Introduction
In the ever-evolving landscape of the media and entertainment industry, mergers and acquisitions are no strangers to controversy and complexity. The merger between Zee Entertainment Enterprises Limited (ZEE) and Sony Group Corporation (SGC) is a recent case study that highlights the intricate dance between regulatory scrutiny, stakeholder interests, and market dynamics. This article traces the trajectory of the Zee-Sony merger, from its inception to the eventual challenge in the National Company Law Tribunal (NCLT) and the favorable order that paved the way for its realization.
A Landmark Merger
The proposed merger between ZEE and SGC garnered significant attention due to its potential to reshape India's broadcasting sector. With a vision to create the largest television broadcaster in India, the merger promised a synergy of content production, distribution, and broadcasting capabilities. The Competition Commission of India (CCI), responsible for ensuring fair competition, raised initial concerns over market concentration in certain segments. The parties' proactive response to these concerns was pivotal in obtaining a phase one clearance from the CCI vide order dated October 4, 20221.
The CCI's main areas of concern revolved around the parties' dominant presence in TV channel supply and advertising airtime markets. The fear of reduced bargaining power for advertisers and downstream partners like distribution platform operators (DPOs) triggered alarms. To address these concerns, the parties devised voluntary remedies, including the divestment of select TV channels. The parties' concerted efforts to demonstrate that their merger would not hinder fair competition played a crucial role in gaining CCI's approval.
The NCLT Challenge
Despite the CCI's green light, the journey towards the merger's completion encountered a significant obstacle in the form of creditors' objections. Creditors such as Axis Finance, JC Flower Asset Reconstruction, IDBI Bank, and others raised concerns about ZEE's alleged default on loans and misuse of funds. The creditors' objections were twofold:
- Non-Compete Fee: One of the key objections
pertained to the non-compete fee associated with the merger, a
complex arrangement that sparked heated debates during the National
Company Law Tribunal (NCLT) proceedings. The objection revolved
around a non-compete fee of USD equivalent to INR 1,101,30,91,800
(Indian Rupees Eleven Hundred and One Crore Thirty Lakh Ninety-One
Thousand and Eight Hundred). This fee was stipulated to be payable
by SPE Mauritius Investment Limited, a Sony group entity, to Essel
Mauritius. The funds from this non-compete fee were intended to be
used either for Essel Mauritius to subscribe to its portion of the
Essel Subscription Shares or paid to Essel Mauritius SPV for the
same purpose. This intricate arrangement was part of the broader
non-compete agreement involving key individuals and entities.
The contention put forth by the objecting creditors was that this non-compete arrangement was, in fact, a cleverly disguised mechanism to disadvantage lenders and public shareholders of Zee Entertainment Enterprises Limited (ZEE). The argument was that if the non-compete fee wasn't allocated to the promoters, the substantial amount of INR 1,101,30,91,800 would have rightfully belonged to ZEE's shareholders. This, they argued, could have been utilized to recover the outstanding dues owed to the creditors.
The essence of the objection lay in the alleged dubious nature of the non-compete fee arrangement. Creditors questioned the legitimacy and fairness of this arrangement, suggesting that it was structured in a way that potentially diverted significant funds from the company and its shareholders to the promoters' benefit. These objections were lodged on the grounds that the merger would negatively impact their interests. The NCLT was tasked with weighing these objections against the potential benefits of the merger.
- Appointment: This challenge revolved around
the appointment of Mr. Punit Goenka as Managing Director and CEO
for a five-year term following the scheme's implementation. The
intricacies of this appointment, alongside recent developments
involving regulatory authorities, added layers of complexity to the
NCLT's deliberations.
The appointed Managing Director and CEO position was envisioned to be held by Mr. Punit Goenka, a key figure in the Zee Entertainment Enterprises Limited (ZEEL) landscape. However, this proposition faced strong opposition from creditors who pointed to a recent interim order issued by the Securities and Exchange Board of India (SEBI). This order, issued on June 12, 20232, restrained both Mr. Punit Goenka and Mr. Subhash Chandra from assuming any key managerial positions in listed companies or their subsidiaries. The order was rooted in allegations of financial irregularities purportedly committed through entities within the Essel Group.
The crux of the creditors' argument rested on the premise that the appointment of Mr. Punit Goenka as CEO of the merged Zee-Sony entity should not proceed due to the ongoing regulatory scrutiny. The SEBI order, they asserted, cast a shadow of uncertainty over the eligibility of Mr. Punit Goenka to hold such a position within a listed company.
The petitioners further emphasized that both Mr. Subhash Chandra and Mr. Punit Goenka had appealed the SEBI order but were denied a stay by the Securities Appellate Tribunal, underscoring the urgency and sensitivity of the matter.
NCLT's Findings and Observations
In a process laden with legal intricacies, stakeholder interests, and regulatory obligations, the NCLT's findings and observations illuminated the legal landscape surrounding the Sony-Zee merger and the balance between corporate ambitions and regulatory compliance. The NCLT's detailed findings and observations are as follows:
Stakeholder Claims and Privity of Contract-The NCLT's analysis commenced by scrutinizing the objectors who raised concerns against the merger. It was highlighted that none of the objectors were direct creditors of Zee Entertainment Enterprises Limited (ZEE) nor had any privity of contract with ZEE. Instead, the claims of these objectors stemmed from their dealings with other entities within the Essel Group. This distinction was paramount in understanding the legal standing of the objectors in the context of the Sony-Zee merger.
Legal Disputes and Disputed Claims- The NCLT's observations extended to the nature of the claims themselves. Among the objectors, JC Flower's claim, arising from being the assignee of Yes Bank, was built upon a letter of comfort given by Dr. Subhash Chandra. The tribunal questioned the rationale behind lending a substantial amount based on a mere letter of comfort, which was distinct from a guarantee under legal norms. Moreover, the NCLT noted that certain claims were in dispute and pending before various courts and tribunals, further complicating the objectors' standing.
Statutory Requirements and Objection Criteria- The NCLT's analysis extended to the statutory framework governing objections to schemes of arrangement under Section 2303 of the Companies Act, 2013 and law laid down in the cases of Emco Ltd.4, Astorn Research Ltd.5 and Mayfair Ltd.6 which stipulates that to object to a scheme, the objector must be a creditor, and their claim should not be disputed. The tribunal found that none of the objectors satisfied these requirements.
Commercial Wisdom and Shareholder Approval- The NCLT also acknowledged the principle of commercial wisdom exercised by shareholders in approving a scheme of arrangement as per the law laid down by the Hon'ble Supreme Court in Miheer Mafatlal V. Mafatlal Industries7. The fact that 99.997% of ZEE's shareholders approved the scheme was a significant factor in the NCLT's analysis. The tribunal highlighted that it has limited jurisdiction to interfere with the shareholders' commercial wisdom unless the scheme is deemed unconscionable, illegal, unfair, or unjust.
Separate Legal Entities and Asset Transfer- The NCLT's observations recognized the distinct legal status of each entity within the Essel Group. It was emphasized that ZEE's assets and liabilities would merge with the new entity, ensuring the lenders' rights to recovery were not compromised. The scheme's provisions facilitated the transfer of debts, borrowings, and liabilities to the merged entity, underscoring the continuity of rights and obligations.
The NCLT's findings in the Sony-Zee merger deal underscore the significance of legal precision, regulatory compliance, and the principles of corporate governance in complex business transactions. As the merger journey advances, the NCLT's role in assessing objections demonstrates the importance of a fair and transparent legal process in shaping the landscape of corporate consolidation and transformation.
The NCLT's deliberations culminated in a verdict that held immense implications for both ZEE and SGC. The tribunal acknowledged the creditors' objections but ultimately dismissed them, ruling in favour of the merger vide order dated August 10, 20238.
Conclusion: Lessons from the Zee-Sony Merger
The journey of the Zee-Sony merger is a testament to the complexity of mergers in the media and entertainment sector. It underscores the importance of proactive engagement with regulatory bodies and the need to address concerns through voluntary remedies. The NCLT's final approval exemplifies the delicate balance between stakeholder interests and market competition which was grounded in the belief that the merger would serve the best interests of ZEE's stakeholders, creditors, and employees. This decision was a pivotal moment, as it signalled the alignment of legal considerations with the merger's strategic promise.
As the media landscape continues to evolve, the Zee-Sony merger serves as a valuable case study for future mergers and acquisitions in the sector – a reminder that strategic vision, regulatory compliance, and stakeholder alignment are key to overcoming challenges and achieving success.
Shantam Sharma, Assessment Intern at S.S. Rana has assisted in the research of this Article.
Footnotes
1. Available at: https://www.cci.gov.in/images/caseorders/en/order1666779994.pdf
3. Section 230. Power to compromise or make arrangements with creditors and members
4. (2004) SCC Online Bom 422
5. (2013) SCC OnLine Guj 1510
6. (2003 94) Mh.L.J.663
7. (1997) 1 SCC 579
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