This article is written by Shakchi Verma, Amity University Lucknow, 1st year LLM student, during an internship at LeDriot India.
KEYWORDS
• Mergers and acquisitions
• ZEE
• Sony Group corporations
• NCLT
INTRODUCTION
In the fast-changing media and entertainment sector, the scenario of mergers and acquisitions is highly controversial and complex. A recent example is the merge of ZEE (Zee Entertainment Enterprises Limited) and SGC, or more precisely Sony Group Corporation. This article tracks the Zee-Sony merger journey from its conception to the difficulties it faced in the National Company Law Tribunal (NCLT), which eventually resulted in a favorable verdict that enabled the merger.
A Milestone Merger
The Zee-Sony merger had generated much attention because of the prospects it had to revolutionize India’s broadcasting industry. In a plan to be the largest television broadcaster in the country, the merger intended to integrate content production, distribution, and broadcasting. The Competition Commission of India, which had already pointed out a lack of fairness in competition owing to some market concentration in several sectors, had initially registered their reservations. Zee and Sony, keen on securing a phase one clear in respect of CCI, went ahead with measures in which they would divest some of the channels at stake as a gesture before presenting this case on 4 October 2022.
The major concerns of the CCI were that the merger could result in market dominance in TV channel distribution and advertising airtime, which raised apprehensions about the decreased bargaining power of advertisers and partners. To address these apprehensions, Zee and Sony proposed voluntary measures that would ensure that the merger would not stifle competition, a factor critical for obtaining CCI’s approval.
The NCLT Objections
Despite this, CCI approval did not put an end to further hurdles because some creditors, Axis Finance, JC Flower Asset Reconstruction, and IDBI Bank, have objections regarding alleged loan defaults and fund mismanagement on the part of ZEE. The creditors’ objections were two folds:
• Non-Compete Fee: A debatable non-compete fee agreement of a sum of about the USD equivalent of INR 1,101.3 crores stood out in the NCLT. The creditors, on this point, contend that such fee would actually be received by Sony’s SPE Mauritius from Essel Mauritius and large sums would be diverted, hence out of ZEE and the shareholders’ kitty. That money could quite possibly make good creditors fully, leaving one to challenge the merit of the arrangement for a non-compete.
• The second major issue is that the appointment of Mr. Punit Goenka as the CEO and Managing Director of the merged entity has been contested by the creditors. It has highlighted an interim order passed by the Securities and Exchange Board of India (SEBI) which has prohibited Mr. Goenka and Mr. Subhash Chandra from holding any managerial position in listed companies on account of charges against them of financial malpractice. The creditors asserted that this was an inappropriate action in view of the present regulatory scrutiny, and further, Goenka’s and Chandra’s appeals were rejected, which does not bring about a stay.
Observations And Findings Of NCLT
The judgments of NCLT in dealing with the complicated legal issues clarified the regulatory structure of the merger with corporate objectives while being under the requirement to abide by the compliance. Of them, the following can be regarded as significant ones:
• The NCLT held that all the objecting creditors were not direct lenders to ZEE or in privity of contract with ZEE, as their claim arose out of another of the Essel Group companies, and that made all the difference in the legal basis of objections.
• It further considered on the face of claims made by various creditors like JC Flower what was actually the nature of the claim against Subhash Chandra when it consisted of a “letter of comfort” instead of the guarantee and had some part of its standing objections still hanging in different courts.
• Objection Requirements. The Companies Act, 2013, provides for an undisputed creditor claim in merger schemes. NCLT held that no creditor’s order satisfied the test set out in the statute.
• Commercial Wisdom and Shareholder Approval: The NCLT noted the principle of commercial judgment that the merger is supported by a formidable shareholder approval of 99.997%. With this basis, it noticed that the tribunal could step in only if the scheme was illegal or unjust.
• Corporate Structure and Debt Transfer: While marking a distinct corporate identity, it was important to stress the fact that in merger processes, assets, liabilities, and debts are indeed transferred to the new entities in such a way as not to impair the rights to recovery of the creditors
• NCLT judgment made sure that in cases where massive stakes are involved, need for regulatory compliance and proper governance in the merger cases becomes a reality. This judgment of NCLT went in favor of NDTV on 10 Aug 2023 as on creditor objections it dismissed with its approval allowing the deal go ahead.
Conclusion
The journey of the Zee-Sony merger depicts some of the inherent challenges in mergers in the media sector. It highlights the importance of being proactive in engaging with the regulators and the significance of voluntary concessions in mitigating the concerns. Therefore, the order of NCLT finally sanctioning the merger has achieved a careful balance between the stakeholder interests and the requirements of competition, in favor of the potential benefits that the merger may bring to the stakeholders of ZEE, creditors, and employees. This case provides a very good model for future mergers to indicate that regulatory compliance, strategic foresight, and stakeholder engagement are critical elements to overcome the hurdles and achieve successful consolidation.
Reference
• Zee- Sony Merger- A Journey Through Challenges And Triumphs (https://www.mondaq.com/ )
• Exploring the Sony-Zee Merger: A Comprehensive Analysis (https://cbcl.nliu.ac.in/ )