Santa Monica Pictures, LLC, Perry Lerner, Tax Matters Partner - Page 257

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               Second, Mr. Shapiro opined that it would not be rational for           
          CLIS to contribute the EBD film library to SMHC in its capacity             
          as an equity holder of SMHC because:  (1) The face amount of                
          SMHC’s debt was greater than the value of its assets as of                  
          December 10, 1996; and (2) SMHC’s creditors with priority claims            
          would capture the value of any contribution.222  Moreover,                  
          although debt holders may generally have an incentive to make               
          additional investments to a company in proportion to their                  
          claims, he observed that it would not be rational for one of the            
          debt holders on its own to undertake an investment that would               
          benefit it in an amount less than the cost of the investment.               
          Thus, because Generale Bank held a more significant debt claim in           
          SMHC, he opined that it would not be rational for CLIS to                   
          contribute the EBD film library in its capacity as a debt holder            
          of SMHC.  Mr. Shapiro concluded that “the true economic reality             
          of this transaction is that CLIS contributed the Film Rights to             
          SMP and not to SMHC.”223                                                    


               222 Mr. Shapiro describes this phenomenon as the                       
          “underinvestment problem”; i.e., debtholders will appropriate               
          value created by a new equity infusion, and, therefore, such                
          equity infusions do not occur.  Mr. Shapiro assumed that Generale           
          Bank and CLIS were unrelated for purposes of his analysis.                  
               223 Mr. Shapiro also observed that the $5 million advisory             
          fee exactly equaled SMP’s “cost basis” in the EBD film library.             
          On this basis, without elaboration, Mr. Shapiro concluded:  “It             
          appears that CLIS was paid separately for its Film Rights in the            
          guise of an advisory fee, instead of being paid for the Film                
          Rights as part of the price paid for SMHC’s debt.”                          





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