The eagerly anticipated merger of two major players in India’s media landscape, Zee Entertainment Enterprises Ltd (ZEEL) and Culver Max Entertainment Pvt Ltd (formerly Sony Pictures Networks India), received the green light from the National Company Law Tribunal (NCLT) last week. This favourable verdict not only ends prolonged uncertainty but also marks the beginning of one of the biggest alliances that targets to build a $10 billion entity.
Nakul Batra, partner, DSK Legal, said as the next steps, the merger will come into effect within 30 days from now. “All employees and assets of Zee will move to Sony. Not the least, shares of Sony will be listed and admitted for trading on the stock exchanges,” he said.
After hearing the submissions of all the petitioners and the respondent and after perusing the entire material and the case laws relied on both parties, the NCLT bench confirmed that none of the petitioners is the direct creditor of Zee nor has any privity of contract with Zee whose scheme of merger was pending for approval before the bench.
NCLT’s scrutiny of the legality, feasibility, and impact of the merger highlights its transformative potential.
Here’s an overview of the case, NCLT’s assessment and its key findings.
The proposed merger
The scheme submitted for sanction before the NCLT Bench was a scheme of arrangement of merger of ZEEL and Bangla Entertainment Pvt Ltd, which are transferor companies with Culver Max Entertainment Pvt Ltd, which is a transferee company.
Zee is a listed company with NSE and BSE in which the promoters Subhash Chandra and his family members are holding 3.99 percent shareholding. The remaining shareholding of 96.01 percent is held by public shareholders that include institutions.
The scheme of merger was duly approved by 99.997 percent shareholders of ZEEL. All the secured creditors along with BSE/NSE have submitted NOC for sanction of the scheme. Further, the net worth of the merged entity will be Rs 44,000 crore (i.e., more than 4 times the present net worth of Zee). Therefore, there is no prejudice caused to any creditor of Zee.
The petitioners
Imax Corporation, JC Flower, Axis Finance Ltd, IDBI Trusteeship Services Ltd and IDBI Bank Ltd were the petitioners in the case.
Why was a common order issued?
As per the NCLT order, interlocutory and intervention applications were filed by the applicants opposing the scheme of merger of ZEEL and Bangla Entertainment Pvt Ltd with Culver Max Entertainment Pvt Ltd under Section 230-232 of the Companies Act, 2013. Since the grievance of all the petitioners is almost the same, all the applications were disposed of through a common order.
What was the common grievance?
The common grievance of all the above applicants in opposing the scheme was two-fold:
1. The first matter pertained to a non-compete fee of USD equivalent to Rs 110,130,918,00 payable by SPE Mauritius Investment Ltd (a Sony group entity) to Essel Mauritius. This amount is intended for Essel Mauritius to subscribe to its portion of the Essel Subscription Shares or for Essel Mauritius SPV to subscribe to its share. The non-compete agreement also includes the potential for a loan from SPE Mauritius to Essel Mauritius and/or Essel SPV for subscribing to Essel Subscription Shares under specific circumstances. This agreement involves Subhash Chandra, Punit Goenka, Amit Goenka, and SPE Mauritius Investments Ltd, and is effective from the specified date. The contention of the applicants is that this Non-Compete Arrangement is dubious and serves as a disguised means to defraud lenders and Zee’s public shareholders. They argue that if the Non-Compete Fee was not directed to the promoters, it could have been used to settle dues owed to ZEEL’s shareholders, from whom the applicants aim to recover their outstanding amounts.
2. Another concern revolved around the appointment of Punit Goenka as managing director and CEO for a five-year term following the merger. However, the petitioners argued that an interim SEBI order dated 12.06.2023 restricted Goenka and Subhash Chandra from holding key managerial roles in listed companies or subsidiaries due to alleged financial irregularities involving Essel Group entities. Consequently, appointing Punit Goenka as CEO of the merged Zee-Sony entity, as stipulated in the scheme, is infeasible. The petitioners further asserted that the appellants’ attempt to overturn SEBI’s order was denied by the Securities Appellate Tribunal, rendering them ineligible for positions in the merged entity until SEBI’s ban is lifted. SEBI is currently reviewing the case, and its final decision is awaited.
Key takeaways from the NCLT order
While the final order of NCLT has a detailed 12-pointer findings and observations section, the most important takeaway is obviously the bench’s approval of the merger.
However, the bench also clears the air on several other issues related to the matter.
For instance, the order said that as per the bench, all the petitioners had claims against the other entities of Essel Group among which Zee is just one of the entities.
“Zee is one of the entities of Essel Group and each entity of Essel Group has its independent legal status with separate assets and liabilities and therefore, the scheme of merger of Zee which was approved by 99.997 percent of shareholders cannot be halted upon for the outstanding liabilities if any of the other entities of the same group. The assets and liabilities of Zee would merge with the new entity and the lenders of Zee will not lose their right to recovery,” said an excerpt from the order.
This bench further observed that the petitioners having failed in ensuring recovery of their alleged dues from other entities of Zee through the legal proceedings were opposing the scheme of Zee as a last resort for their recoveries
With regard to the disability of Punit Goenka in holding any key managerial position in the merged entity due to the interim order dated 12.06.2023 passed by SEBI is concerned, the order said, “The impugned order passed by SEBI is a very recent one that was passed much after filing the above scheme before the NCLT which cannot be anticipated at the time of approving the scheme by the board and filing before the NCLT.”
“Culver Max Entertainment Private Limited (the transferee Company) has every right to take up this issue at their board level after approval of the scheme depending upon the final outcome of the order of the SEBI for which the present scheme need not be halted on that ground,” it added.
At the same time, the order also said that the observations of the bench do not in any way amount to approving the appointment of Goenka under the scheme as it is sub-judice and subject to further approval of the transferee company or any other authority required as per regulations.
What remains?
Manini Roy, senior associate at TAS Law explained that both the companies are governed by the Ministry of Information and Broadcasting and Competition Commission of India (CCI) and their approvals are imperative for the merger.
“Additionally, ZEEL is a listed entity and hence it will require further approval from the SEBI, Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). However, reportedly all such clearances from the ministry, statutory and regulatory body have been granted and the merger procedure is at a very crucial stage,” Roy added.