Sony and Zee’s attempt to revive their $10 billion merger deal has been encountering challenges. On February 20th, Zee Entertainment Enterprises Ltd. clarified that emerging reports of renewed negotiations with Sony to resurrect the called off deal are inaccurate. The company stated that it is currently not engaged in any discussions, indicating an impasse in the merger deal. This deal was initiated in December 2021 which bore immense significance for the sustainability of both companies, particularly for Zee as the company was under scrutiny for corporate misgovernance, notably following the unprecedented crisis involving promoter share pledging in 2019. Amidst this crisis, Zee’s promoters, the Essel Group, liquidated stakes to repay debts, resulting in a drastic drop in promoter shareholding from 42% to 4%. Despite regulatory scrutiny from the Securities and Exchange Board of India (SEBI) against Mr. Punit Goenka and Sony’s opposition, he retained his role as Key Managerial Permission (KMP).

The merger was terminated due to disagreements regarding the selection of the CEO for the combined entity. Additionally, companies within Sony group argued that the merger’s closing conditions were not met, resulting in the agreement’s cancellation. Now, after calling off their deal, the two companies are knocking on the doors of legal forums in India and Singapore.

Unravelling spiraling complexities and challenges

It was indeed saddening to witness the Indian promoters, including the Chairman Mr. Subash Chandra and others who had painstakingly built the company from its inception, dwindling down to just a 4% stake. The Chairman established an Indian entertainment network amidst fierce competition from global giants such as Rupert Murdoch’s Star India. However, his empire crumbled due to failed investment infrastructure. As a part of the merger conditions, Sony insisted on disposing of Zee’s INR 520 crore investment in Margo and excluding it from the merged entity, matter still appears on books and remains unresolved. In November 2019, three independent Zee directors resigned, leading to SEBI investigation. Their concerns revolved around the use of a INR 200 crore fixed deposit held at Yes Bank to repay loans owed by related parties of Essel Group, which is promoted by Subash Chandra and his family, including his son Punit Goenka. SEBI disclosed that Chandra, in his capacity as the chairman of Essel Group, issued a letter of assurance for INR 4,210 crores. Now, the board has leveled accusations against Subash Chandra for “suppressing material facts” in the ongoing investigation.

Moreover, the shifting landscape of the industry, heightened competition, and declining profitability have put Zee in a predicament since the merger announcement. The impending finalization of Reliance’s acquisition of Viacom and Disney+ Hotstar deal, with Reliance group securing 51% stake, is not promising for Zee as these entities would possess significant broadcasting rights for major cricket events, including the Indian Premier League, International Cricket tournaments, and other bilateral cricket series’ of the Indian team. The merger covers 50% of India’s streaming consumers.

In order for Zee to establish its prominence in Over The Top (OTT) domain, it should expand its platform with a secured support from a financial partner. Due to adverse industry conditions, Zee’s Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) dipped 42.9% to INR 209.2 crore over INR 366 crores in the corresponding period in the previous fiscal. Consolidated revenue declined 3.1% to INR 2073 crore. Business Today reports sharp fall in profits considering sequential drop due to major cricket events in the first half of quarter.

The primary contention over appointment of Mr. Punit Goenka as the CEO of the merged entity led Sony to withdraw from the deal. Sony wanted Goenka off the post due to ongoing investigation against him and insisted on appointing CEO Mr. NP Singh. Zee released a statement on Goenka’s willingness to resign in favour of the merger and accept a less prominent role as director on the merged entity’s board until a resolution is met, aimed at safeguarding stakeholders’ interests. Zee also mentioned proposing an extension of up to six months for this arrangement. NP Singh stated that the group was “committed to setting the company up for a long-term, strong future”, emphasizing confidence in Sony India team’s capability to navigate forthcoming challenges and commitment to spearheading change.
The looming threat of a 90-million-dollar termination fee asserted by Sony against Zee adds complexity to the resolution process. Currently, Culver Max Entertainment Sony Group has turned to Singapore International Arbitration Centre (SIAC), while Zee, denying the charges, approached the National Company Law Tribunal (NCLT) in Mumbai, requesting for directions to enforce the merger scheme.

Detailing the next steps, if the parties have already selected an arbitrator, SIAC can facilitate arbitration proceedings as it has appointed arbitrators worldwide. However, if the parties have not yet chosen their arbitrators, Sony will request SIAC to establish the arbitration tribunal which on being constituted, will have a formal hearing to determine the arbitration schedule. The NCLT granted approval for the merger in August 2023. Nevertheless, certain observations made by the NCLT posed challenges to the completion of the merger. Its analysis on objectors who raised concerns regarding non-compete fee and appointment of Punit Goenka, noting that none of them were direct creditors of Zee nor had any contractual relationship with Zee. The tribunal further delved into the nature of claims, particularly focusing on the letter of comfort assured by Mr. Chandra and JC Flower’s claim, emphasizing that such a latter lacked the nature of a legal guarantee. Additionally, the NCLT observed that certain claims were under dispute and pending in various courts and tribunals, further complicating the objector’s position. Furthermore, the NCLT examined the statutory framework governing objections to schemes of arrangement under Section 230 of the Companies Act, 2013, as well as legal precedents such as Emco Ltd., Astorn Research Ltd., and Mayfair Ltd. The tribunal found that none of the objectors met the criteria to object to the scheme, as they were not creditors with undisputed claims. Acknowledging the principle of commercial wisdom exercised by shareholders, as established in the case of Miheer Mafatlal v. Mafatlal Industries, the NCLT highlighted that the overwhelming approval of the scheme by 99.997% of ZEE’s shareholders weighed significantly in its analysis. The tribunal emphasized its limited jurisdiction to interfere with shareholders’ commercial judgment unless the scheme is deemed unconscionable, illegal, unfair, or unjust.

The fate of the merger will depend on NCLT’s decision as Zee has requested the tribunal to enforce the merger. NCLT recently issued notice to Sony with a two-week window to submit its response and scheduled hearing for March 12. The SIAC clarified that it lacked jurisdiction to prevent Zee from approaching the Indian tribunal, asserting that the merger fell under the purview of the NCLT of India, as stated in Zee’s filings to Indian stock exchanges. Sony expressed disappointment over the ruling but stressed that it was solely procedural, reiterating its intention to pursue arbitration in Singapore and uphold its rights to terminate the merger agreement and seek remedies.

What does the future hold for merger deals?

As the landscape of mergers and acquisitions undergoes transformation, uncertainties surrounding regulatory approvals are becoming more prevalent. In Corporate India, numerous conflicts have unfolded, with the most recent example being the dispute within Indigo Airlines involving promoters Rahul Bhatia and Rakesh Gangwal. These power struggles, whether among sibling promoters, conflicting investors and promoters, or other stakeholders, pose significant risks to the company’s sustained growth and, consequently, to the multitude of shareholders when the company is publicly traded. The unfortunate dissolution of partnerships between multinational corporations (MNCs) and Indian companies amidst promising ventures is concerning, particularly when reasons for such separations remain opaque. This phenomenon not only dampens prospects but also jeopardizes the reputation of Indian businesses globally.
In a narrative of business revitalization, prompt action holds utmost importance. Zee’s protracted period of turmoil has undermined trust among shareholders, leaving a notable gap. The Goenkas now face repercussions resulting from this deficit in trust. Should Zee pursue legal action against Sony, the risks escalate. Entering into an unrestrained legal dispute could exacerbate the unresolved challenges confronting Zee such as spanning issues with debtors, regulatory conflicts with SEBI, and the prevailing lack of confidence among shareholders; all unfolding simultaneously.

In light of these challenges, it is imperative for legal advisors and stakeholders to integrate robust troubleshooting mechanisms into their merger agreements. Fast-track arbitration provisions can serve as vital safeguards, facilitating the resolution of unforeseen hurdles that may arise during the merger process. In an era marked by increasing complexity and unpredictability, the implementation of comprehensive contingency plans can prove instrumental in navigating uncertainties effectively. By fostering collaborative efforts and prioritizing strategic planning, we can ensure that valuable partnerships not only endure but also contribute positively to our business ecosystem.

– Authored by Arundhathi Ram.