Two years, pending regulatory issues, delayed deadlines, leadership tussle and several court hearings later everybody is asking the same question- will the $10 billion Zee-Sony merger go through at all? Insiders close to developments say the merger has a scope of becoming an acquisition.
As per the latest clarification given by Zee representatives, speculations regarding the fallout of the merger are baseless, but the controversies surrounding Zee suggest otherwise.
“Given the NCLAT proceedings, the recent default on payment by Zee to Disney as per the license agreement executed between them, and the difficulties in meeting the conditions precedent in the merger scheme, it is hard to believe in the success of the merger,’ said A plausible situation where insolvency proceedings are initiated against Zee, Sony can also think about the route of acquisition, rendering the need for a merger useless,” said corporate law expert and partner at Singhania & Co, Rajiv Sharma.
At the end, upon fulfilment of the legal requirements, it is Zee and Sony’s mutual decision to pull the trigger on the execution of the merger.
There is no simple answer to whether the merger will actually see the light of the day.
There are multiple factors to consider when determining the fate of the proposed merger between Zee and Sony, said Sharma.
“Sony India Private Limited’s parent company Sony Group Corporation is a well reputed Japanese organisation with a net worth more than 70 times that of ZEE, with more than seven decades in the business. The Japanese are known for their attention to detail in anything and everything they do, so it is highly unlikely that Sony will compromise on anything inferior which may tarnish their well-established reputation and goodwill,” he said.
Recap of the leadership tussle
As per the initial merger agreement, Zee Entertainment Enterprises MD and CEO, Punit Goenka was slated to assume the role of MD and CEO in the merged venture. SPNI (Sony Pictures Networks India) was intended to hold 50.86 percent of the company, Zee’s promoters would have 3.99 percent, and the remaining 45.15 percent was to be allocated to public shareholders.
In August 2023, days after the NCLT (National Company Law Tribunal) approved the Zee-Sony merger, SEBI (Securities and Exchange Board of India) issued an order that prevented Goenka and his father Subhash Chandra from assuming any significant management roles in Zee companies or the newly-merged entity.This was followed by the Securities Appellate Tribunal (SAT) expressing dissatisfaction with SEBI’s order. Soon after, on October 30, SAT overturned SEBI’s decision prohibiting Goenka from holding any managerial position in listed companies for a year.
By now, Sony no longer wanted Goenka at the helm of the new company, instead they wanted their own executive NP Singh to take on the role.
Reportedly Goenka even offered to step down as CEO post-merger, suggesting an independent search for a replacement, however, Sony rejected the proposal.
Mergers and acquisitions
‘Mergers” and ‘acquisitions’ are commonly used interchangeably as terms. However they have nuanced differences. In an acquisition, a company buys another . On the other hand, a merger involves the blending of two firms, leading to the formation of a fresh legal entity operating under a unified corporate identity.
So where is the Zee-Sony deal headed?
“Mergers are tricky. One entity that takes over is likely to dominate the other entity. We have seen in the past that after certain mergers, there were teams that just picked up their bags and left and started separate ventures because they are not able to coordinate or be part of the culture anymore. So in that backdrop, a merger in that sense is like an acquisition,” said another corporate law specialist Archana Balasubramanian who is also a partner at Agama Law Associates.
According to Balasubramanian, in this case, the agreement very clearly stipulates that the appointment of Puneet Goenka as the chairman and MD is a condition for the merger to go through, it seems opportunistic for it to not happen.
“This case may seem like an acquisition to the people within the organisation. Like Zee may feel that Sony is acquiring because they are trying to replace their key person and similarly Sony employees and vendors may also feel that way,’ she said.
As far as SEBI allegations are concerned, since there is no clear allegation that has come out, it is very hard to say there has been any kind of reputational damage or violation.
“It happens very often in the listed markets that promoters do get pulled up. This happened to even other stalwarts in the news industry very recently. So, just SEBI’s accusation should not be sufficient to remove someone from the helm of affairs,” Balasubramanian added.
Like Balasubramanian, most experts are in favour of honouring the initial terms of the merger.
The scheme of the merger was initially proposed in 2021, and was approved by 99.979 percent of the equity shareholders of Zee. Zee promoters, i.e., the Goenka family, do not own more than 3.99 percent of the entire shareholding of Zee, and thus, cannot be said to be influencing the said decision said experts.
“Therefore, it is difficult to attribute any element of hostility in the merger itself. If anything, it indicates that the shareholders of both Zee and Sony have entered into this arrangement with their eyes wide open, and understand the consequences thereof,” said Abhilash Agrawal, counsel (corporate) at Law SB.
“We have to appreciate that the scheme of the merger (a copy of which is available online) provides for a board with Punit Goenka as the managing director of the merged entity for a period of 5 years from the date of the merger coming into effect. It is important to note that there is nothing legally barring the appointment of Goenka, since the earlier June, 2023 SEBI order restricting him from holding directorial/managerial positions in listed companies, was set aside by the Securities Appellate Tribunal in October, 2023,” Agrawal explained.
According to Agrawal, if the parties do not come to an agreement on the appointment of Goenka as the managing director of the merged entity, it may create an interesting catch-22 situation, as the approved scheme only provides for the appointment of some other person as managing director, if Goenka “ceases” to be the managing director.
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“The only way Goenka shall “cease” to be the managing director, would be if his employment with the merged entity is terminated as per his employment agreement,” Agrawal added.
Regardless of the grounds provided in the said employment agreement for such termination, this employment agreement itself will only come into picture, if and when the merged entity comes into existence. And the merged entity will only come into picture if Zee and Sony come to an agreement; which might entail Zee insisting that Goenka should be appointed as the managing director.
“So, regardless of the dispute, as per the agreed scheme submitted by the parties to the merger (which has received subsequent approvals by the Competition Commission of India, NCLT, NCLAT, etc.), Goenka has to be appointed as the managing director first; and then, only after he ceases office, can someone else be appointed in his stead,” Agrawal explained.