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Purchasing a film library.

The purchase of a film library can provide a company with opportunities for generating revenues without the risks involved in producing feature films.

Over the years, film libraries have been very profitable. One only has to remember the plethora of transactions in the early 1950's, when a truce was declared in the battle between the majors and the television networks. At that time, Paramount, RKO and Warner Bros., among others, each sold their libraries, which they valued substantially on the basis of 1950's television prices. The prices paid for these film libraries, which included hundreds of feature films, short subjects and cartoons ranged between 15 million and $20 million, an amount less than the average budget of a new studio theatrical release. The 1950's transactions were relatively straightforward.

In the recent economic climate, a number of libraries have become available from sellers who have acquired them from varied sources and who may be in financial difficulty. These transactions involve greater risks and require film lawyers to develop strategies, enabling them to analyze the assets, evaluate the legal risks, formulate an acquisition strategy, draft and negotiate purchase agreements, conduct due diligence and close the transaction.

Some of the most important matters to be considered are:

What rights does the seller have in each of the pictures? The seller should have created a data base that contains this information, and may be reviewed by the purchaser. The most practical way to review this is to look at a number of the most valuable titles for testing purposes. This will also give a purchaser a sense of the accuracy of the seller's data base, and the extent to which it may be relied upon.

What rights are unlicensed? This is obviously critical in valuing the library. Although it may be impractical to review all licenses, a spotcheck may indicate certain generalized problems, such as a pattern of licensing rights beyond the seller's term of rights in a film. When a purchaser discovers problems such as these before the closing, it has the opportunity to try to have the seller clean up some of the problems or use this information in determining a more beneficial final purchase price.

Are the pictures protected by copyright? We have had the experience of libraries involving older foreign films that do not contain copyright notices, since this was not required in their country of origin and are accordingly in the public domain in the U.S. We have also seen cases where older films were registered in the United States but were never renewed and, again, are in the public domain in the United States.

Are there restrictions on transferability? This involves a review of the chain of title documents to determine what restrictions, if any, there are on the seller's selling or assigning rights in the picture. In certain library purchases where this is a problem for a limited number of pictures, a purchaser will decide to take a license of those pictures and a sale of the rest of the pictures; in other cases, a purchaser will attempt to have the party that licensed rights to the seller waive the restriction.

Are there first class pre-print materials available for each of the pictures to which the seller has access or which the seller owns? This involves an inventory of the materials, confirmation from laboratories that the materials are on deposit and in first class condition, and the ultimate preparation and negotiation of laboratory access letters, which must be delivered as a condition of closing any purchase transaction.

What participation and residuals are payable? This involves a review of past history and an attempt to determine what percentage of revenues must be paid to third parties. The purchaser should also consider whether there are cases where residuals or participations must be paid on a basis that is not related to cash flow.

For example, we have seen agreements by which the seller acquired rights which require the payment of sales kickers, deferments that are payable at certain "breakpoint" levels and residuals that may be payable based on income streams; in cases where the seller has already received a license fee as an advance against those income streams. The aggregate percentage of participations and residuals will have a major impact on the purchaser's net receipts and on the overall valuation of the library.

Based in New York, Donald L. Baraf and Adrienne Halpern are attorneys with Loeb and Loeb, an international law firm.
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Author:Halpern, Adrienne
Publication:Video Age International
Date:Apr 1, 1992
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