I did not write this, but I wanted to share it with my friends. Please enjoy.
Very Respectfully,
George Ohan
Joint Venture Agreement: Preparing the Pre-Production Prenup
by Robert Seigel on January 4, 2012 in Legal
I often meet with two (or more) clients who wish to work together to produce a film, a video or some other audio-visual project. Sometimes one person will be designated a project’s producer while the other person may serve as the director. One of the parties often has written or controls the rights in and to the project’s script. Occasionally the two clients are both designated as producers with a script who either have a director in mind or are seeking a director. These parties either have little or no money raised to date. It is, at this time, when the parties’ business relationship is beginning and the stakes are relatively low (i.e., the bulk of a project’s financing still needs to be raised and a small sum of money may have been spent to date) that the parties should enter into some sort of a Joint Venture Agreement.
A “Joint Venture Agreement” is just another way of referring to a partnership agreement usually formed just for one project. This agreement specifies the parties’ rights and obligations pertaining to the project. It is a sort of business relationship “pre-nuptial agreement” in which the parties understand what is expected of them and what happens if a problem should occur between or amongst the parties. (A Joint Venture Agreement can be between two parties or among three or more parties.) If the Joint Venture Agreement addresses key issues comprehensively, the parties often can sign it, place it in a drawer and only look at it when the need arises.
The joint venture often is a preliminary step prior to forming a production entity such as a limited liability company or a corporation once a project’s funding begins to fall into place. Its term can be for a few months or years with six months to two years serving as the norm. If one of the parties wrote or otherwise controls the right in a project’s script, that party’s contribution to the joint venture would include the “optioning” of the script by the venture with the venture having the right to acquire the script’s rights before the end of the venture’s term. If the venture’s term should end and the venture (or a subsequently formed production entity) has not acquired such rights, the option would be deemed to have lapsed and the script’s rights would remain with the party that wrote or otherwise controls the script’s rights without any encumbrances. However, if the venture or one of the parties to the venture spent any development or otherwise related monies concerning the script or the project, the party who owns the rights to the script would be free to work with other persons or entities to produce the project once the venture’s term has ended, subject to that party either repaying or having a third party repay the other joint venture party any of that party’s share of the Venture’s direct, verifiable “out-of-pocket” expenses. The joint venture parties sometimes will permit such expenses to be excused without any right to repayment to a party. This point is a matter of negotiation between or among the parties.
There should be a provision in the Joint Venture Agreement which states what is expected of the parties. A party’s contribution to a venture can include the project’s script (or any underlying rights to a script), funding, development, production, marketing or distribution resources or skills or the promise to use best efforts by each party to secure such financing, to locate such resources or to render such services.
One of the most important provisions in a Joint Venture Agreement is the one that addresses how the parties make decisions regarding the venture. The parties can separate the types of decisions made on behalf of a venture into purely creative and business (i.e., economic) decisions. Although creative and business decisions often overlap, creative decisions can be separated into two categories: those creative decisions which require the additional allocation and expenditure of funds and those creative decisions which do not affect (i.e., increase) a project’s budget.
If none of the parties is to be a project’s director, the selection of a director may require the parties’ unanimous approval (although this decision and other decisions may be subject to the approval of a project’s financier in certain cases). If one of the parties shall be designated as the project’s director or a third party is to be engaged as the director, the parties would attempt initially to reach some sort of consensus; however, there should be some mechanism to address those times when consensus cannot be reached by the parties. The parties have several options regardless of the nature of such decisions. First, the parties can agree that a decision must be unanimous or a decision is not made. This method of decision-making works well concerning such issues as the selection of cast, crew and director, but it can result in a deadlock by the parties if they are unable to agree. Second, the parties could agree to choose a third party approved by the parties whose decision would govern. This option can be avoided if there is an odd number of parties in a joint venture but issues may arise if the parties have difficulty deciding who should be designated as the third party “tie-breaker.” Third, a party or parties can agree to defer to a party whose decision shall govern since that party may have expertise in a certain area or that party has secured financing or distribution for a project and this type of decision-making may be a condition to forming the venture and to producing the project.
Regarding expenditures made on behalf of the venture, the agreement can state that expenditures which are at a certain monetary level or greater require the (usually written) approval of the venture’s parties. This provision can be problematic if one of the parties may be unavailable or inaccessible during the venture’s term or the production of the project. The parties can select a third party as an alternative signatory for the purpose of paying for expenditures of a certain amount or higher or the agreement can provide a grace period in which the unavailable party must get in contact with the venture’s other party or parties or his, her or their right to approve such expenses would be deemed waived. Still, if a party accesses monies to pay for an unauthorized expenditure, the agreement would acknowledge that such party would be personally responsible for repaying such expense. But in this age of e-mail, faxes and overnight delivery, this situation is becoming less and less of an issue.
In the area of compensation, the Joint Venture Agreement may state the specific figures reflecting how much money would be paid to a party for certain services, or the parties may agree to equal compensation, whether such compensation is upfront, deferred or contingent in nature (i.e., “on the backend”). One of the troublesome issues regarding compensation in which the parties have to address in a Joint Venture Agreement is how to address the scenario when one of the parties leaves the project whether voluntarily or otherwise. There should be a pro rating of a departing party’s compensation that is tied to when the party departs the project. If a party departs from the project at an early stage, that party should receive less compensation that if the party would leave at a later stage of the project. This point is a highly contested issue.
The parties address a similar issue concerning the allocation of the parties’ credits regarding the project. A party’s credit should be subject to that party’s substantial or full compliance of the Venture’s terms and the rendering of services as designated in the Joint Venture Agreement. This credit provision should state how the credits should read and appear on all positive copies of the project and in its promotional and advertising materials. The parties also can deal with this issue by stating in the Joint Venture Agreement that a party’s credit shall appear whenever another party’s or parties’ credit(s) shall appear. Once again, this can be a highly negotiated provision.
A joint venture can be terminated for reasons other than the expiration of its term (which usually can be extended by the parties’ unanimous consent) such as by operation of law which may occur when the venture has not complied with certain laws which may result in the venture’s dissolution or when the venture may be compelled to seek bankruptcy protection.
If a joint venture’s parties are from different locations, there should be a provision that acknowledges which country’s or state’s laws should govern disputes by the parties. Other common provisions in a Joint Venture Agreement address such issues as how monies should be allocated by the venture in terms of repaying any loans, repaying any investments made by the parties in the Venture or to third parties, that each party is free to pursue other business opportunities which are unrelated to the venture without having to ask if the other parties wish to participate in such new business opportunities and that a party’s offers assurances that the party has the rights (or, at least, the right to acquire) the rights in a project’s property which may include its underlying rights.
It is a part of human nature to avoid dealing with difficult issues regarding any relationship, whether the relationship is personal or business in nature. Still the Joint Venture Agreement serves as a means of clarifying many misunderstandings at an early stage and decreasing the chances of growing animosity among the parties later in the heat of developing, producing or distributing a project. The parties who wish to work together ultimately should realize that if they can weather the storm of dealing with the issues addressed in a Joint Venture Agreement, they probably have just as good as or a better chance of dealing effectively with the often difficult issues which arise when the parties are in the production and distribution trenches together.
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