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Paramount to Be Audited by China’s Huahua, Shanghai Film Group (EXCLUSIVE)

Chinese companies Huahua Media and Shanghai Film Group are formally seeking an audit of four movies produced and released by Paramount Pictures.

The move comes less than a day after Huahua’s three-year deal to co-finance a slate of Paramount titles was officially dissolved by mutual consent, after less than a year of operation.

The Chinese pair have hired lawyers and accountants to examine the studio’s accounts concerning “Jack Reacher,” “Allied,” “xXx: The Return of Xander Cage,” and “Star Trek: Beyond.”

Under the slate funding deal, Huahua was an investor in titles “Jack Reacher: Never Go Back,” “Arrival,” “Allied,” “xXx,” and “Ghost in the Shell.”

Signing an agreed termination of the slate funding deal allowed Paramount and Huahua to halt their contract without suing each other. But it is understood that the audit concerns movies in which there were additional investments from the Chinese companies. They may also seek an audit of “Ghost in the Shell.”

Clauses permitting such audits are common in investment deals. Triggering them usually implies dissatisfaction over the transparency of the business, typically regarding issues of deflated revenue or inflated costs.

It is understood that the Chinese companies are concerned Paramount may have assigned a disproportionate share of its central costs to the movies with outside finance, compared to those movies wholly owned by the studio.

In a statement Tuesday, Paramount’s parent company, Viacom, blamed the slate financing termination on “recent changes to Chinese foreign investment policies.” But while government controls on the outflow of capital from China hampered state-owned Shanghai Film Group, they had little impact on Huahua, a private company with substantial capital offshore. Rather, concerns about Paramount’s accounting and its assessment of the slate’s profitability were Huahua’s main motivation for breaking off what would otherwise be a largely passive investment. The company concluded that Paramount’s upcoming titles between now and mid-2018 had little chance of a positive investment return.

Still, Viacom said that Paramount maintains its relationship with Huahua and will explore opportunities to work together.

Terminating the slate deal early cost Paramount $59 million, which will be shown in the studio’s fourth-quarter 2017 results. The studio said it has found other financing partners to replace the Chinese investors. They include Hasbro, Skydance Media and SEGA, and will provide 25% of the production costs of the studio’s film slate for fiscal 2018 and 2019.

Jim Gianopulos, Paramount chairman and CEO, said Tuesday that the studio was changing its approach to funding movies. “The actions we are announcing today establish a financing model that is better aligned to Paramount’s new strategic approach to film production. Our focus on a more balanced slate – a mix of big, broad-audience films and more targeted and co-branded films made with greater fiscal discipline – demands a more flexible and tailored financing model going forward. This structure positions us to capture more upside beyond 2019 as the new slate takes full effect.

“The production financing Paramount has secured is weighted toward its bigger-budget films, allowing Paramount to capture greater upside on its more modestly budgeted titles, where presently there is no third-party financing.”

Another element of Huahua’s dissatisfaction with the slate funding agreement was the wholesale change of senior management at Paramount after Sumner Redstone asserted control in the fall of last year. High-profile departures since the ousting of Philippe Dauman have included Brad Grey, Nic Crawley and Rob Friedman. This week, Megan Colligan was forced out as president of worldwide marketing and distribution.

“We are a great company with exceptional people, and I am more bullish than ever about our future,” said Gianopulos on Monday in a memo to staff, following news of Colligan’s exit.

Paramount did not respond to a request for comment.

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