There are Observations on Chinese Investment in Hollywood

Few months before I had the honor of representing Hunan Group on the recently announced slate financing with Lions Gate, which is the largest Chinese investment in Hollywood to date.  From that experience, I can make several observations that may be relevant for others, as similar transactions are sure to follow:

1. You may have heard the quip that Chinese don’t understand how a course on U.S. history could take up an entire semester, given that it covers only 200 years, while their history is thousands of years. They have a much longer time perspective than we do, and they are usually not in a rush. So have patience. Issues may come up again and again, and it may take quite a few attempts to resolve an issue with finality. They have learned that patience can work to their advantage, although it may sometimes frustrate the U.S. counter parties if they are not accustomed to this approach.
2.  In Asia, including China, lawyers are often thought of as not needed until the very end of a transaction, after all the business points have all been agreed to, and the lawyer’s role is just to draft the contract. But in the U.S., lawyers play a very different role; they are actively involved from the very beginning and take an important role in the negotiation of business issues from the outset. The U.S. legal system is so complex that it is sometimes impossible to distinguish business issues from legal issues. Best to make this clear from the outset.
3. Miscommunication can kill deals (particularly if there is an unintended slight), and even putting aside making sure there is clear Chinese-English translation, Hollywood has its own unique vocabulary, and it is important to make sure that everyone is on the same page as to what is meant by industry terms in order to avoid misunderstandings later. For example, does “first look” mean an option or a right of first negotiation? Does “budget” mean an initial estimate of production costs, or does it mean the final actual cost?
4. China has a thriving and growing film industry, and Chinese companies usually have that in mind in making any U.S. investment. They want to distribute Hollywood films in China, they want to learn and adopt Hollywood techniques for Chinese productions, and they want to spread Chinese culture by arranging for worldwide distribution of their Chinese films. This is a very different focus than for other foreign investors, who are usually content to just make their bets on Hollywood films.
5.  China has a restricted currency, so getting investment funds out of China is not as simple as a wire transfer unless the company already has funds outside of China. There are approaches that work to solve the issue, but they must be implemented in advance, not the day of funding, as they take time to put in place.
6. And most importantly, the U.S. and California tax issues should be dealt with first, not last. The U.S. tax system is quite complex, and the tax consequences often depend on how a transaction is characterized or structured, even if the economic substance of one choice is similar to an alternative characterization or structure that has far different tax consequences. The U.S. has an income tax and a withholding tax, and California has its own separate tax system. Chinese companies pay tax in China, and they don’t particularly want to pay double tax (or triple tax, if you include California), and there are ways to structure the transactions to make sure this doesn’t happen – if planned in advance.