Due diligence peculiarities of Enterprises

Grandall Legal Group

Jin Chun Yan
[email protected]

The October 2009 embarkation of Huayi Brother Media Corporation on the Growth Enterprise Market Board of the Shenzhen Stock Exchange via an IPO opened the door for domestic radio, film and television enterprises (the Enterprise) to enter China's mainstream capital market. Thereafter, several mature Enterprises have also strived for greater growth by intensively engaging in IPO planning.

Compared to normal manufacturing enterprises, the Enterprise has its own peculiarities. For example, it operates under a tougher industrial supervision and administration regime, with light assets mainly derived from film or TV work copyright, and as a business operation that is significantly influenced by contracts with investors, producers, directors, main actors and actresses.

Therefore, during the process of rendering IPO services to Enterprises, lawyers should not only follow the IPO requirements as set out in the general legal framework, but also pay close attention to following:

Industrial supervision and administration

The State Administration of Radio Film and Television (SARFT) is the responsible government body for the television and film industry. It has authority to supervise the establishment of Enterprises and their activities, as well as draft industrial supervision and administration documents.

In accordance with the Provisions on Radio and Television Program Production, every Enterprise that intends to engage in the production of radio and television programmes must first submit an application to the SARFT or its provincial bureaus. They must then acquire the Permit for Producing Radio and Television Programs.

Any lawfully established organisation with a Radio and Television Programs Production License that seeks to produce TV plays must first file a record to the SARFT. Upon its publication, the organisation will finally acquire the qualification by obtaining the TV Play Production Licence. This also holds true for any film-making organisation with a Film Production Licence, any local television station and radio station, and any film and TV broadcasting group above the municipal level that seeks to produce TV plays. And this is all pursuant to the Regulations on Administration of TV Plays, Regulations on Broadcasting and Television Administration, Provisions on Radio and Television Program Production and Interim Measures for the Administration of Recording and Publications of TV Plays (电视剧拍摄制作备案公示管理暂行办法). Following completion of the production of a TV play, and before its public screening and broadcasting, a Public Screening Licence must be obtained from the SARFT or its provincial bureaus upon their examination of the content.

Film producing entities must first file a record of the screenplay (outline) to the Provincial Administration of Radio, Film and Television Bureau (PARFT). Upon its publication, the entity will finally acquire the qualification by obtaining the Film Production Licence or Letter of Confirmation for the Record of Screenplay (Outline). This is in accordance with the requirements of the Regulations on Administration of Film, The Regulations for Administration of the Records of Screenplay (Outline) and Films, and Notice on the Improvement and Perfection of the Records of Screenplay (Outline) and Films Examination.

If the content of the screenplay concerns state security, foreign affairs, ethnic affairs, religion, military affairs, police, judicial affairs, history, social or cultural elites and sensitive historical events, the approval of the relevant provincial regulatory departments must be obtained before filing the records. For instance, films of significant revolutionary or historical events, documentary films relating to important documents and sino-foreign cooperative films are all subject to project initiation, examination and approval by the SARFT.

After the completion of film production it is necessary to obtain a Public Screening Licence, following examination by SARFT, before a public screening within mainland China. Film distribution and public screenings can only be carried out by institutions holding a Film Distribution and Business Operation Licence or a Public Screening and Business Operation Licence.

Copyright ownership

The Enterprise is able to derive substantial revenues from the authorisation or transfer of copyright relating to film works and TV plays. When undertaking due diligence on Enterprises, lawyers should pay attention to whether the screenplay of films or TV plays are duly authorised by the authors, and whether copyright is duly registered upon completion of film and TV production. Lawyers should also check to see whether there are any existing or potential legal disputes arising from the authorisation or transfer of property rights from films and TV plays.

Contracts

Contracts between Enterprises and investors, consigned producers, producers, directors and main casts are deemed to be material contracts for business operation. This attracts great attention, especially the:

• terms on the investors' respective investments and profit distribution proportions;

• terms on production period, cost and profit distribution with consigned producers;

• terms in relation to episode quantities, profit assessment guidelines, daily expenses, payment, film remuneration, sign-up fees, profit distribution with producers or directors; and

• terms on the provision of agency services for main casts, or the rights and obligations of the TV and film works during the production period with the main casts' agency companies.