International buyers approaching ‘US law’ as a uniform dealmaking framework may not be prepared for the many variations that exist across state and federal jurisdiction and affect deals very differently.
Getty Images
In my last article, “Lights, Camera, Due Diligence: What International Investors Miss When Buying US Entertainment Assets,” I discussed the nuances of the relationship-driven entertainment ecosystem in the United States and shared tips for US market entry. However, there are many additional considerations for investors when the goal is to be successful. One important example is international buyers approaching “US law” as if it were one uniform piece of the dealmaking puzzle, when, in practice, it is not at all. Federal law matters, but state law can be just as important. California, New York, Tennessee, Georgia, Texas, Florida and Delaware can all show up in the same entertainment transaction. A company may be incorporated in Delaware, have its main executives in California, maintain financing relationships in New York, shoot productions in Georgia, claim tax incentives in another state and exploit rights globally.
That creates many bespoke, complex business and legal issues for each deal. Which state’s employment law applies? Are restrictive covenants enforceable? Are contractors properly classified? Are production incentives transferable? Is there state tax exposure? Does a governing law clause solve the issue, or do the location of employees, founders or operations pull another state into the analysis?
A company may be incorporated in Delaware, have its main executives in California, maintain financing relationships in New York, shoot productions in Georgia, claim tax incentives in another state and exploit rights globally.
GC Images
The US Is Not One Legal Market
California deserves special attention because so much entertainment activity runs through the state. A buyer should not assume that a noncompete, nonsolicitation or founder restriction will work simply because the agreement is governed by another state’s law. That can matter a great deal in acquisitions of production companies, talent businesses, creator networks, agencies, management companies and founder-led media businesses.
It often surprises international buyers that while they may focus on federal approvals and the main purchase agreement, many of the most important issues sit in state law. In a people-driven business, the enforceability of employment, retention and post-closing restrictions can be central to the value being acquired.
Tax Is Not Back-Office Cleanup
Tax structuring should be addressed before signing, not after closing. For an international investor, US federal tax is only the starting point. State and local tax, withholding, treaty planning, transfer pricing, acquisition debt, cash repatriation and entity classification can all affect the actual return. In royalty-driven businesses, even small assumptions about withholding or the treatment of income can materially change the model.
Entertainment assets create deal complications due to revenue streams that can come from many places. A music catalog may generate income from US and non-US sources. A film library may collect revenue across territories, distributors and platforms.
UCG/Universal Images Group via Getty Images
Entertainment assets often make this more complicated because revenue can come from many places. A music catalog may generate income from US and non-US sources. A film library may collect revenue across territories, distributors and platforms. A digital media company may have users, advertisers and data relationships across multiple jurisdictions. A live events or production business may have state-specific payroll, incentives and tax issues. The buyer’s model should reflect that reality.
Having assessed their entry point into the market, identified an optimal deal structure, and even analyzed applicable laws that would feature in a deal, international buyers may feel ready to make the leap. However, an important fact remains: US dealmaking is markedly different than European dealmaking, from expectations to customs to regulatory frameworks. My final article in this series will delve into how buyers can build the right playbook before they bid.
Leave a comment