Santa Monica Pictures, LLC, Perry Lerner, Tax Matters Partner - Page 278

                                       - 45 -                                         
          The draft term sheet contained a section called “Terms of                   
          Preferred Interests”, which provided:                                       
               The Preferred Interests will have a liquidation value                  
               equal to $     million, will have a 6% per annum                       
               dividend preference, and will be convertible after 5                   
               years into 51% of Newco’s common membership interests,                 
               provided that if the conversion right is exercised,                    
               Newco may redeem all of the Preferred Interests at                     
               their liquidation value plus accrued and unpaid                        
               dividends.  The conversion right will be accelerated in                
               the event Newco fails to make a dividend payment when                  
               due on the Preferred Interests, and in other pertinent                 
               circumstances.                                                         
          In addition to these items, the draft term sheet contained a                
          section entitled “Conditions”, which, among other things,                   
          required Generale Bank to give satisfactory representations and             
          warranties to Newco and Rockport Capital as to the original                 
          amount of the loans evidenced by its “Note”, the amount                     
          outstanding under those loans at the time of the contribution of            
          the note to Newco, and the fact that MGM Group Holdings and                 
          Generale Bank continuously recorded the note as debt from the               
          date of its creation through the date of contribution.  It also             
          provided that Rockport Capital (and its associates) would decide            
          whether Newco should be structured as a partnership or a                    
          corporation for Federal income tax purposes.  The draft term                
          sheet did not mention any films or film business.                           
               On October 21, 1996, at the request of Mr. Lerner, Shearman            
          & Sterling sent Mr. Geary a memorandum entitled “Draft Letter               
          Agreement” discussing the alternative transaction alluded to in             






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