Navigating the Complex ZEE-Sony Merger: Legal Battles, Commercial Insights, and Future Implications

Zee-Sony and its Merger

The merger between ZEE and SGC (Sony Group Corporation) received notable attention due to the reshaping of India’s TV broadcasting sector. ZEE and SGC group alliance together on the NCLT order and promised cooperation in terms of content production, distribution, and broadcasting.

The financial circumstances and governance in the Zee group have made several creditors of the Zee group file legal proceedings to recover their debts. However, such proceedings are still pending before the concerned bodies. Meanwhile, the ZEE promoters received an interim order from the Securities Exchange Board of India (SEBI) restricting them from holding any position in any listed company. Further, the appellate body has refused to interfere with such orders.

To ensure fair and healthy competition in the market, the CCI (Competition Commission of India) initially raised concerns in the market for specific segments and their concentration.

CCI was concerned about the dominance of parties in the supply of TV channels and advertising time in the market. The advertisers and downstream partners approached and were in fear of reducing bargaining for their advertisements. Just to address these concerns, the parties divested the TV channel and further demonstrated that the merger would not disturb the atmosphere of healthy and fair competition in the market. The parties’ responses on CCI concerns and got clearance from the CCI vide order dated October 4, 2022.

Name of the Parties

Axis Finance Limited vs. Zee Entertainment Enterprises & Ors.

Facts of the Case

Within the Zee-Sony Merger case, an Interlocutory Application along with Intervention Applications filed accordingly by the applicants to oppose the merger of Zee Entertainment Enterprises Limited and Bangla Entertainment Private Limited with Culver Max Entertainment Private Limited (Sony Pictures Networks India Private Limited) under Section 230-232 of the Companies Act, 2013

Legal Issues

Two-fold issues were involved in this case:

• Non-compete fee- One of the major legal issues was related to the non-compete fee associated with the merger.
• Appointment- Another legal issue related to appointing the Managing Director and CEO for the five-year period.

The parties’ responses on CCI market concerns further received approval from the end of CCI vide order 4^th Oct. 22; the process towards the merger of ZEE and SGC group faced objection from the side of their creditor like-wise Axis Finance, IDBI bank, JC Flower Asset Reconstruction with others raised concern on ZEE loan default and misuse of public funds. The creditor objected in two ways-

Non-Compete Fee

One of the major issues related to the non-compete fee with respect to the merger was debated in the National company tribunal case proceedings. The creditors objected to the non-compete of the merger USD fee, which will be a sum of INR 1,101,30,91,800 (Indian Rupees Eleven Hundred and One Crore Thirty Lakh Ninety-One Thousand and Eight Hundred). It was stipulated to be payable by SPE Mauritius Investment Limited, a Sony group entity, to Essel Mauritius. Such funds were intended and used either by Essel Mauritius to subscribe to the Essel subscription shares portions or to be paid to Essel Mauritius SPV for the same intention. Using this complex nature of arrangement for funds utilization for personal gain has made individuals and other entities associate together against the non-compete fees by the ZEE group. Zee Group has initiated this mechanism to use the public funds for themselves and intends to bear the loss if it occurs by the lenders or other public shareholders. The objection of creditors argument was based on the fact that if ZEE promoters did not use the non-compete fee for their personal means, then that sum of Amount INR 1,101,30,91,800 would rightfully belong to shareholders and investors of ZEE. The creditors questioned the legitimacy and fairness of the ZEE mechanism as it was performed in a manner in order to divert the public funds from the public company Zee and their shareholders to utilize it for personal benefits. The creditor’s objections were admitted accordingly that the merger would negatively impact their interests. 

Appointment

Another legal issue was raised related to the further appointment of Mr. Punit Goneka for the post of managing director and CEO for a five-year term for Zee Entertainment Enterprises Limited (ZEEL). However, the creditors highly criticized the same proposal as the ZEE promoters received an interim order from the Securities Exchange Board of India (SEBI) restricting them from holding any position in any listed company. The order from the SEBI was issued on 12 June 2023 restraining Zee promoters from getting managerial posts based on the allegation of financial fraud committed by them within the Essel group. Further, the ZEE promoter’s appeal was denied a stay by the Securities Appellate Tribunal for the urgency and sensitivity of the matter.

Applicable Law-

A detailed finding and observation from the NCLTs- Based on privity of contract and stakeholder claims- NCLT observed and found against those objectors who raised against the merger that all objectors are neither a direct creditor of ZEE nor associated with any privity of contract between them. However, the claims from such objectors were from the dealings of other entities within the Essel Group. NCLT observed and found a difference in objectors for the ZEE and Sony merger.

Legal Dispute and Claim

NCLT extended its observation on the claimed nature, as JC Flower from the objectors has claimed as an assignee of Yes Bank on the basis of Dr Subash Chandra’s letter of comfort. It was further asked about the reason for lending such a substantial amount on the comfort letter, as it is different from a guarantee under law. NCLT finds that various claim dispute is already pending before concerned courts; thus, it makes a creditor’s objection complex.

 Law Requirements and Objection Basis

NCLT extends its analysis to the required statutory framework that specifies objections for an arrangement under section 230 of the Companies Act 2013 and specified under notable cases like Emco Limited and Astron Research Limited that to raise any objection for a scheme, such objector must be a direct creditor and his claim should not be disputed in nature. Later, NCLT found and declared that neither a single objector complied with the rules for objection.

Commercial Insights and Shareholders Approval

NCLT acknowledged the principle of commercial intelligence exercised by the shareholders while approving an arrangement of scheme according to the law laid by the Hon’ble Supreme Court in the case of Miheer Mafatlal v. Mafatlal Industries Limited. Further, the NCLT tribunal finds that 99.997% of shareholders of ZEE have approved such a scheme. Only the NCLT tribunal can intervene in the shareholder’s commercial intelligence if the said scheme would be unconscionable, illegal, unfair, or unjust for the shareholders and the creditors.

Separate Legal Entities and Asset Transfer-

NCLT court observed and found that there is a difference in the legal status of entities under the Essel group and concluded with the fact that the concerned Zee’s assets, including liabilities, will merge with the new entity so that the creditor’s fundamental rights to recover can’t be further compromised. This merger under the scheme refers to transferring the debts, borrowings and other existing liabilities to the merged entity along with the rights and obligations.

The NCLT, further in its order for both ZEE and SGC, held implications for them. The NCLT considered the objection raised by objectors, but after complying with the legal requirement for objections, they found it not satisfactory and thus dismissed it.

Conclusion

The NCLT order for the Zee-Sony Merger is among the proof of complex mergers within the media and entertainment field as it is based on the circumstances of the case. It underlines the necessity of engagements with the regulatory bodies. NCLT approval for the merger assumes to sever and save the interests of the creditors, Zee stakeholders and concerned employees. NCLT’s order adopted the interventionist model given the scope of its limited jurisdiction articulated by the apex court of law. ZEE-SGC group merger may be an appeal matter, although many claim disputes are still pending with the ZEE group between lenders. Moreover, this merger is very important as the merger decision attributes those valid legal considerations with merger plans.