Q&A: Lawsuit halts sale of Weinstein's movie studio

A proposed $500 million deal to sell Harvey Weinstein's movie studio appears in jeopardy after New York's attorney general filed a lawsuit that could catapult the company into bankruptcy as it smolders in the wake of dozens of sexual misconduct allegations against the Hollywood mogul.

The Weinstein Co.'s board will not consider completing a sale while Attorney General Eric Schneiderman's lawsuit is pending, according to a person familiar with the negotiations who was not authorized to speak publicly and spoke to The Associated Press on condition of anonymity.

Schneiderman's lawsuit has "essentially blown up the deal," the person said.

Schneiderman, a Democrat, said he objected because the deal was going to reward a studio executive accused of covering up for Weinstein. He said the deal also shortchanged the mogul's accusers on financial compensation.

The person familiar with negotiations said that was not the case and that the final offer included a dedicated $50 million fund to compensate Weinstein's accusers.

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WHO OFFERED TO BUY THE COMPANY?

Former U.S. Small Business Administrator Maria Contreras-Sweet is leading a group of investors offering $220 million for the Weinstein Co.'s assets. The group also would assume about $225 million in studio debt.

Contreras-Sweet's group plans to use the Weinstein Co. assets to form a new studio with a new identity, with a women-led board of directors and management. They want the company's 170 employees to have jobs at the new studio and are committed to completing movie projects currently in the works.

The Weinstein Co. has produced and distributed Oscar winners such as "The King's Speech" and "Silver Linings Playbook."

Contreras-Sweet served in the Obama administration from 2014 to 2017. Her group's other investors include Lantern Asset Management and Yucaipa Companies, a private equity firm founded by billionaire Ron Burkle.

Contreras-Sweet's representatives said she was not available for an interview.

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WHY IS THE NEW YORK ATTORNEY GENERAL SUING?

Schneiderman said he wanted to make sure that potential purchasers know the extent of "pervasive patterns of illegal activity" at the Weinstein Co.

He said he does not object to a sale, but that any deal must adequately compensate Weinstein's accusers, protect employees from abuse and oust executives who allegedly covered up misconduct.

Schneiderman alleged that Contreras-Sweet's group would have put Weinstein Co. president David Glasser in charge despite evidence he failed to stop Weinstein and never had the studio's human resources department formally investigate any allegations against the mogul.

Schneiderman said he also was concerned because documents showed the group's offer did not include a dedicated victim compensation fund. Instead, he said, it was relying on insurance policies and a letter of credit that he feared would be eaten up by legal fees and other expenses.

"If any prospective buyers are interested in turning the page and doing right by (Weinstein Co.) employees and victims who were abused for years, they can and will fix these problems with the deal," Schneiderman said. "We will not stand in their way."

Glasser and the Weinstein Co. did not immediately respond to messages.

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WHAT DOES THE LAWSUIT MEAN FOR A POTENTIAL SALE?

Contreras-Sweet's deal for the company is in limbo. Her group has not publicly announced that it is pulling out of the deal, which was expected to close this week, but signs are pointing in that direction.

Schneiderman said Contreras-Sweet's representatives have not been willing to discuss his demands because the Weinstein Co. would not allow them to do so.

"There's been no effort on their part to cooperate with us at all," Schneiderman said. "In fact, her attorney said, 'why should we talk with you?'"

One sticking point in any sale will likely be the size of the compensation fund for Weinstein's accusers, said Richard Levick, the chairman and CEO of crisis-management firm Levick International.

Any deal would have to ensure funds available for compensation go well beyond the $30 million the company's insurance provides, Levick said, adding that the Contreras-Sweet group may be reluctant to move forward if they are "already at the limit of what they thought was a good deal."

Because of the lawsuit, any other potential bidders are sure to demand a lower price for what was already a fire sale deal, Levick said.

"For the remnants of the Weinstein Co. it is a game of how low you can go," Levick said. "The limbo music is playing."

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WHAT DOES THIS MEAN FOR ACCUSERS?

Some Weinstein accusers see selling the studio as their only chance at getting financial compensation. If the company files for Chapter 11 bankruptcy protection, any lawsuits against it would stop and top creditors would be the first in line to get paid, not accusers.

Lawyer Gloria Allred, who represents some of the accusers, said she had "grave concerns" that there will be no money left for accusers if the Schneiderman lawsuit compels the Weinstein Co. to file for bankruptcy.

Cris Armenta, a lawyer representing accusers in a proposed class-action lawsuit against the Weinstein Co., said bankruptcy could also be advantageous because it would open the company's finances to scrutiny.

In the long run, she said, that could help ensure the company follows through on any lawsuit settlements.

"A bankruptcy will always make matters somewhat more complex," Armenta said. "From the victims' point of view, it provides a tremendous amount of transparency and oversight."

At least one potential buyer also favors bankruptcy.

Killer Content Inc. has said that would be the best way to ensure transparency and prevent people accused of complicity in Weinstein's alleged misconduct from benefiting.

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IS THERE STILL A MARKET FOR THE WEINSTEIN CO.?

The studio was struggling even before the scandal broke, but its extensive film library could be attractive to potential buyers seeking evergreen revenue at fire-sale prices.

Jason Squire, editor of The Movie Business Book and a professor of cinema practice at the University of Southern California, said he does not consider the lawsuit as a "doomsday" scenario.

The Weinstein Co. already has moved to sell off its most lucrative assets in the wake of the scandal. Last year, Warner Bros. acquired distribution rights for the movie "Paddington 2" for more than $30 million.

Other bidders for the Weinstein Co. have been reported to include: Lionsgate Entertainment; Miramax, the studio formerly led by Harvey Weinstein and his brother Bob; and investment firms interested in acquiring some of the company's assets.

It is not clear if other potential buyers would keep the company intact, as Contreras-Sweet's group has planned.

The path forward for any buyer is unclear given the scrutiny the New York attorney general's office would give any offer for the company. It is unclear how flexible the Weinstein Co. would even be in allowing any bidder to engage with the office.

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Follow Mike Sisak at twitter.com/mikesisak and Alexandra Olson at twitter.com/Alexolson99