Ahead of an expected sale, Entertainment One is being sued for allegedly failing Endemol Shine North America from its profit share for Hell on wheels.
The lawsuit, filed Wednesday in Los Angeles Superior Court, alleges that eOne failed to declare the millions of dollars in tax credits it received for producing the series in Canada, even though it was set up specifically to secure the incentives. . Endemol also allegedly uncovered millions more in underreported earnings and overspending.
The complaint was filed as Hasbro considers selling the manufacturing and distribution unit back to eOne founder Darren Throop, who is backed by private equity firm CVC Capital Partners, to focus on branded assets such as dungeon and dragons, Peppa Pig And Transformers aiming to become a digital games giant. Recent titles from the company include The Queen of Women And Yellow jackets.
Hell on wheels, which chronicles the construction of the American Transcontinental Railroad, premiered on AMC Network in 2011 and became the second most watched series debut in network history. It ran for five seasons.
Endemol developed the show and sold it to AMC Network for distribution in the United States. It then engaged eOne to produce and distribute the series in Canada in select territories. eOne, which took responsibility for the series’ profit sharing accounting and payment, agreed to ensure that Endemol would receive a 20 percent share of net profit and 7.5 percent of modified adjusted gross revenue (MAGR). ) would receive — or the revenue the company receives minus distribution fees, expenses and production costs — derived from the series, according to the complaint. The agreement states that “net profit will be defined in accordance with (eOne’s) customary industry standard definition.”
Endemol chose to shoot in Canada to take advantage of tax incentives to shoot in the region, the complaint said. This led Endemol to approach Toronto-based eOne rather than more experienced US companies, such as Sony or 20th Century Fox, to ensure the series would qualify for the incentives.
For years, eOne’s accounting records indicated it owed no entry fees to Endemol, which isn’t unusual since many shows take years to break even, the lawsuit alleges. But an audit in 2019 found that the company underpaid all other participants. This prompted eOne to ask Endemol if it was interested in participating in ongoing settlement talks it had with others, the lawsuit said.
Endemol says a subsequent audit found that eOne underreported a total of $25 million in MAGR, largely due to the company keeping to itself all production tax credits it received for shooting the series in Canada. This allowed eOne to report a hugely inflated figure for the show’s production costs, the lawsuit alleges.
“There was no justification for eOne’s absorption of the tax credits for its sole benefit,” the suit reads. “eOne’s decision to keep them exclusively for itself not only violates the express terms of the MAGR Agreement, but also reflects eOne’s bad faith and dishonest conduct that violates Endemol’s reasonable expectations of benefit from any contract with eOne in the first place.”
In addition to pocketing the tax breaks, eOne also charged 15 percent overhead on the production cost of the series, according to the complaint.
An audit of net income also revealed that eOne failed to report more than $31 million. A significant portion of that stemmed from the company’s choice not to report licensing revenue from iTunes and Netflix, the complaint said.
eOne reportedly justified the accounting by claiming that some of the issues, including the retention of all production tax credits and the addition of an overhead cost of 15 percent of production costs, were approved under the company’s standard definition of MAGR and net profit.
“However, Endemol cannot verify that because eOne has never deigned to send Endemol either definition,” Robert Schwartz, Endemol’s attorney, writes in the indictment.
Hasbro and eOne did not immediately respond to requests for comment.