For more than three years, internal conflict has raged among the shareholders of Octagon Films, one of Ireland’s most illustrious television and film production houses. 

The Berlin-based film company, W2 Film Produktions, is suing Octagon directors Morgan O’Sullivan and James Flynn claiming they systematically diverted over €40 million from the company either to themselves or related businesses. The claims are categorically denied.

W2 is a 49 per cent shareholder of Octagon. O’Sullivan and Flynn, who have worked on everything from Hollywood blockbusters like Braveheart to award winning Irish series Love/Hate, control the rest of the business.

Given the timeframe to date, it will be no surprise to hear that acrimony and six-figure litigation expenses are racking up. Yet the case is still months away from a full hearing.  Undoubtedly the price of such legal showdowns can be high. 

But according to Flynn the true cost of the action is much higher.

In a recent court filing, the film producer complained of the significant financial and reputational loss and damage caused by the marathon litigation. Apart from a recent offer to produce a TV spin-off of the very successful Vikings series, he said: “the phone has effectively stopped ringing”.

New work has completely dried up as a result of the “very serious and unfounded allegations of wrongdoing,” he continued.  Turnover for Flynn and O’Sullivan business ventures has allegedly fallen by a dramatic 67 per cent from approximately €4.2 million in 2016 to  €1.4 million for January to early December 2019, the court was informed.

To add to the film producers’ woes, W2 indicated last November that it might move to injunct any attempt to make the Vikings Valhalla follow-up.

Separately, accounts lodged last July with the Companies Registrations Office saw profits at Octagon continue a year on year tumble from €161,682 in 2017 to €78,136 in 2018. That was down from €298,494 in 2016, the year the dispute first came to public attention.

These figures would certainly suggest the court case is taking a toll. 

Can the Bafta and Emmy winning makers of television hits such as Borgias, Vikings, Love/Hate and The Tudors, along with films such as Calvary, survive the legal onslaught?

*****

When you think of big productions located in Ireland, like The Tudors and Vikings, there is a good chance the words ‘tax breaks’ will come to mind. 

The government, keen to lure in investment in the sector, set up the generous section 481 rebate back in 1997. Before that, there was the section 35 tax incentive, introduced in the budget a decade earlier.

As it currently stands, section 481 allows independent film and television producers shooting in Ireland to claim back up to 32 per cent in tax credits (37 per cent if they locate in the regions) against the costs of cast and crew and all related services sourced in the country. Relief is capped at €70 million. 

The qualifying rules mean international producers are incentivised to team up with local production houses. Typically, a special purpose vehicle is set up for production.

For years, the talents of O’Sullivan and Flynn thrived in this environment. 

O’Sullivan, in particular, has a longstanding pedigree in the tv and film industry, making Hollywood contacts as far back as 1970 when as an independent RTE producer he decided to make a behind the scenes documentary on the classic US cop show Hawaii Five-0.                             

The 74-year-old headed up Ardmore Studios, sat on the Irish Film Board (Screen Ireland) and was chair of the Irish Film and Television Academy (IFTA). Back in the 1980s and 1990s, O’Sullivan played a key role in lobbying the government to support the underdeveloped Irish film industry. “It’s not all sunglasses and autographs. We simply want to be recognised as a serious business and treated as such. I don’t want Ireland to miss the boat,” he told The Irish Times, 30 years ago.

By the 1990s, O’Sullivan had truly arrived, co-producing international blockbusters, filmed in Ireland, like Braveheart. One of his companies, World 2000 Entertainment was linked to Disney in the early noughties and there was a link-up with legendary Hollywood action producer Jerry Bruckheimer (Top Gun, Pearl Harbor, Pirates of the Caribbean) for historical epic King Arthur, starring Clive Owen and Kiera Knightley.

Flynn (54) is hardly a laggard. Having started off his career with John Boorman’s Merlin Productions, he worked for the Irish Film Board before forming a partnership with O’Sullivan in 1998.  He has offered executive and co-production services for the likes of Alien director Ridley Scott and worked on, what was in 2002, the biggest budget film shot in Ireland, the sci-fi flop Reign of Fire starring Christian Bale and Matthew McConaughey.

He was also chair of lobby group Screen Producers Ireland (currently chaired by former minister and Green Party leader John Gormley). His wife Juanita Wilson won an Oscar nomination in 2009 for her directorial debut on the short film The Door.

Both Flynn and O’Sullivan clearly have substantial industry reputations. In recent years their television work, in terms of international and domestic output, is probably better known. Alongside American cable productions like Camelot and The Borgias, there have been domestic successes like Love/Hate and Raw. The acclaimed Love/Hate secured European Netflix distribution in 2015.

*****

*****

A new production house

Octagon Films was set up by O’Sullivan and Flynn in 2001. According to the company’s constitution, it was: “to carry on in all parts of the world the business of developing, making, producing, exhibiting, distributing, renting, letting on hire and otherwise exploiting cinematograph and television films and motion pictures of all kinds, and to act as agents for the purchase, sale, hiring and exploiting of such films”.

The Berlin based W2, which invests in international film productions, says it bought a 49 per cent stake in the start-up the following year believing it likely that it would be a successful venture. 

However, W2 now claims that it was misled about Octagon’s finances from as far back as 2003. The central tenet of its court case against Flynn and O’Sullivan is that they allegedly diverted as much as €44 million in fees, income and opportunities from the company, cutting W2 out as a shareholder.

On affidavit last year, O’Sullivan described the €40 million claim as “quite unreal”

It is suing for damages alleging breach of duty, breach of contract, fraud, and conspiracy. 

The Berlin company also wants an account of all the profits made by the defendants on a number of productions spanning back 17 years.

The case being brought by W2 is known as a derivative action which allows a minority shareholder to sue on behalf of the company, in this case Octagon, the directors or majority shareholders over some alleged failure.

On affidavit last year, O’Sullivan described the €40 million claim as “quite unreal”. He said it “betrays either a gross misunderstanding of the operation of the film finance sector or a willful disregard of film finance and production services practices”.

The thrust of Flynn and O’Sullivan’s defence is that the scope of Octagon was limited to film development, and was intentionally separate from much of the executive and film production services the two men provided through their other outlets World 2000 Entertainment (linked to O’Sullivan) and Metropolitan Film Production (O’Flynn).

They claim they were entitled to carry out their own work under the Octagon banner and deny that any money due to the company was diverted.

The court heard that Octagon Films allegedly had turnover of €1.8 million between 2002 and 2014 despite its directors being involved in 113 film and tv productions that cost around €1 billion and generated almost €457 million in section 481 relief.

During that time, two films were directly made by Octagon, Inside I’m Dancing in 2004 and As If I Am Not There in 2010. 

W2 director Winfried Hammacher told the court, on affidavit, that he believed Octagon was dormant until he saw the company credited on an episode of Vikings in 2014. It is the Berlin company’s claim that Octagon should have received millions in fees but that instead, the take was nominal.

A row over the fees generated from the original series of Vikings is a central tenet of W2’s case.

During 2015, W2 says it began to investigate the role of Octagon in a number of very successful productions from Calvary to The Borgias.

There was correspondence back and forth between the parties.

The following year the case went to court.

The long and winding road

When W2 first went down the legal route in 2016, O’Sullivan and Flynn brought, without success, a High Court petition to wind up Octagon.

Since then, there have been numerous pre-trial applications and hearings along with accusations, denied by the two producers, that they have engaged in foot dragging and intentional delay. 

Over 20 affidavits have been filed by the parties and the case has had over 60 pre-trial court dates before Justice Theresa Pilkington.

The amount of documentation requested by the Berlin-based film company ahead of the trial was so vast, it might take a year to put together, the court heard.

In October 2018, W2 secured a freezing order against the Irish producers’ assets.

Many more of the courtroom rows have revolved around the issue of discovery, specifically the handing over of extensive documentation to W2. The German firm has sought an extensive number of financial records around the two men’s TV and film work which it claims will give proof of fraud.

Grant Thornton and EY accountants hired by the two sides, clubbed their resources to provide joint reports establishing parameters on a number of issues in contention including what categories of documents needed to be surrendered. 

On budget and on time?

After considerable correspondence and negotiations, a court order finalised the parameters of the discovery process in late June of last year and gave the film producers a deadline of October 15, 2019 to deliver up information. 

This was unrealistic, the two men argued retrospectively.

In a recent affidavit, Flynn suggested his side was overwhelmed by the discovery process, which he said sought material spanning back 17 years.

The amount of documentation requested by the Berlin-based film company ahead of the trial was so vast, it might take a year to put together, the court heard. This was apparently calculated on the basis of five reviewers, working a 5 day week.

That would mean the hearing of the trial would be pushed back to as far as December 2020.

The court heard gathering files from one source alone – the film producers’ former lawyers Matheson – would apparently involve a trawl through 613 boxes of files or 600,000 hard copy pages and cost in the region of €425,000, according to advice received from a legal costs accountant.

The scope of documents to be identified, reviewed and processed, the court was told, had not been fully appreciated last June. Problems included the fact that many documents were held by third parties who were under no obligation to surrender them. These included Take 5 Productions, IBRC, Screen Ireland (formerly the Irish Film Board), RBK, Mazars, Crowe, O’Leary Tucker and – the aforementioned – Matheson. These parties had shown a willingness to cooperate but also expressed serious concerns about the breadth and extent of the discovery requested and the very significant time, cost and resources involved.

The court heard Matheson’s final position on the matter was unclear and IBRC said it was unable to satisfy the discovery request without a court order directing compliance.

Privacy rules under the General Data Protection Regulation (GDPR), were also cited as a hindrance as documents would apparently have to be reviewed to see whether confidential and personal matters irrelevant to the case and touching on the confidential business of third parties would require redaction – leading to “unavoidable delay”.

There was also the issue of legally privileged material.

He said it was noteworthy that O’Sullivan and Flynn had not sought to defend findings in the final joint expert report that they allegedly received €17.9 million “profit entitlement” from various bank accounts.

It was suggested that Matheson might have to review the paperwork on over 100 film and tv productions.

In total, despite the joint expert reports by the two top accountancy firms, Flynn said more than 2.5 million documents had yet to be processed. A member of EY’s Forensic and Integrity services had estimated discovery costs could reach €900,000, excluding legal costs, he added.

Berlin strikes back

In reply, the W2 director said he found Flynn’s claims suggesting “discovery is an almost impossible task for them” not credible. Hammacher alleged the film producers were trying to delay proceedings years after they began, either because they had no real defence to the claims or because they were trying to render themselves judgment proof, a term used to describe people who can’t afford to meet their creditors’ demands.

He then launched into an attack on the defence provided by the Octagon directors. 

He said the notion that the Irish producers carried out their own separate work but “gifted” production credits to Octagon “to boost its reputation” was ridiculous, untenable and at odds with the content on the film company’s website. 

He said it was noteworthy that O’Sullivan and Flynn had not sought to defend expert findings that they allegedly received €17.9 million “profit entitlement” from various bank accounts that were not recorded in the general ledgers of the various section 481 production companies set up for different shows.

With reference to the joint accountants’ final report from June 2019, he claimed Metropolitan Films had received income from the relevant productions of over €16.4 million, O’Sullivan Productions had taken in €11.9 million, World 2000 Entertainment €3.1 million and O’Sullivan personally €1.3 million.

Morgan O’Sullivan’s salary and pension is alleged to have come to €2.8 million. His wife Elizabeth O’Sullivan, a director of O’Sullivan Productions, is claimed to have got a total €1.6 million. 

Hammacher alleges that significant sums were paid out to O’Sullivan and Flynn and their relatives, and that other company costs remain unaccounted for. 

He claims Flynn received €1.75 million in salary and pension payments and that his wife, the director and writer Juanita Wilson, took in €2.7 million.

Morgan O’Sullivan’s salary and pension is alleged to have come to €2.8 million. His wife Elizabeth O’Sullivan, a director of O’Sullivan Productions, is claimed to have got a total €1.6 million. 

W2 alleges that millions more are “impossible to trace”.

Riposte

It was at this point in the row, in late 2019, that Flynn complained the legal proceedings were causing film and tv work to dry up for him and his business partner, resulting in significant financial loss and damage. 

On affidavit late last year, he claimed if he and O’Sullivan won the case, they would not be compensated by W2, a company that is allegedly insolvent. He claims the Berlin firm is continuing the litigation with support from unknown third party backers.

The financial risks are uneven, he suggested.

Replying to the accusations of the W2 director, Flynn said the Octagon project had effectively been over for a decade as the German firm had proven unwilling to commit financial investment after 2006. He said the W2 shareholder Will Baer confirmed its demise in a phone call back in 2009.  He described Baer as the principal operator when W2 first came on board with Octagon, and said “worryingly” he had been “conspicuous by his absence from this litigation”.

In Flynn’s account, all the high profile production work like The Tudors, Penny Dreadful, Roman Spring of Mrs Stone and The Borgias derived from him and O’Sullivan’s previous relationship with US television network giant Showtime. This relationship allegedly predated Octagon’s inception. He claims Hammacher had long been aware of his external production work and even used Flynn’s CV in a German film fund application in 2009.

Flynn stands over his contention that he attempted to generate profile for Octagon, by associating it with a number of productions he worked on.

The use of “vanity company credits’ is regular industry practice for branding purposes, he claimed and he says he did it in order to raise funds that would allow Octagon pay creditors and develop some projects it had on the books.

In domestic productions such as Raw and Love/Hate, Flynn claims Octagon was credited and paid as a co-producer.

To meet Revenue requirements on section 481 tax relief, a qualifying production company has to be nominated, usually a SPV. Octagon was never that company, he states. While for example, Octagon was named in the Jane Austen biopic, Becoming Jane, he claims the company was not exposed to any financial risks, while he and O’Sullivan made personal guarantees that left them on the hook for millions.

In domestic productions such as Raw and Love/Hate, Flynn claims Octagon was credited and paid as a co-producer.

Flynn absolutely denies dissipating monies from Octagon and claims the combined profits of Metropolitan, World 2000, O’Sullivan Productions and Octagon over 17 years probably totalled around €5.8 million on turnover of €39.6 million.

He claims there are ample records tracking the flow of money except in respect of bank entities that have been liquidated. 

Payments to him and O’Sullivan and their spouses at a 15 per cent profit margin are, he contends, in line with industry norms. “Whilst the Directors acknowledge the growth of active competition in the film tax relief sector, there are no other individuals in Ireland who have enjoyed comparable success over the past two decades,” he said.

Having been involved in projects nominated for Oscars, Golden Globes and multiple Emmy awards, Flynn says their current market rate for high-end, episodic television ranges from $30,000 to $50,000 per episode where each episode would be completed within two to two and a half weeks.

But that, he claims, is increasingly in the past. He says despite their track record and unblemished reputations, in 2018 and 2019 he and O’Sullivan did not secure an opportunity to tender for three large scale television projects filmed in Ireland with a combined value of €180 million. He blames being side lined solely on the legal proceedings.

Based on falling turnover, he calculates that as producers they have suffered losses of around €1.3 million since 2016. This does not include the cost of legal and expert fees to date of €678,000.

The drama it seems is far from over.