SPV, or a special purpose vehicle

It is a truism to say that the production of film projects is an extremely complex process. A film’s premiere on the proverbial red carpet requires a series of complicated steps to be taken beforehand, including, for example: securing funding, hiring crew members, obtaining rights to music or the screenplay, scouting locations, filming, post-production and running a marketing campaign.

Each of these elements involves potential risks for the film producer. Examples include: failing to secure the production budget, failing to complete the film within the specified timeframe, failing to secure the participation of specific stars in the project, or even the commercial failure of the finished film.

The possibility that economic risks may materialise is, of course, a scenario for which every entrepreneur – including a film producer – should be prepared. With this in mind, and bearing in mind the saying that ‘misfortunes never come singly’, it is also wise to prepare for the possibility that more than one risk might materialise during the course of a single project. For, as Murphy’s Law teaches us, “if something can go wrong, it will”. Such a worst-case scenario could result in losses that not only prevent the current project from continuing but – worse still – undermine the producer’s financial liquidity, and thus their ability to undertake further projects in the future.

One way to protect a producer against such risks is, amongst other things, to produce a film using a special purpose vehicle.

What are special purpose vehicles?

A special purpose vehicle, commonly abbreviated as SPV (Special Purpose Vehicle) or SPE (Special Purpose Entity), is a company established for a specific (potentially time-limited) purpose. In other words, it is a company set up for the purposes of a specific undertaking, which could, for example, be a property development or a film project.

Under Polish law, the most common form of SPV is a limited liability company, i.e. a legal form that allows one to benefit from the advantages of capital companies, namely the limited liability of shareholders for the company’s debts. A limited liability company differs from its alternative (a public limited company) in that it involves a lower level of formalisation of internal corporate procedures. In practice, depending on the project’s needs, the role of a special purpose vehicle may also be fulfilled by a limited partnership (in which, however, at least one partner is liable for the company’s liabilities up to the full amount with their personal assets) or the aforementioned public limited company.

Another advantage of a limited liability company as a form of SPV is the low cost of setting it up. The minimum share capital of the company is only PLN 5,000.00, and if such a company is incorporated via the S24 system, the notary’s fee for the articles of association is waived, and the court fee is PLN 250 instead of PLN 500.

Why is it worth setting up special purpose vehicles?

Using a special purpose vehicle in film projects is an excellent way to mitigate the economic risks discussed earlier. It also helps to diversify the risks associated with running several business ventures across separate legal entities.

A characteristic feature of every company (with the exception of a civil law partnership) is the principle that it constitutes a separate entity from its partners/shareholders, with the result that the liabilities of the SPV’s partners/shareholders are separate from the liabilities of the company itself. Combining this feature with the principle of limited liability of partners in a limited liability company allows for the amount of funds to be committed to a given film project to be controlled in advance. In the event of the project’s failure and a negative financial result, the creditors of the special purpose vehicle cannot pursue their claims directly against the SPV’s partners. This solution therefore safeguards the assets of the owners controlling the SPV, and if riskier ventures are skilfully separated into separate SPVs from less risky ones, it may prove to be the key to building business success.

Naturally, in the event of a risk of the SPV becoming insolvent, its managers, as members of the management board, should bear in mind the provisions of Article 299(1) of the Commercial Companies Code. According to this provision, if the members of the management board fail to fulfil their obligation to file a petition for the declaration of bankruptcy of the limited liability company within the prescribed time limit, the company’s creditors may be entitled to seek payment of the limited liability company’s debts directly from the members of the management board, provided that enforcement proceedings against the company prove unsuccessful.

Incidentally, it is worth noting here that carrying out film industry projects in the form of a special purpose vehicle also brings other, ancillary benefits.

An unquestionable advantage is the financial transparency of the project – limited liability companies, limited partnerships and public limited companies are required to maintain separate accounts. Whilst this entails additional costs, it also allows for the precise tracking of costs and revenues associated with a specific film project. Such financial transparency, combined with companies’ reporting obligations (the disclosure of financial statements online), can be beneficial from the perspective of both the producer and the co-producers and investors, as it facilitates the monitoring of the project’s profitability.

An additional advantage of the SPV’s organisational separateness and legal personality is the ability for such a company to enter into employment contracts and any civil law contracts in its own name solely for the purposes of a given project.

Right, but what’s the catch?

Given that a special purpose vehicle has so many advantages, one might ask whether there are any risks associated with setting it up for the purposes of a single project. One potential issue is that the special purpose vehicle lacks a filmography – i.e., for obvious reasons, it does not appear as the producer of any previous film and, in this respect, may be considered unreliable in the eyes of the producer’s potential business partners.

This should be taken into account particularly when applying for public funding for a film project, e.g. from the Polish Film Institute – whether in the form of grants or so-called ‘incentives’. The PISF requires the producer to have specific (and documented) experience in the industry. In principle, a producer should have a film in their portfolio that has been distributed in cinemas, broadcast or made publicly available by a media service provider, or screened at least at one international film festival accredited by the International Federation of Film Producers Associations (FIAPF). A special purpose vehicle, as a producer-legal entity, will not have such experience.

However, this issue can be addressed by involving a producer – a natural person – in the company who possesses the required experience. It should be borne in mind, however, that ultimately it is the Polish Film Institute (PISF) that will assess the credibility and validity of the evidence presented by the applicant for a grant or ‘incentive’, and whether they have sufficiently demonstrated their ability to utilise the resources of another (experienced) producer in order to carry out the film project.

At what stage of production should an SPV be established?

It is best to set up a special purpose vehicle at the start of the project, so that all rights and obligations associated with it can already be exercised within the SPV. However, if for some reason the idea of setting up a special purpose vehicle occurred to the producer at a later stage of the film’s production (for instance, because what was originally intended to be a low-budget film with a simple financing structure has developed into a larger project with a complex financing model), they may still consider assigning individual contracts (taking care, however, to obtain the necessary consents and address tax issues) or, in some cases, transferring an organised part of the business to a new entity (although this is a much more complex and formalised process).

In summary

The use of a special purpose vehicle (SPV) can bring film producers many benefits, the primary one undoubtedly being the reduction of financial risk and the diversification of risk when conducting more than one business activity – whether this involves several film productions or ventures in other industries. This advantage alone undoubtedly outweighs the need to incur additional costs associated with setting up an SPV and subsequently maintaining its accounts.