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Credits Roll as the Zee-Sony Merger Fails – But the Saga Continues

[BalaGanesh R and Jayestha Kamboj are penultimate year law students at Jindal Global Law School]


The failure of merger between Culver Max Entertainment Private Limited (formerly, Sony Pictures Networks India), Zee Entertainment Enterprises Limited (ZEEL), and Bangla Entertainment Private Limited, reverberates across the media. With the initial shareholder support and regulatory approvals in place it was anticipated that the merger would follow through as planned, but as soon as disagreements surfaced, things went south. Prima facie it is expected to leave profound legal and economic repercussions for the companies involved and the media and entertainment landscape in India as a whole. Following the termination notice by Sony, the strategic announcement of the merger by Reliance and Disney stands prepared to capitalize the chaos. The vulnerability of Zee to the action of minority shareholders, along with ongoing arbitration proceedings adding layers to the uncertain future of the companies, is a fact not unfamiliar to us. Ultimately, these ill-fated turn of events prompts the importance of FastTrack mergers and robust corporate governance to mitigate similar consequences in future.

Surmounting Obstacles: Legal and Regulatory Hurdles

The legal proceeding revolving around the merger between Sony and Zee persisted amidst objections by the creditors and strict scrutiny by the sectoral regulators.  The Composite Scheme of Arrangement, seeking the sanction of the Tribunal under section 230 to 232 of The Companies Act 2013, encountered several challenges from creditors such as Axis Finance, IDBI Bank etc. These objections were evinced in the applications and interlocutory petitions.  

The assertions by Zee highlighted the adherence to the procedural requirement including board resolution and compliance with regulatory directives which included seeking clearance from Competition Commission of India (CCI). It was emphasized that 99.99% of the shareholders, present and voting, approved the merger scheme. The objection by the creditors was pertaining to the non-compete fee associated with the merger, which was as high as INR 1,100 crores. Zee proposed the perspective of various stakeholders to shape the trajectory of the process of merger.  Observations made by Ms. Rupa Sutar, Authorized Representative of the Regional Director, Ministry of Corporate Affairs (MCA) Mumbai, were presented affirming procedural compliance, entailing no objection to the merger scheme, which further validated the process.  

Thereafter, the tribunal conducted the evaluation of the Composite Scheme of Arrangements and concluded that it complied with the provisional requirements and is fair and reasonable. The integral steps to the completion of a merger include approval by regulatory authorities and adherence to the pre-conditions stipulated within the scheme. These encompass approval from The Ministry of Information and Broadcasting and the CCI regarding the transfer of licenses and various appointments. Subsequently, Securities and Exchange Board of India (SEBI) issued confirmatory order in August 2023, obstructing the founders of Zee, Subhash Chandra as well as Punit Goenka from holding the key position within Zee.

Withdrawal from NCLT Enforcement:

The NCLT had approved the merger between two entities vide its order dated 10 August 2023, however, there were several disagreements about the appointment of the head of the newly amalgamated entity. Zee proposed as per the terms of the Master Cooperation Agreement  that Mr. Punit Goenka be appointed while Sony expressed concerns over SEBI’s Interim order and inclined towards appointing NP Singh, the MD, and CEO of Sony India as the head. Looming concerns over inordinate delays and reports that the CCI and Stock Exchanges were reconsidering approvals cast a shadow of doubt over the successful execution of the merger.

Following a series of plot twists ever since the merger was announced, credits started rolling with Sony sending out its termination notice on 22 January 2024, Sony has sought a termination fee of $90 million from Zee alleging violation of the conditions of the Master Cooperation Agreement, Zee vehemently denying all allegations-initiated legal action to contest the claims in the arbitration proceedings before Singapore International Arbitration Centre (SIAC). Mad Men Film Ventures, a shareholder of Zee, had sought for the enforcement of the merger between both the entities and the NCLT admitted the application for the same. But as a recent development Zee has sought to withdraw the Merger Implementation Application from NCLT to focus aggressively on the Arbitration proceedings initiated at SIAC and in other forums. Zee's decision to withdraw the application is a deliberate attempt to prevent any negative repercussions to the arbitration proceedings, should the NCLT not decide in its favor.

Termination Fees and Factors Beyond Material Breach:

Companies are obliged by the agreements which they enter, but its common practice that clauses which address material breach, unforeseen circumstances and lapse of time are included in termination clauses in an agreement to make sure there's a fallback in case matters don’t pan out as the parties originally intended. Termination fees in the case of mergers are not to be misconstrued as a price which can be paid and used as an avenue by the disinterested party to walk out from a merger. Rather it exists to indemnify the other party for the time and resources which were employed in furtherance of the deal for undertaking honest commercially reasonable efforts.  We cannot draw any conclusions at present owing to the limited documents available in the public domain to inspect and opine specifically as to what terms were breached in the Master Cooperation Agreement.

But more than material breach of terms there might be other factors at play which might go unnoticed. The fall in Zee’s Post Tax Profit from 800 Crore INR in 2021 to 250 Crore in 2023, Sony might have felt that it is getting bad end of the bargain as the circumstances have changed radically given erosion in value, perhaps Sony wanted to re-negotiate the initially agreed consideration but felt that it likely won’t be agreed to give a pre-existing agreement.

Strategic Moves, Industry Shifts and Potential Ramifications:

Amidst the ensuing chaos between Sony and Zee, Reliance is strategically placed to capitalize on the same. Following Sony's notice of termination, Reliance and Disney announced a joint venture on February 28 2024, though CCI’s approval is still pending, this joint venture is expected to march forward given that Sony and Zee were previously granted conditional approval. The entire process subject to approval from the regulators is predicted to reach finality within Q4 of 2024 or Q1 of 2025, the result being access to more than half of India's population owing to the synergies of the joint venture allowing for a broad portfolio in digital services, entertainment, and sports.

The outcome is one which is comparable to sorrowful ending in a drama for Sony and Zee, both parties set out to form an entity which would redefine the media and entertainment industry in India are now facing each other in courtrooms as adversaries. Gauging the impact of this fallout on both the parties becomes pertinent at this juncture. Sony and Zee collectively lose out on an opportunity to compete against the international streaming rivals to the likes of Amazon Prime and Netflix. While dissecting the effects separately we can observe that, Sony with less than 10% of market share in the entertainment industry will face difficulties in continuing to hold its position in the Hindi General Entertainment category and the opportunity which was available to expand its presence down South through Zee’s widespread regional channels is removed from the equation.

From Zee’s perspective this might seem trivial as it might be riddled with a grave situation wherein the promoters might be ousted with minority shareholders forming a coalition as at present the Goenka’s shareholding only amounts to 3.99%, a similar instance can be reminisced where not too long-ago Invesco which held 17% stake in the company wanted to oust the family. Its alarmingly low promoter holding leaves it open to a takeover offer to acquire shares of the entity subject to a minimum offer size of 26%, additionally any shareholder or group of shareholders with at least 10% of the shares in a publicly traded company may propose a resolution to replace the directors and hence Zee must satisfy its investors to prevent a hostile takeover. In addition, for the last two years, the corporation has been involved in several lawsuits; to cap it all, the recent Arbitration proceedings against Sony will only make matters worse.

Conclusion: Reflecting on Merger Fallout

The bleak result of the Sony and Zee merger underscores the need for a strong corporate governance structure and the need to resolve any possible problems early on in order to prevent such adverse outcomes and to maintain the trust of the investors.  Rule 25 of the Companies (Compromise Arrangements and Amalgamation) Rules, 2016 has been modified by the Ministry of Corporate Affairs regarding Section 233 of the Companies Act 2013 which governs fast track mergers, via notification dated May 15 2023. Instead of the drawn-out sequence of unfortunate events, this would have allowed the entire procedure to end in a brief amount of time and there exists a probability that the merger had succeeded in a different reality where the amendment had been made sooner.


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