Media & Entertainment
Spotlight on M&A in the US and
Canada
Gordon Esau
Partner, Vancouver
Dentons Canada
604 443 7105
Gor...
About Dentons
Dentons is a global firm driven to provide a competitive edge in an increasingly complex and
interconnected ...
Geographic coverage
3
4
Overview of Unique Aspects of Media
and Entertainment M&A in the US
Introduction
• What makes M&A transactions in the media and entertainment sector
different?
• What are some of the industr...
Limited life of specific assets
6
• Key media and entertainment assets may have limited lives:
• Life of Copyright/Termina...
Limited life of assets - copyrights
7
• Copyrights have limited terms
• Term depends on when work was originally published...
Limited life of assets - contractual rights
8
• Contracts have terms that expire
• Renewal cannot be assured
• Examples in...
Advance recoupment and third party participations
9
• Payment of advances is common in the media and entertainment
industr...
Royalty payment cycle
10
• Media and entertainment businesses involve paying and/or receiving
royalties
• Royalties typica...
Other royalty issues
11
• If Target has non-US royaltors, is it in compliance with US tax withholding
obligations?
• 30% g...
Transferability
12
• Significant assets may not be transferable without third party consent:
• Joint ventures
• Customer d...
Litigation
13
• Media and entertainment are litigious industries
• Target will always have litigation/claims
• Which ones ...
Regulatory issues
14
• Is Target (or competitors) under investigation (Federal or state AG)?
• Is Target subject to consen...
15
Foreign Investment Review in
Canada
Investment Canada Act (ICA)
16
• ICA applies to:
• Establishment of new Canadian businesses
• Acquisitions of control of a...
Review thresholds
17
• Pre-closing approval by Industry Minister of significant transactions
where book value of assets ≥ ...
Net benefit factors
18
• Test for Ministerial approval is “net benefit to Canada”
• Economic considerations generally incl...
Net benefit factors (continued)
19
• Compatibility of the investment with national industrial, economic and
cultural polic...
Government policies
20
• Cultural Policies (Heritage Canada)
• Magazine Publishing
• Book Publishing
• Film Distribution
•...
Government policies (continued)
21
• Definition of SOEs has been broadened to include companies that are
“influenced” by f...
Review process
22
• Application triggers a 45 day initial review period
• Unilateral extension by Minister for 30 days if ...
National security review
23
• Introduced in 2009
• Government can review investments that may be “injurious” to Canada’s
n...
Enforcement experience
24
• Only 2 deals rejected under “net benefit” test until 2012 Petronas interim
rejection (which wa...
June 2013 amendments to the ICA
25
• Current review threshold based on the target Canadian business’ book
value of assets ...
Amendments widen discretion for Government to
find a reviewable transaction for SOEs
26
• Responsible Minister (the Minist...
Cultural Industries Acquisitions
27
• Cultural businesses include those involved in the publication, distribution
or sale ...
Cultural Industries acquisitions (continued)
28
• Notification is very easy and inexpensive. An application for review can...
29
Q&A
Thank you!
© 2013 Dentons
Dentons is an international legal practice providing client services worldwide through its membe...
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Media and Entertainment: Spotlight on M&A in the US and Canada

  1. 1. Media & Entertainment Spotlight on M&A in the US and Canada Gordon Esau Partner, Vancouver Dentons Canada 604 443 7105 Gordon.esau@dentons.com CLE Seminar for In-House Counsel January 7, 2014 Beverly Hills, CA
  2. 2. About Dentons Dentons is a global firm driven to provide a competitive edge in an increasingly complex and interconnected marketplace. It was formed in March 2013 by the combination of international law firm Salans LLP, Canadian law firm Fraser Milner Casgrain LLP (FMC) and international law firm SNR Denton. Dentons is built on the solid foundations of these three highly valued law firms. Each built an outstanding reputation and valued clientele by responding to the local, regional and national needs of a broad spectrum of clients of all sizes – individuals; entrepreneurs; small businesses and start-ups; local, regional and national governments and government agencies; and mid-sized and larger private and public corporations, including international and global entities. Dentons' clients now benefit from approximately 2,600 lawyers and professionals in more than 75 locations spanning 50-plus countries across Africa, Asia Pacific, Canada, Central Asia, Europe, the Middle East, Russia and the CIS, the UK and the US who are committed to challenge the status quo and offer creative, dynamic business and legal solutions. 2
  3. 3. Geographic coverage 3
  4. 4. 4 Overview of Unique Aspects of Media and Entertainment M&A in the US
  5. 5. Introduction • What makes M&A transactions in the media and entertainment sector different? • What are some of the industry-specific areas to focus on and where are the traps for the unwary? • Limited life of specific assets • Advance recoupment • Royalty payment cycle • Transferability issues • Litigation risks • Regulatory issues 5
  6. 6. Limited life of specific assets 6 • Key media and entertainment assets may have limited lives: • Life of Copyright/Termination Rights • Distribution Agreements • Administration and Sub-publishing Agreements • Recording Agreements • Production deals • Purchase price impact • Initial offer • Back end adjustment • Insurance may be available to hedge against copyright termination rights • Due diligence is critical!
  7. 7. Limited life of assets - copyrights 7 • Copyrights have limited terms • Term depends on when work was originally published (pre-1978 or post-1978) • Different rules apply to pre-1972 sound recordings • Authors (or heirs) have right to terminate past transfers of copyrights • Timing for exercise depends on date work was originally published/transferred (pre-1978 or post-1978) • Termination rights do not apply to "works made for hire" • Rules are complex • When purchasing catalogue of copyrights, must account for expirations and potential for termination in valuation • Insurance may be available to hedge against termination
  8. 8. Limited life of assets - contractual rights 8 • Contracts have terms that expire • Renewal cannot be assured • Examples include Production Joint Ventures, Distribution Agreements, Administration and Sub-Publishing Agreements and Recording Agreements • A dollar of revenue from a 3 year distribution deal is not worth as much in an M&A transaction as a dollar of revenue from an asset that the Target owns • Different life spans of different asset classes should be taken into account in purchase price calculations
  9. 9. Advance recoupment and third party participations 9 • Payment of advances is common in the media and entertainment industries • Third parties also frequently have participation rights in revenue streams • Buyer should not pay for revenues it does not receive • Key questions: • Whether Target has been paid advances that are unrecouped? • What percentage of Target's revenue must be paid over to third party participants? • Answers will impact purchase price
  10. 10. Royalty payment cycle 10 • Media and entertainment businesses involve paying and/or receiving royalties • Royalties typically represent significant expense/revenue stream • Royalties may be payable quarterly or semi-annually • Closing mid-cycle creates issues • Adjustment mechanism is critical! • Typical closing date balance sheet/net asset/working capital adjustment mechanisms may not suffice • Industry specific mechanisms include: • Closing effective as of end of last royalty period • Requires true up for expenses and earnings after that date • Adjust for foreign and other "pipeline" royalties that may lag
  11. 11. Other royalty issues 11 • If Target has non-US royaltors, is it in compliance with US tax withholding obligations? • 30% gross withholding tax for royalties (but not sales of property--how does Target treat sales of digital downloads?) • What percentage of foreign royaltors are in tax treaty jurisdictions? • Does Target consistently collect and maintain Forms W8-BEN before paying foreign royaltors? • If Target is not compliant, escrow can help, but… • Statute of limitations issues • Interest and penalties • Accounting due diligence is critical • If issues are uncovered, consider practicalities of "clean up" in tandem with escrow
  12. 12. Transferability 12 • Significant assets may not be transferable without third party consent: • Joint ventures • Customer databases - need to review privacy policy • Non-exclusive licenses of IP that do not explicitly permit assignment • Example: mechanical licenses for compositions • Are there "key man" clauses? • Which third party consents are critical as conditions to closing? • Can the need for key consents be eliminated by using a different transaction structure?
  13. 13. Litigation 13 • Media and entertainment are litigious industries • Target will always have litigation/claims • Which ones matter and which ones don't? • In assessing each case: • Is it "ordinary course of business" or specific to the particular target? • Copyright and trademark infringement claims are "ordinary course" but can be expensive if litigated • Audit claims are ordinary course but costs/risks are fact dependent • Adverse judgment in audit claim (if litigated) could have ripple effect on other audits/accounting under other contracts • What are defense costs likely to be? • Can case be settled on reasonable terms? • If Target loses case, what is impact/precedent? • Assessment is easier for strategic buyers who are competitors/harder for financial buyers
  14. 14. Regulatory issues 14 • Is Target (or competitors) under investigation (Federal or state AG)? • Is Target subject to consent decree(s) that impact cost structure/business model? • Does Target comply with existing regulations? • Examples: minors; FTC/advertising; COPPA; escheat etc. • If not in compliance, what will it cost to comply? • Are there new/proposed regulations that could impact cost structure/business model? • Example: Communications and Video Accessibility/FCC regulations on online video captioning
  15. 15. 15 Foreign Investment Review in Canada
  16. 16. Investment Canada Act (ICA) 16 • ICA applies to: • Establishment of new Canadian businesses • Acquisitions of control of a Canadian business by a non-Canadian • Notification vs. Review • Notification is an administrative formality which must be made within 30 days following closing • Review is a time-consuming process, requiring Ministerial approval • Approval is required pre-closing, except for indirect acquisitions (where non-WTO) and acquisitions of cultural targets below the review threshold but made subject to review by government decision • Indirect acquisition = acquisition of control of foreign corporation that controls an entity in Canada carrying on the Canadian business
  17. 17. Review thresholds 17 • Pre-closing approval by Industry Minister of significant transactions where book value of assets ≥ $344 million (direct acquisitions, non- cultural) • Review threshold to increase to $1 billion in “enterprise value” staged over 4 years (not yet implemented) • Indirect acquisitions are not subject to review outside of cultural sector where vendor or purchaser is a WTO investor • Review threshold where target is engaged in cultural activities is $5 million for a direct acquisition and $50 million for an indirect acquisition • Same lower thresholds where neither vendor nor purchaser is a WTO- controlled entity • For Cultural Industries, notifications and applications are dealt with by the Minister of Canadian Heritage
  18. 18. Net benefit factors 18 • Test for Ministerial approval is “net benefit to Canada” • Economic considerations generally include: • Impact on employment • Capital expenditures, R&D, production • Head office location • Participation of Canadians in senior management • Canadian exports, productivity, innovation, efficiency, technological developments
  19. 19. Net benefit factors (continued) 19 • Compatibility of the investment with national industrial, economic and cultural policies articulated by the federal Government and the provinces Conclusion: Net benefit factors are broad and vague. Minister of Industry or Minister of Canadian Heritage has very broad discretion in making a decision.
  20. 20. Government policies 20 • Cultural Policies (Heritage Canada) • Magazine Publishing • Book Publishing • Film Distribution • State Owned Enterprise Policy • A new and more stringent policy framework for the review of SOE investments in Canada announced in December 2012 • Further acquisitions of control of a Canadian oil sands business will be prohibited, except on an “exceptional” basis • Applies to reviewable transactions only • SOEs will also be expected to be more transparent, constrain state influence and operate according to free market principles
  21. 21. Government policies (continued) 21 • Definition of SOEs has been broadened to include companies that are “influenced” by foreign governments, not just those that are controlled or owned by foreign governments • Threshold for Investment Canada review of SOE investments will not increase to CDN$1 billion in “enterprise value” over the next four years but will remain at the book value of assets threshold (CDN$344 million in 2013 but annually adjusted on basis of a GDP index)
  22. 22. Review process 22 • Application triggers a 45 day initial review period • Unilateral extension by Minister for 30 days if review is not complete • Further extensions require investor approval • Application includes 3 to 5 year plans of investors which address how the investment will benefit Canada • Industry Canada staff and investor negotiate “undertakings” to achieve “net benefit to Canada”
  23. 23. National security review 23 • Introduced in 2009 • Government can review investments that may be “injurious” to Canada’s national security • No review threshold, minority investments caught • Federal Cabinet decision: • Authorize on terms and conditions • Prohibit • Divest • Little experience, but fall 2013: rejection of Accelero/Allstream deal
  24. 24. Enforcement experience 24 • Only 2 deals rejected under “net benefit” test until 2012 Petronas interim rejection (which was ultimately approved): one by American bidder and one by Anglo-Australian company • Aliant Tech Systems’ proposed acquisition of geospatial business of MacDonald Dettwiler & Associates - 2008 • Concerns about foreign control of radar satellite technology • Taxpayer funded research • BHP Billiton in its bid to acquire Potash Corp. of Saskatchewan – 2010
  25. 25. June 2013 amendments to the ICA 25 • Current review threshold based on the target Canadian business’ book value of assets ($344 million in 2013) is retained for SOEs • Non-SOEs subject to a higher review threshold based on enterprise value (to be set at $600 million when implemented, rising to $800,000 in two years and then to $1 billion four years later) • Result: SOE investments will be more often subject to Ministerial approval on the basis of the “net benefit to Canada” test, enabling the Government to scrutinize more SOE investments in Canada
  26. 26. Amendments widen discretion for Government to find a reviewable transaction for SOEs 26 • Responsible Minister (the Minister of Industry except where the target industry is cultural when it is the Minister of Canadian Heritage) can avoid the general ICA rules and presumptions when: • Determining when an acquisition of control occurs, especially presumptions regarding when control is acquired. Generally the acquisition of less than one- third of the voting shares of a corporation or of less than a majority of the economic interests of a partnership is deemed not to be an acquisition of control. BUT for an SOE, these rules need not be applied if the Minister concludes based on “any information and evidence” made available to him that the SOE will acquire control in fact. • When determining whether one entity is controlled by another or whether an investor is Canadian or not, for a SOE, the Minister can look beyond the presumptions in the ICA to determine if there is control in fact.
  27. 27. Cultural Industries Acquisitions 27 • Cultural businesses include those involved in the publication, distribution or sale of books, magazines, periodicals, newspapers or movies in print or machine readable form. It also includes businesses involved in the production, distribution, sale or exhibition of film or video recordings or audio or video music recordings. • Special restrictions apply to the acquisition or establishment of businesses in the Canadian film distribution sector. Generally the takeover of a Canadian owned and controlled film distribution business will not be allowed. • Because of much lower thresholds, it is more likely that a review will be required. A target business that is primarily carrying on a non-cultural business can be reviewed as a cultural business if selling minor volume of cultural products (e.g., books).
  28. 28. Cultural Industries acquisitions (continued) 28 • Notification is very easy and inexpensive. An application for review can be more time consuming and costly. Required forms are included in our materials. • Numerous examples over the last few years of foreign investors acquiring a significant minority position in film production and other companies operating in the Cultural Industries sector. • Often prudent to obtain a letter of opinion under Section 37(1) of the Investment Canada Act. This is available for companies operating in the Cultural industry. • Acquisition of control of a company operating in the Cultural Industries sector can trigger issues under broadcast regulations and Canadian content rules for individual productions which must be reviewed with Canadian legal counsel.
  29. 29. 29 Q&A
  30. 30. Thank you! © 2013 Dentons Dentons is an international legal practice providing client services worldwide through its member firms and affiliates. This publication is not designed to provide legal or other advice and you should not take, or refrain from taking, action based on its content. Please see dentons.com for Legal Notices. Document No. 5812385 Gordon Esau, Partner Dentons 250 Howe Street Vancouver, BC Canada V6C 3R8 D +1 604 443 7105 E gordon.esau@dentons.com

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