Author: John Byrne  Lawyer/Business Consultant, Lemniscate Ltd

Corporate Legal Forms

There are four principal legal forms that a film production or distribution company might take: 

• sole trader: the simplest structure, but carrying unlimited liability for the owner
• partnership: relatively simple but inflexible. Financial affairs are confidential but limited to 20 partners and again carrying unlimited liability for the partners
• limited liability partnership: introduced in 2001, these provide limited personal liability for the partners but tax and operational issues are still being sorted out. Loss of confidentiality as accounts must be filed. Limited partners may not be involved in the management of the partnership
• limited liability company: see below

Limited Liability Companies: this is generally the best legal form for film companies to use. Limited companies are cheap and easy to set up and they protect the directors by limiting their liability for any debts run up by the company to the amount that they have invested in it. However, this protection is removed if any director acts in any way that is unlawful, negligent or not in the best interests of the company (ie. in the best interests of the shareholders on an ongoing basis). The directors are also liable if the company continues to trade beyond the point when it can reasonably expect to meet its outstanding liabilities. In this situation, the directors are personally responsible for any additional liabilities incurred after the company has reached this point.

When creating a limited company, directors must be clear about their individual rights and responsibilities; the rights and responsibilities of their fellow directors; the fundamental issues that will need the unanimous agreement of all directors; and the procedures that will be put in place for resolving any disputes. Directors should make sure that they are familiar with the company's internal rules and procedures and that they read all documents (eg. minutes of board meetings) carefully before signing them.

Being a director of a limited company carries a number of additional responsibilities. Companies are obliged to prepare annual accounts and file a copy with Companies House. Company law requires that certain information appears on all correspondence issued by the company.

Film production companies may wish to establish Special Purpose Vehicles (SPVs) for each film that they make. These are separate limited companies that control the assets and liabilities for the individual film and ring-fence it from the rest of the company's activities. When acting as the director of a SPV (or any subsidiary company) the director is responsible for that company and must always act in that entity's best interests - not necessarily those of the parent or holding company. This can clearly create potential conflicts of interests on which legal advice should be sought.

Choosing a Company Name

There are certain checks that need to be carried out before a company registers a particular name. Firstly, the name must be available for registration at Companies House. The name may not include any of a list of prohibited words (including "Royal", "British" etc.); and (if the same directors are involved) may not be the same name as a company that has been declared insolvent within the last five years. Furthermore, the name of the company cannot imply that it is part of a larger corporate structure if this is not in fact the case. It is possible to register a name which is similar to an existing name - but this may be subject to challenge by the existing company within twelve months of registration, particularly if there is any suggestion that the new company is attempting to pass itself off to customers as the better known brand. If the company is trading internationally, the checks will also need to ensure that the name will work, and is not already being used, in other countries.

The company name does not have to be the same as the trading name but the company must always make clear when it is trading under a different name than that under which it is registered. The exact company name must appear on all company stationery and correspondence.

Contracts

Contracts do not have to be written down to be legally binding - but it is always better for both parties to have something in writing and signed. Under English law, there is no duty of good faith in a contract - the terms have to be clearly agreed to be binding on both parties. A contract should clearly establish your rights, the other parties rights and the consideration to be made by both parties. (Consideration must be present for a contract to exist but it does not have to be commensurate or equivalent on both sides.)

There are a number of different types of quasi-contractual agreement including:

• Heads of Agreement - this records the salient points agreed between the parties but may not be intended to be legally binding
• Letter of Intent - describing an intention to act in a certain way but which, again, may not be intended to be binding
• Comfort Letter - which can be agreed in place of a formal guarantee but is, again, not usually intended to be binding
• Memorandum of Understanding - recording the broad parameters reached between parties but, again, more often than not, not intended to be binding

Any of these agreements can carry the force of a full contract if the parties agree, or may provide that specific terms are legally binding. Conversely, the parties can make everything "subject to contract" to make absolutely clear that none of the terms is intended to carry contractual force. Whatever their intentions, all parties should make absolutely clear what legal force they intend any of these documents to have.

An important point to remember is that lack of documentation does not equate to lack of contractual obligations. As mentioned above, the contract does not have to be in writing and lack of signature on a document does not necessarily mean that the terms are not binding. It just becomes more difficult to prove what was intended by both parties if documents are not properly signed off and agreed.

Employee Contracts

All employees are entitled to receive a statement of their terms and conditions of employment, whether or not that is in the form of a formal contract, a letter of appointment or any other written form. If the employer only uses a letter of appointment, rather than a formal contract, however, the courts may imply contractual terms. It is always better, therefore, to issue a formal contract to all employees.

The content of the statement of employment must include:

• the employer and employee names
• the date on which employment commences
• the date on which the period of continuous employment began (where an employee has moved jobs within the same employer)
• the scale, rate or method of calculating remuneration
• the intervals at which remuneration will be paid
• any terms and conditions regarding hours of work
• any terms and conditions relating to holidays, holiday pay, sick pay, pensions etc
• the notice period entitlements for employer and employee
• the job title and/or a brief description
• the place of work
• if employment is not intended to be permanent, the period for which it is expected to continue or the end date of any fixed term
• details of any collective agreements
• details of any applicable disciplinary or grievance procedures

Top Tips

• The secret to getting best value from a lawyer is knowing exactly when to use them.
• Most film companies should take the legal form of a limited liability company to protect the directors from unlimited liability if the company folds.
• When choosing a name, the company must avoid passing the company off as an established company by choosing a name which could create confusion in clients' minds.
• Contracts do not have to be written down to be binding but it is generally preferable for them to be in writing to avoid confusion later on.