement of domain name portfolios very seriously.

            With the advent of new generic top-level domains (generic top-level domains or ‟gTLDs”), it is now an essential strategy for all French luxury and fashion houses to buy and hold onto all available gTLDs relating to fashion and luxury (eg, .luxury, .fashion, .luxe).

            4.3. Licensing

            15 | What rules, restrictions and best practices apply to IP licensing in the fashion industry?

            French IP rights may be assigned, licensed or pledged. The French intellectual property code refers to licences over trade marks, patents, designs and models, as well as databases. With respect to copyright, this code only refers to the assignment of the patrimonial rights of the author (ie, representation right and reproduction right) in its article L122-7. In practice, copyright licences often occur, especially over software.

            When it involves French design rights, the corresponding deed, contract or judgment must be recorded in the French Design register, to be enforceable against third parties. The documents must be in French (or a translation must be provided). Tax will be incurred only up to the 10th design, in a recordal request filed with INPI. For community designs, recordal must be made with EUIPO. For the French designation of an international design, recordal must be requested through WIPO for all or part of the designation.

            When it involves French trade marks, the corresponding deed, contract or judgment should be recorded in the INPI French trade mark register, especially for evidentiary and opposability purposes, for the licensee to be able to act in infringement litigation and for such deed, contract or judgment to be enforceable against third parties. Again, the copy or abstract of the deed, or agreement, setting out the change in ownership or use of the trade marks should be in French (or a French translation be provided).

            Of course, copyright of fashion products does not have to be recorded in any French register, as there is no registration requirement for French copyright. However, best practice is for the parties to the deed, agreement or judgment to keep, on record, for the duration of the copyright (70 years after the death of the creator of the copyright) such documents, so that the copyright assignment, pledge or licence may be enforceable against third parties.

            Fashion brands such as Tommy Hilfiger, Benetton and Ermenegildo Zegna use franchising to access new markets, increase their online presence and develop flagship stores. Franchise agreements generally include a trade mark, trade name or service mark licence, as well as the transfer of knowhow by the franchisor, to the franchisee. On this note, knowhow licences exist in France, although knowhow does not constitute a proprietary right benefiting from specific protection under the French intellectual property code.

            A licensor must make some pre-contractual disclosure to prospective licensees, pursuant to article L330-3 of the French commercial code, when he or she makes available to another person a trade name or a trademark, and requires from such other person an exclusivity undertaking with respect to such activity. The precontractual information must be disclosed in a document provided at least 20 days prior to the signature of the licence agreement. Such document must contain truthful information allowing the licensee to commit to the contractual relationship in full knowledge of the facts.

            A licensing relationship governed by French law must comply with the general contract law principles, including the negotiation, conclusion and performance of contracts in good faith (article 1104 of the French civil code). This statutory legal provision implies an obligation on each party of loyalty, cooperation and consistency. In case of breach of this good faith principle, the licence may be terminated and damages potentially awarded.

            4.4. Enforcement

            16 | What options do rights holders have when enforcing their IP rights? Are there options for protecting IP rights through enforcement at the borders of your jurisdiction?

            Lawsuits involving the infringement or validity of a French design, or the French designation of an international design, may be lodged with one of the 10 competent courts of first instance (Bordeaux, Lille, Lyon, Marseille, Nanterre, Nancy, Paris, Rennes, Strasbourg and Fort-de-France).

            Lawsuits involving the infringement, in France, of a registered or unregistered community design may be lodged only with the Paris court of first instance. An invalidity action against a community design may only be brought before EUIPO. However, invalidity may be claimed as a defence in an infringement action brought before the Paris tribunal.

            The scope of protection for the design is determined exclusively by the various filed views, on the design registration, irrespective of actual use. Therefore, applicants should pay great care to those views, when filing a design application, so as to anticipate the interpretation made by the judiciary tribunal.

            Infringement is identified when a third-party design produces, on the informed observer, the same overall visual impression as the claimant’s design.

            The infringement lawsuit may be lodged by the design owner, or the duly recorded exclusive licensee.

            The claimant will be indemnified for lost profits, with the court taking into account: (i) the scope of the infringement; (ii) the proportion of actual business lost by the claimant; and (iii) the claimant’s profit margin for the retail of each unit.

            Damages may also be awarded for the dilution or depreciation of a design.

            As far as trademarks are concerned, lawsuits may be lodged before the 10 above-mentioned competent courts at first instance if they are French trademarks or the French designation of an international trademark. Lawsuits relating to the infringement of EU trade marks may only be lodged with the Paris judiciary tribunal.

            Such infringement proceedings may be lodged by either the trademark owner or the exclusive licensee, provided that the licence was recorded in the trademark register.

            To determine trademark infringement, the judiciary tribunal will assess: (i) the similarity of the conflicting trademarks, on the basis of visual, phonetic and intellectual criteria; and (ii) the similarity of the goods or services, bearing such trademarks, concerned. Such trademark infringement may be evidenced by any means.

            To secure evidence of the infringement, and to obtain any information related to it, rights holders may ask, and obtain, from the competent judiciary tribunal, an order to carry out a seizure on the premises where the products that infringe the copyright, trademarks, designs, etc. are located. Such order authorises a bailiff to size the suspected infringing products, or to visit the alleged infringer’s premises to collect evidence of the infringement by taking pictures of the suspected infringing products, or by taking samples. The IP rights holder must lodge a lawsuit against the alleged infringer with the competent judiciary tribunal within 20 working days, or 31 calendar days, whichever is the longer, from the date of the seizure. Otherwise, the seizure may be declared null and void on the request of the alleged infringer, who may also ask for some damages.

            In addition, IP rights holders may also request an ex parte injunction, to prevent an imminent infringement, which is about to happen, or any further infringement, to the competent judiciary tribunal.

            Infringement action, for all IP rights, must be brought within three years of the infringement. There is one exception, for copyright, which statute of limitations is five years from the date on which the copyright owner was made aware, or should have been aware, of such copyright infringement.

            There is also an option to protect design rights, copyright, trade marks, patents, etc at French borders, which we often recommend to our fashion and luxury clients. They need to file their IP rights with the Directorate-General of Customs and Indirect Taxes, via a French and EU intervention request, and obtain some certifications from those French customs authorities, that such IP rights are now officially registered on the French and EU customs databases. Therefore, all counterfeit products infringing such IP rights registered on these French and EU customs databases, which enter the EU territory via French borders, will be seized by customs at French borders for 10 days. Potentially, provided that certain conditions are met, French customs may permanently destroy all counterfeit products thus seized, after 10 days.

            5. Data privacy and security

            5.1. Legislation

            17 | What data privacy and security laws are most relevant to fashion and luxury companies?

            As explained in questions 8 and 10, fashion and luxury companies must comply with the GDPR, the French Data Protection Act and the cookies and other tracking devices guidelines from the CNIL.

            5.2. Compliance challenges

            18 | What challenges do data privacy and security laws present to luxury and fashion companies and their business models?

            The strict compliance with the GDPR, as well as the amended version of the French Data Protection Act, do present some challenges to luxury and fashion companies and to their business models.

            Indeed, on a factual level, most small and medium-sized enterprises (‟SMEs”) incorporated in France are still not in compliance with the GDPR, the French Data Protection Act and the cookies and other tracking devices guidelines from the CNIL. Most of the time this is because such SMEs do not want to allocate time, money and resources to bringing their business in compliance, while they are fully aware that a serious breach may trigger a fine worth up to 4 per cent of their annual worldwide turnover, or €20 million, whichever is greater.

            Fashion and luxury companies now have to take ownership of, and full responsibility for, the rigorous management and full protection of their data assets. They can no longer rely on a ‘I was not aware this may happen’ defence strategy, which was very often used by fashion companies before the GDPR entered into force when their internal databases or IT systems got hacked or leaked to the public domain (eg, Hudson’s Bay Co, which owns Saks Fifth Avenue, Macy’s, Bloomingdales, Adidas, Fashion Nexus, Poshmark). The way to rise up to such challenge, though, is to see the GDPR as an opportunity to take stock of what data your company has, and how you can take most advantage of it. The key tenet of GDPR is that it will give any fashion company the ability to find data in its organisation that is highly sensitive and high value, and ensure that it is protected adequately from risks and data breaches.

            With the GDPR, almost all fashion and luxury businesses worldwide that sell to EU customers (and therefore French customers), either online or in brick and mortar locations, now have a Data Protection Authority (‟DPA”). 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 them to identify the main establishment, including when a sole company manages the operations of a whole group. However, 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 such organisation has its main or unique establishment will be in charge of controlling its compliance with the GDPR. This unique one-stop DPA will allow companies to substantially save time and money by simplifying processes.

            To favour the European data market and the digital economy, and therefore create a more 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 27 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.

            The scope of the GDPR extends to companies that are headquartered outside the EU, but intend to market goods and services into the EU market, as long as they put in place processes and treatments of personal data relating to EU citizens. Following these EU residents on the internet to create some profiles is also covered by the scope of the GDPR. Therefore, EU companies, subject to strict and expensive rules, will not be penalised by international competition on the EU single market. In addition, they may buy some data from non-EU companies, which is compliant with GDPR provisions, therefore making the data market wider.

            The right to portability of data allows 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. Compliance with the right to portability is definitely a challenge for fashion and luxury businesses.

            5.3. Innovative technologies

            19 | What data privacy and security concerns must luxury and fashion retailers consider when deploying innovative technologies in association with the marketing of goods and services to consumers?

            Innovative technologies, such as AI and facial recognition, involve automated decision making, including profiling. The GDPR has provisions on:

            • automated individual decision making (making a decision solely by automated means without any human involvement), and

            • profiling (automated processing of personal data to evaluate certain things about an individual), which can be part of an automated decision-making process.

            These provisions, set out in article 22 of the GDPR, should be taken into account by fashion and luxury businesses when deploying innovative technologies. In particular, they must demonstrate that they have a lawful basis to carry out profiling or automated decision making, and document this in their data protection policy. Their Data Protection Impact Assessment should address the risks, before they start using any new automated decision making or profiling. They should tell their customers about the profiling and automated decision making they carry out, what information they use to create the profiles, and where they get this information from. Preferably, they should use anonymised data in their profiling activities.

            5.4. Content personalisation and targeted advertising

            20 | What legal and regulatory challenges must luxury and fashion companies address to support personalisation of online content and targeted advertising based on data-driven inferences regarding consumer behaviour?

            There is a tension, and irrevocable difference, between the GDPR’s push towards more anonymisation of data, and the personalisation of online content and targeted advertising based on data-driven inferences regarding consumer behaviour. This is because the latter needs data that is not anonymous, but, instead, traceable to each individual user.

            Indeed, a fashion and luxury business cannot truly personalise an experience in any channel – a website, a mobile app, through email campaigns, in advertising or events in a store – unless it knows something about that customer, and the luxury business cannot get to know someone digitally unless it collects data about him or her. The GDPR and the increasing concerns around privacy complicate this process.

            However, GDPR does not prohibit fashion businesses from collecting any data on customers and prospects. However, they must do so in compliance with the core GDPR principles set out in question 10.

            6. Advertising and marketing

            6.1. Law and regulation

            21 | What laws, regulations and industry codes are applicable to advertising and marketing communications by luxury and fashion companies?

            Advertising and marketing communications are regulated by the following French laws:

            • law dated 10 January 1991 (‟Evin law”) that prohibits advertising alcohol on French TV channels and in cinemas, and limits such advertising on radio and on the internet;

            • law dated 4 August 1994 (‟Toubon law”) that provides that the French language must be used in all advertising in France, and

            • decree dated 27 March 1992 that provides for specific rules relating to advertising on TV.

            Various legal codes set out some specific rules governing advertising and marketing communications in France, such as: the French consumer code, which prohibits deceptive and misleading advertising, and regulates comparative advertising; or article 9 of the French civil code, which protects individuals’ images and privacy.

            Moreover, there are some industry codes of practice, drafted by the French advertising self-regulation agency (‟ARPP”), which represents advertisers, agencies and the media. These codes of practice set out the expected ethical standards and ensure proper implementation of these standards, through advice and pre-clearance, including providing mandatory advice before the broadcast of all TV advertising.

            The French consumer and competition governmental authority (‟DGCCRF”) has investigative powers in relation to all matters relating to the protection of consumers, including advertising and marketing practices.

            DGCCRF agents are entitled to enter the professional premises of the advertiser, advertising agency or communication agency during business hours to request an immediate review of documents, take copies of these documents, and ask questions.

            The ARPP works with an independent jury that handles complaints against advertisements that violate ARPP standards. Its decisions are published on its website.

            If there is a data breach within a marketing campaign, the CNIL, the French DPA, may fine the culprit data controller (such as an advertiser or an agency) up to €20 million, or 4 percent of their worldwide annual turnover, whichever is the highest.

            6.2. Online marketing and social media

            22 | What particular rules and regulations govern online marketing activities and how are such rules enforced?

            Online marketing activities are regulated in the same manner as activities conducted in the ‟real world”, pursuant to the French digital economy law dated 21 June 2004. However, more specific to the online world, the digital economy law provides that pop-ups, advert banners, and any other types of online adverts must be clearly identified as such and therefore distinguished from non-commercial information.

            Article L121-4-11 of the French consumer code provides that an advertiser who pays for content in the media to promote its products or services must clearly set out that such content is an advertisement, through images or sounds clearly identifiable by consumers. Otherwise, this is a misleading advert or an act of unfair competition.

            The ARPP issued a standard relating to digital adverts, communications carried out by influencers, native advertising, etc emphasising the fact that all such online marketing communications and advertising should be clearly distinguishable as such by consumers.

            7. Product regulation and consumer protection

            7.1. Product safety rules and standards

            23 | What product safety rules and standards apply to luxury and fashion goods?

            French law dated 19 May 1998, which is now set out in articles 1245 et seq of the French civil code, transposes EU directive 85/374/EEC on the liability for defective products in France.

            Alongside this strict civil liability for defective products exists some criminal liability for defective products on the grounds of deceit, involuntary bodily harm, involuntary manslaughter or endangering the lives of others.

            Articles 1245 et seq. of the French civil code apply when a product is considered unsafe. Therefore, a fashion business would be liable for damage caused by a defect in its products, regardless of whether or not the parties concluded a contract. Consequently, these statutory rules apply to any end-user in possession of a fashion product, whether or not such end-user had entered into an agreement with the fashion company.

            Articles 1245 et seq. of the French civil code provide for a strict liability, where the claimant does not need to prove that the ‘producer’ made a mistake, committed an act of negligence or breached a contract. The claimant only has to prove the defect of the product, the damage suffered and the causal link between such defect and such damage.

            A defective product is defined in article 1245-3 of the French civil code, as a product that does not provide the safety that any person is entitled to expect from it, taking into account, in particular, the presentation of such product, the use that can reasonably be expected of it and the date on which it was put on the market.

            Such strict civil liability rules apply to the ‟producer”, a term that may refer to the manufacturer, the distributor, as well as the importer in the EU, of defective products.

            As soon as a risk of a defective product is recognised, the ‟producer” should comply with its duty of care and take all necessary actions to limit harmful consequences, such as a formal public warning, a product recall or the mere withdrawal of such product from the market.

            7.2. Product liability

            24 | What regime governs product liability for luxury and fashion goods? Has there been any notable recent product liability litigation or enforcement action in the sector?

            The regime governing product liability for luxury and fashion goods is described in our answer to question 22.

            The Hamon law introduced class action for French consumers. Consequently, an accredited consumer association may take legal action to obtain compensation for individual economic damages suffered by consumers placed in an identical or similar situation, that result from the purchase of goods or services.

            There has been no notable recent product liability litigation in the fashion and luxury sectors. However, a health class action matter is currently pending before the Paris judiciary tribunal. A pharmaceutical company was sued by 4,000 French individuals because it sold an anti-epileptic drug without providing adequate information relating to the use of such drug during pregnancy. As a result, some French babies were born with health defects because such drug has detrimental effects on foetal development. The judiciary tribunal should hand down its decision about the laboratory’s liability soon.

            8. M&A and competition issues

            8.1. M&A and joint ventures

            25 | Are there any special considerations for M&A or joint venture transactions that companies should bear in mind when preparing, negotiating or entering into a deal in the luxury fashion industry?

            As set out in question 2, the general contract law provisions included in the French civil code, which underwent a major reform in 2016, must be complied with. Therefore, for private M&As, the seller would seek to promote competition between different bidders through a competitive sale process, which conduct must comply with the statutory duty of good faith.

            In France, it is compulsory for the transfer of assets and liabilities from the seller to the buyer to cover all employment contracts, commercial leases and insurance policies pertaining to the business. Except from those, all other assets and liabilities relating to the transferred business may be excluded from the transfer transaction by agreement. Furthermore, the transfer of contracts requires the approval from all relevant counterparties, thus making the prior identification of such contracts in the course of the due diligence an important matter for any prospective buyer.

            In private M&As, there is no restriction to the transfer of shares in a fashion company, a fashion business or assets in France. However, French merger control regulations (in addition to merger control regulations of other EU member states) may require a transaction to be filed with the French competition authority (‟FCA”) if: (i) the gross worldwide total turnover of all the fashion companies involved in the concentration exceeds €150 million; and (ii) the gross total turnover generated individually in France by each of at least two of the fashion companies involved in the concentration exceeds €50 million.

            There are no local ownership requirements in France. However, French authorities may object to foreign investments in some specific sectors that are essential to guarantee France’s interests in relation to public policy, public security and national defence. As of today’s date, fashion and luxury are not part of these sectors that are protected for national security purposes.

            In addition to prior agreements, such as non-disclosure agreements or promises, final agreements will set out the terms relating to the transaction; in particular, a description of the transferred assets, the price, the warranties granted by the seller, the conditions precedent, any non-competition or non-solicitation clauses. Asset purchase agreements must set out compulsory provisions, such as the name of the previous owner, some details about the annual turnover, otherwise the buyer may claim that the sale is invalid. Most of these agreements, and most sales of French targets and assets, are governed by French law; in particular, the legal transfer of ownership of the target’s shares or assets.

            More specific to the fashion and luxury industries, any sale of a fashion business would entail transferring the ownership of all intellectual property rights tied into that fashion target. As such, the trade marks, which have sometimes been filed on the name of the founding fashion designer of the acquired fashion business (eg, Christian Dior, Chantal Thomass, John Galliano, Ines de la Fressange) would be owned by the buyer, after the sale. Thus, the founding fashion designer would no longer be able to use his or her name to sell fashion and luxury products, without infringing on the trade mark rights of the buyer.

            8.2. Competition

            26 | What competition law provisions are particularly relevant for the luxury and fashion industry?

            Articles L 420-1 and L 420-2 of the French commercial code are the equivalent to articles 101-1 and 102 TFEU and provide for anticompetitive agreements and abuses of a dominant position, respectively.

            Specific provisions of the French commercial code are also applicable, such as article L 410-1 et seq. on pricing, article L 430-1 et seq. on merger control, L 420-2-1 on exclusive rights in French overseas communities, L 420-5 on abusively low prices and L 442-1 et seq. on restrictive practices.

            For example, a decision handed down by the Paris court of appeal on 26 January 2012 confirmed the existence of price fixing agreements, and anti competitive behaviour, between 13 perfume and cosmetics producers (including Chanel, Guerlain, Parfums Christian Dior and Yves Saint Laurent Beaute) and their three French distributors (Sephora, Nocibe France and Marionnaud). The court also upheld the judgment from the FCA, dated 14 March 2006, sentencing each of these luxury goods companies and distributors to fines valued at €40 million overall.

            Court action for breach of competition law may be lodged with a French court of the FCA by any person having a legal interest. Class actions have been available since the entering into force of the Hamon law, but only when the action is filed by a limited number of authorised consumer associations.

            There has been a rise in antitrust damage claims lodged in France, and French courts are now responsive to such claims. A section of the Paris commercial court has been set up to review summons lodged in English, with English-language exhibits, and can rule on competition cases with proceedings fully conducted in the English language.

            As set out in question 4, while selective distribution is tolerated as an exemption, pursuant to article 101(3) TFEU, total restriction of online sales by a manufacturer, to its selective distributors, is a breach under article 101(1) TFEU (Pierre Fabre Dermo-Cosmétique SAS v Président de l’Autorité de la concurrence and Ministre de l’Économie, de l’Industrie et de l’Emploi, ECJ, 2011).

            The ECJ has refined its case law (which, of course, applies to France) in its 2017 ruling in Coty Germany GmbH v Parfümerie Akzente GmbH. The ECJ ruled that a contractual clause, set out in the selective distribution agreement entered into between Coty and its selective distributors, and which prohibits members of such selective distribution network from selling Coty cosmetics on online marketplaces, such as Amazon, complies with article 101(1) TFEU. This is because, according to the ECJ, the clause is proportionate in its pursuit of preserving the image of Coty cosmetics and perfumes, and because it does not prohibit distributors from selling Coty products on their own online e-commerce sites, provided that some quality criteria are met.

            This new ECJ case law is useful guidance for national courts on how to assess, in pragmatic terms, the prohibition of selling luxury products in marketplaces. Indeed, the Paris court of appeal handed down a judgment in relation to the validity of a similar clause set out in the contracts for Coty France on 28 February 2018, and used the ECJ analysis to confirm the validity of such prohibition, in relation to a marketplace that sold Coty perfumes during private sales.

            9. Employment and labour

            9.1. Managing employment relationships

            27 | What employment law provisions should fashion companies be particularly aware of when managing relationships with employees? What are the usual contractual arrangements for these relationships?

            Employer–employee relationships are governed by the following complex set of laws and regulations that leave little room for individual negotiation:

            • the French labour code set out a comprehensive legal framework for both individual and collective relationships between employers and employees;

            • collective bargaining agreements have been negotiated between employers’ associations and labour unions covering the industry as a whole, or between employers and labour unions covering a company. In the former case, the collective agreement usually applies to the industry sector as a whole, even to companies within that sector that are not part of the employers’ associations (for the fashion and luxury sectors, the ‟clothing industry collective agreement”, the ‘textile industry collective agreement (OETAM)’, or the ‟collective agreement for the footwear industries” may apply, for example), and

            • individual employment agreements, which relate only to the aspects of the employer–employee relationship not already covered by the labour code or relevant collective bargaining agreement.

            Because more than 90 per cent of French employees are protected by collective bargaining agreements, the rules set out in the French labour code are supplemented by more generous rules in areas such as paid leave, maternity leave, medical cover and even working time.

            Under the ‟Aubry law” dated 19 January 2000, a standard 35-hour working week became the rule. Employees working beyond 35 hours are entitled to overtime. A company-wide collective bargaining agreement may provide for a maximum working time of 12 hours, and a maximum weekly working time of 46 hours over 12 consecutive weeks. Extra time is either paid via overtime, or compensating by taking extra days off (called ‟RTT”).

            Any dismissal of a French employee must be notified in writing, and based on a ‘real and serious’ cause. A specific procedure must be followed, including inviting the employee to a pre-dismissal meeting, holding such meeting with the employee, and notifying the dismissal by registered letter with an acknowledgement of receipt. Dismissal for economic reasons and dismissals of employee representatives are subject to additional formalities and requirements, such as the implementation of selection criteria to identify the employees to be dismissed, the involvement of, and approval from, the French labour authorities and compulsory consultation with employee representatives. Upon termination, French employees are entitled to a number of indemnities (severance payment, notice period, paid holidays, etc) and, should the dismissal be deemed to be unfair, the ‟Macron scale”, set out in article L 1235-3 of the French labour code, provides that, in case of a court claim for unfair dismissal, French labour courts must allocate damages to former employees ranging between a minimum and a capped amount, based on the length of service with the former employer. Because many regional labour courts were resisting the application of the ‟Macron scale” to their court cases, the French supreme court ruled in July 2019 that such ‟Macron scale” is enforceable and must apply.

            Of course, French freelancers and consultants who work for fashion and luxury houses are not protected by the above-mentioned French labour rules applying to employer–employee relationships. However, French labour courts are prompt at requalifying an alleged freelancing relationship into an employment relationship, provided that a subordination link (characterised by work done under the authority of an employer, which has the power to give orders, directives, guidelines, and to control the performance of such work, and may sanction any breach of such performance) exists, between the alleged freelancer and the fashion company. Most creative directors of French fashion houses are consultants, not employees, and therefore have the right to execute other fashion projects or contracts, for other fashion houses (for example, Karl Lagerfeld was the creative director of both Chanel and Fendi).

            Article L 124-1 et seq of the French education code provide that a ‟gratification” (not a salary) may be paid to an intern, in France, if the duration of his or her internship is more than two consecutive months. Below that time frame, a French company has no obligation to pay a gratification to an intern. The hourly rate of such gratification is equal to a minimum of €3.90 per internship hour; however, in certain sectors of the industry where collective bargaining agreements apply, the amount may be higher than 3.90 Euros.

            9.2. Trade unions

            28 | Are there any special legal or regulatory considerations for fashion companies when dealing with trade unions or works councils?

            As mentioned in question 24, an employer may have to consult employee representatives if it wants to dismiss, for economic reasons, some of its employees. Also, trade unions, either covering a company or a group of companies, or covering an industry as a whole, negotiate, and will renegotiate and amend, any collective bargaining agreements in place in France.

            Unsurprisingly, employee representatives play a very important role, in French employer–employee relationships. Depending on the size of a company, some employee delegates or a works council, as well as a health and safety committee, may have to be appointed and set up. Such employee representatives not only have an important say on significant business issues such as large-scale dismissals, but must be consulted prior to a variety of changes in the business, such as acquisitions, or disposals, of business lines or of the company itself. In French companies with work councils, employee representatives are entitled to attend meetings of the board of directors, but are not allowed to take part in any votes at such meetings. As a result, most strategic decisions are made outside of board of directors’ meetings.

            Dismissals of employee representatives are subject to additional formalities and requirements, such as the approval given by French labour authorities.

            While the top creative management of French fashion houses may be terminated at will, because most creative directors are freelancers, the core labour force of most French fashion and luxury houses (eg, blue-collar workers on the shop floor (seamstresses etc), lower to middle management, etc) is almost immovable because of the above-mentioned strict French labour laws relating to hiring and firing. One advantage of such ‟job security” is that French students and the young labour force do not hesitate to train for, and take on, highly specialised and technical manual jobs, which are necessary to creative and exceptionally high-quality luxury products (eg, embroiderers working for Chanel-owned Lesage, bag makers working for Hermes, feather workers employed by Chanel-owned Lemarie and all the seamstresses working for Chanel and all the haute couture houses in Paris).

            9.3. Immigration

            29 | Are there any special immigration law considerations for fashion companies seeking to move staff across borders or hire and retain talent?

            Yes, the multi-year ‟passeport talent” residence permit was created to attract foreign employees and self-employed persons with a particular skillset (eg, qualified or highly qualified employee, self-employed professional, performer or author of a literary or artistic work) in France.

            Such residence permit provides the right to stay for a maximum of four years in France, starting from the date of arrival in France. A multi-year residence permit may also be granted to the spouse and children of the ‟talented individual”.

            10. Update and trends

            30 | What are the current trends and future prospects for the luxury fashion industry in your jurisdiction? Have there been any notable recent market, legal and or regulatory developments in the sector? What changes in law, regulation, or enforcement should luxury and fashion companies be preparing for?

            The future prospects of the luxury and fashion sectors in France are extremely high, because the Macron reforms are slowly but surely transforming the French economy into a liberalised and free-trade powerhouse, bringing flexibility and innovation at the forefront of the political reform agenda. However, the downside to these sweeping changes is the resistance, violence and riots that have taken place, and still regularly happen, in France, and in Paris in particular, emanating from a French people unsettled about, and scared of, a more free and competitive economic market.

            Fashion and luxury businesses are the first to bear the brunt of these violent acts of resistance, as their retail points on the Champs Elysees and other luxurious locations in Paris and in the provinces have been heavily disrupted (and sometimes ransacked) by rioters, some ‟yellow vests” and ‟anti-pension reforms” social unrest movements.

            However, in the medium to long term, fashion and luxury businesses will be among the first to benefit from those sweeping reforms, thanks to a highly productive, and more flexible, French workforce, better contractual and trade conditions to conduct business in France and abroad, and a highly efficient legal framework and court system that are among the most protective of IP rights owners, in the world.


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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 : Antitrust & competition, Art law, Articles, Banking & finance, Capital markets, Consumer goods & retail, Copyright litigation, Emerging companies, 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, Restructuring, Sports & esports, Tax, Technology transactions, Trademark litigation, Unsolicited bids

              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. 

              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, licencing 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 percent of private sector business, 59 percent of private sector employment and 48 percent 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 bookkeeping 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, licences, 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, licenced, 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, licences) 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 100 million Euros 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 SMEs 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 the ‟Conceptual 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 co founder, 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 cooperation 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.

              [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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                Registration of beneficial ownership: time to take action

                Crefovi : 01/07/2018 8:00 am : Articles, Banking & finance, Emerging companies, Employment, compensation & benefits, Insolvency & workouts, Mergers & acquisitions, Tax

                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? 

                1. 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 percent 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 (i.e. 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 percent up to (and including) 50 percent;
                    • more than 50 percent and less than 75 percent;
                    • 75 percent 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, and
                •  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.

                Crefovi is here to support you, in the drafting of documents relating to the registration of beneficial ownership.

                Crefovi regularly updates its social media channels, such as LinkedinTwitterInstagramYouTube and Facebook. Check our latest news there!

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                  Film finance: how to finance your film production?

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

                  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?

                  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, filmmakers 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 percent 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 percent 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 USD50 million 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 makeup 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, and
                  • 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, and
                  • 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 Euros37 million 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 GBP20 million or less, production companies can claim a cash rebate of up to 25 percent of qualifying expenditure. For films spending more than GBP20 million, 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 Euros30 million 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 Euros4 million.

                  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 Euros1.6 billion 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 USD150 million 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 USD1.4 million 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 USD400,000 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 crowdfunding.

                  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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                    Why it makes sense to invest in the creative industries and support them

                    Crefovi : 04/05/2014 9:00 am : Antitrust & competition, Art law, Articles, Banking & finance, Capital markets, Consumer goods & retail, Emerging companies, Entertainment & media, Fashion law, Gaming, Hospitality, Hostile takeovers, Information technology - hardware, software & services, Insolvency & workouts, Internet & digital media, Law of luxury goods, Life sciences, Mergers & acquisitions, Music law, Private equity & private equity finance, Restructuring, Sports & esports, Tax, Technology transactions, Unsolicited bids

                    While many fast-growth companies in the creative industries are currently the target of heavy private equity investments and a flurry of mergers and acquisitions, it makes sense, from a tax and financial standpoint, for individuals and corporate investors to go ‟long” on creative startups and SMEs.

                    1. ‟Good times” are coming back: it’s time to invest in the creative industries

                    With the global economy recovering from the 2007-2012 recession and a tangible boost of confidence, financial investors and corporates alike are becoming more bullish and enterprising, especially in relation to the creative industries. It is time to invest in the creative industries.

                    In the luxury goods sector, the historical data is very promising, with 2012 being the third year in a row of double-digit growth for personal luxury goods, at 10 percent annual growth rate, now over the 200 billion Euros ceiling (1). There was no recession at all, in the luxury goods sector.

                    As a reflection of the outperformance of this creative sector, many luxury stalwarts have been either acquired (such as Loro Piana and Bulgari sold to LVMH as well as Christopher Kane and Pomellato sold to Kering), invested into (such as the investment of equity investment funds Ardian and Blackstone into a minority participation stake in Versace (2) and the negotiations for an investment made by buyout firm Permira into a 450 million Euros majority stake in Roberto Cavalli (3)) or introduced on the stock market at sky-rocketing valuations, which are ever increasing (Prada, Salvatore Ferragamo, Michael Kors, Brunello Cucinelli).

                    The technology sector is also back to acquisitive mode in full swing, with Facebook spending USD19 billion (!) to purchase WhatsApp, a cross-platform mobile messaging app for iPhone, BlackBerry, Android, Windows Phone and Nokia, which allows to send text, video, images, audio messages free of charge.

                    The USD19 billion figure is split between USD4 billion in cash, USD12 billion in shares and USD3 billion in Facebook shares, which will be distributed to the founders and employees of WhatsApp, spread over four years after the closing of the deal. Sequoia, the investment fund which invested USD8 million for 15 percent of WhatsApp’s capital in 2011, is about to make USD3.5 billion out of this transaction.

                    Juicy business.

                    With many sectoral experts saying, and proving, that the creative and cultural industries are the booster to global and, in particular, European, growth and recovery (4), the future looks very bright indeed for all those companies which main assets are their intangibles (knowhow, intellectual property, brand value, reputation, etc).  

                    2. How to benefit from the bullish market in a tax efficient way

                    If you have some back pocket money (5), i.e. some money sitting around idly in a savings bank account remunerated between 0.5 percent and 1.00 percent, which you absolutely do not need in the short and medium term and which you would not feel badly hurt if you were losing, now is the time to take advantage of the situation.

                    The taxman is generous to individuals ready to part with their cash to invest in the creative industries, on both sides of the Channel.

                    In Great Britain, HMRC is only inclined to give tax credits to individuals, the so-called ‟business angels” who are UK tax residents with an entrepreneurial mind. Enterprise Investment Schemes (‟EIS”), Venture Capital Trust (‟VCT”) and Seed Enterprise Investment Scheme (‟SEIS”) are the three tax tools through which individuals can invest in eligible companies (i.e. companies with no more than 250 employees or gross assets lower than GBP15 million, or GBP200,000 for a SEIS) in a tax efficient way.

                    Tax breaks are summarised below:


                    Maximum investment: GBP100,000

                    Inc tax relief/investment: 50 percent

                    Holding period: 3 years

                    Capital gain tax: exemption


                    Maximum investment: GBP1 million

                    Inc tax relief/investment: 30 percent

                    Holding period: 3 years

                    Capital gain tax: exemption


                    Maximum investment: GBP200,000

                    Inc tax relief/investment: 30 percent

                    Holding period: 3 years

                    Capital gain tax: exemption  

                    In France, individuals who have to pay the French wealth tax (wittily called ‟impôt de solidarité sur la fortune” (‟ISF”), and invest in SMEs, are also rewarded by the French state.

                    Through the ‟ISF PME” tax breaks, individuals subjected to the ISF can deduct up to 50 percent of the sums invested in French SMEs, up to 45,000 Euros per year (6).

                    For everybody else who pays income tax in France, a new tax break of 18 percent of the cash invested in a French SME, capped at 50,000 Euros per taxpayer per year, has been set up (7).  

                    If the SME you have invested in goes bust, you will still have been able to take advantage of the tax breaks. If the SME produces many sparks and is being acquired, at a later stage, by a private equity investment fund, a competitor or any other third party, the early-stage investor individual will be able to cash in and realise a substantial capital gain on its early investment.

                    In the UK, such capital gain is exempted from taxation, unlike in France. That may explain why there are more than 50,000 business angels in the United Kingdom and around 5,000 (!) in France.  

                    Sadly, corporate venture is not currently actively encouraged by either the French or British governments, which results in 230 billion Euros sleeping idly in the coffers of all the companies listed on the French CAC40 index, for example.

                    More lobbying should be done, by institutions representing the creative industries such as Comité Colbert, Fondazione Altagamma, Walpole and the European Cultural and Creative Industries Alliance, to influence governments to provide tax incentives to companies wishing to invest in SMEs in a tax efficient way.

                    Positive changes are looming though, since corporate venture should kick off on 1 July 2014 in France, with companies paying taxes in France being able to amortise their corporate venture investments in innovating SMEs over a period of five years (8).

                    Let’s watch the space and hope that Cameron and Osborne are going to take stock and act accordingly, in the UK soon.  

                    It is time to think carefully how to invest any spare cash that you may have and, with the bright economic outlook and new tax schemes pushed by governments to accelerate growth and recovery, both individuals and corporates have more and more investment options at their disposal, to encourage innovative and creative industries.  

                    (1) Luxury goods worldwide Market Study Spring 2013 Update, Bain & Company

                    (2) M&A in 2014? Luxury brands on sale or seeking for financial partners, Portolano Cavallo Studio Legale

                    (3) Sources Say Roberto Cavalli Nearing €450 Million Sale to Permira, Business of Fashion

                    (4) 1er panorama des industries culturelles et créatives, EY, November 2013

                    (5) Back pocket money, Jimmy C. Newman

                    (6) ‟Réductions, impôt de solidarité sur la fortune

                    (7) ‟Réduction d’impôt pour souscription au capital de sociétés non cotées

                    (8) Corporate venture: ‟pour financer l’innovation

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