Traditionally, independent film producers raise finance to make a film by creating a 'sellable' package, going into the marketplace and pre-selling rights in the picture before filming starts. The package typically includes talent, director, scriptwriter, producers, distributors and sales agents.
Many variations on this basic idea have been tried as the industry becomes more sophisticated. Different countries have, from time to time, offered tax breaks to encourage film-making, the latest of which is Russia.
As well as pre-selling the film rights, a producer can apply
for National Lottery funding and for other 'grant' monies from organisations such as the European Media Development Agency (Emda). So-called sale and leaseback transactions are also available to help support the financing process.
To help promote the UK film industry, legislation was introduced providing tax concessions for producers for production
costs incurred in the UK. Also available to producers is the tax release allowed to the investor under the Enterprise Investment Scheme (EIS).
Financing a film through the EIS has one major advantage over the more traditional, pre-selling route. The finance through EIS is share capital and is raised before filming starts, thus relieving the producer of the pressure to pre-sell the film. When a film is fully financed by a share issue, the producer can make the film and then approach a sales agent or distributor with the negative to negotiate a deal. The producer is in a significantly stronger position in that negotiation because he is not looking for funds to actually make the film.
At the Cannes Film Festival last May, Manches met with Gary Smith, chief executive of Winchester Entertainment, to discuss ways in which the available tax breaks in the UK can be used to stimulate film-making in the UK even further. Out of that discussion came the present deal.
Our client, Winchester Entertainment, a film and TV production company whose recent successes include Shooting Fish and Divorcing Jack, looked hard at the EIS as a way of financing film.
EIS has been used before in the film industry for lower budget films which are not 'packaged'. It soon became apparent that the arrangements for forthcoming films Honest and Mr Benn would be significantly different from any other EIS undertaken by a law firm.
Conceptually, in discussion with Winchester, it is proposed that the Mr Benn and Honest prospectus be the first of a slate of films using EIS as a vehicle. The development of an investment database helps this process. The Mr Benn and Honest prospectus combines two films, both of which have a substantial budget and both of which have significant parts of the package in place.
This means that for the first time, the public has access to a type of film that previously has been the domain of the distributors, sales agents and US studios.
The process of combining two films in one prospectus not only led to a clash of culture between the corporate finance team and the media team, but also a blending of the two films' creative teams.
The EIS requirements for rigid verification do not sit comfortably with the more relaxed entrepreneurial deal-making psyche of film-makers. Encouraging and supporting the film-maker through the process was itself a challenge, more than doubled by having two creative teams in the process. Of course, as part of this, the corporate finance team had to understand the way the film world works, which for them was also a major culture shock.
Mr Benn is a live action feature based on the classic children's cartoon series about a man who has exciting adventures whenever he visits the 'magic costume shop'.
John Hannah is to play Mr Benn with Ben Kingsley attached to play the shopkeeper. The film will be directed by Jevon O'Neil, whose credits include the critically-acclaimed Bob's Weekend.
Honest, a crazy love story set in swinging London in the late 1960s, is about three streetwise sisters who, disguised as men, rob local businesses. It is based on an original idea by record producer and musician Dave Stewart. Others involved include writers Dick Clement and Ian la Frenais and producer Michael Peyser.
The involvement of PricewaterhouseCoopers (PwC), as sponsors of the scheme, is another point in favour of the prospectus. PwC conducted a detailed analysis of the assumptions made by Winchester and the producers of the films, testing them against the anticipated return to the investors. Only when PwC was satisfied that the deal being offered to the investors was 'comfortable', did it sign off the prospectus.
Much discussion took place between the producers as to the budgets of each film and the mechanics for recouping costs and giving the investors returns. That process of negotiation involving both sets of producers, Manches, PwC and Winchester, was always delicate given the various differing interests around the table and the creative tensions that always exist in the film process.
Issues such as what would happen if only part of the money was raised, had to be dealt with. How would the creativity of each project be preserved? How would those in one film be prevented from influencing decisions on the other?
The solutions to each of these issues resulted in innovative drafting on the part of the media group, leading to the preparation of a detailed prospectus that fully complied with the Public Office of Securities Regulations 1995 (POS Regulations) and a financing package covering all eventualities.
Manches brought mediation to bear between the numerous parties. Everyone involved in the deal acknowledges that this transaction has given birth to a new "type of baby" and at times, the birth process was painful for all involved.
A new public company has been formed, UK Films Group plc, with two wholly-owned subsidiaries within which the rights of each film are 'ring-fenced'.
In the event that the EIS does not raise the full total required, the team from each film has agreed a machinery whereby the funds can, at the discretion of the directors of UK Films Group plc, be used to finance the other film.
The plc does not pass down the monies to the subsidiary until it is satisfied that the subsidiary has all of the money it requires to make the film, thus protecting the investors.
Essential to the completion of the entire package was the role played in mediating between accountants, different firms of media lawyers, corporate finance lawyers, film executives, producers and film directors. Each party had to be guided through the complex minefield of corporate law and the complex arena of film finance to ensure that the transaction was balanced, protecting all the interests of the various parties.
Those various interests ensured that, even with skilled mediation, the Manches team were still working hard at the paperwork at 5.30am on the day of the prospectus launch, 3 February 1999.
By 11.00am, the Manches team was at the Odeon Leicester Square, to support the launch of the EIS to journalists from print, television and radio.
The most innovative film financing package of recent years had been launched, giving members of the public the first ever opportunity to invest in an EIS involving two films.
For Winchester Entertainment, lawyers involved in the deal were: Paul Woolf, media partner, Manches; Chris Owen, corporate finance partner, Manches; Stephen Goldstraw, tax partner, Manches.
Paul Grindley, head of legal, Winchester Entertainment. Bob Storer, partner, Harbottle & Lewis, representing Dave Stewart. Steve Butt, partner, Edge Ellison, represented PricewaterhouseCoopers.
Paul Woolf is a media partner at Manches.