The merger and amalgamation among Zee Entertainment Enterprises Limited (“Zee”), Bangla Entertainment Private Limited and Culver Max Entertainment Private Limited (together, “Sony”), popularly known as the “Zee-Sony Merger” was to be executed through a scheme of arrangement. It was intended that the amalgamation was to be closed by December 20, 2023. However, despite having received approvals from the Competition Commission of India, the National Stock Exchange, the Bombay Stock Exchange and the Securities and Exchange Board of India (“SEBI”), the approval of the National Company Law Tribunal (“NCLT”) was pending and the scheme faced strong opposition from various banking and financial institutions such as Axis Finance Limited, IDBI Trusteeship Services Limited, IMAX Corporation, IDBI Bank Limited and JC Flower Asset Reconstruction Private Limited who had filed applications of objection before the Mumbai bench of the NCLT. The said applications were determined together in the case Axis Finance Limited v. Zee Entertainment Enterprises Limited and Others [i] on August 10, 2023, with the NCLT approving the scheme of arrangement and dismissing the objections to the amalgamation on the various grounds analysed in this article.
The contestations of the applicants against the scheme of arrangement were two-fold: (1) the scheme provided for a non-compete fee of INR 1101,30,91,800 (Indian Rupees Eleven Hundred and One Crore Thirty Lakhs Ninety-One Thousand and Eight Hundred) to be paid by SPE Mauritius Investment Limited (an entity of the Sony group of companies) to Sunbright International Holdings Limited (“Essel Mauritius”) to ensure that the Zee, the promoters of Zee, the promoter companies and their affiliates do not compete with the resultant merged entity. However, as the said amount was not being received by Zee directly, but instead by Essel Mauritius, it was alleged that this was merely a means to cheat the shareholders of Zee and consequently, the creditors of Zee were being denied their dues; and (2) the appointment of Mr. Punit Goenka as managing director and chief executive officer of the merged entity, which was one of the terms of the deal, was contrary to the interim order passed by the SEBI, restraining him from holding key managerial positions in listed companies or their subsidiaries due to the allegations of financial irregularities having been undertaken by him.
In determining this case and dismissing the applications, the NCLT brought forth and highlighted certain fundamental principles of law. The first of such principles was with respect to the privity of contract. This is a common law principle whereby a contract cannot impose obligations on, or confer any rights to any person who is not a party to it. The NCLT concluded that none of the applicants opposing the amalgamation were direct creditors of Zee, as each of them had claims against other companies within the Essel group. None of the applicants had privity of contract with Zee, to whom the scheme of arrangement pertained to. Hence, the applicants did not have any grounds to make such a claim against Zee.
Secondly, the order also emphasised the basic company law principle of a company being a separate legal entity. The NCLT noted that each entity in the Essel group had independent legal status and that its assets and liabilities were separate, and hence the scheme of arrangement which had received the approval of 99.997% (ninety-nine point nine nine seven percent) of the shareholders of Zee could not be thwarted merely because other group entities had outstanding liabilities towards the applicants.
Further, the case re-established the position of law with respect to the power of creditors to object to a scheme of arrangement entered into by a company, as per Section 230 of the Companies Act, 2013. The NCLT reiterated that an objection could be made only by persons holding not less than 10% (ten percent) of the shareholding of the company or having outstanding debt amounting to not less than 5% (five percent) of the total outstanding debt of the company as per its latest audited financial statements. In this regard, existing jurisprudence prescribed the following elements that needed to be established by a person objecting to a scheme of arrangement as a part of the requirements of Section 230 of the Companies Act, 2013: (1) the objection must come from a creditor of the company, and (2) the claim that the creditor has against the company must be undisputed. Given that these critical elements were missing in the cases of each of the applicants, the NCLT did not find any merit in their applications.
The case also highlighted the NCLT’s respectful attitude towards the opinion of shareholders in determining the future of a company and that of the SEBI, in dealing with matters under its jurisdiction. In its order, the NCLT observed that the petitioners (the persons opposing the amalgamation) had failed to ensure recovery of the said dues from the Essel group entities and that the NCLT had limited jurisdiction to interfere with the decision of the shareholders of the company to approve the deal, and the commercial wisdom behind such approval. The non-compete fee being paid to Essel Mauritius, a third party to the transaction, formed a part of the scheme which had been approved by the shareholders as well as various regulatory authorities. The non-compete fee was to be utilised by Essel Mauritius only for the limited purpose of subscribing to shares of the merged entity. Hence, the NCLT did not find any mala fide intention of Zee in this regard. The NCLT further observed that the order of the SEBI with respect to Mr Punit Goenka was passed much after the scheme of arrangement was filed before the NCLT and that it was the discretion of the board of directors of the resulting entity to take up the issue of appointment depending on the final order of the SEBI. As a part of further developments since the order of the NCLT, the Securities Appellate Tribunal set aside the interim order of SEBI and it is yet to be seen if SEBI will be pursuing an appeal on this matter.
Further, while there is merit in the NCLT’s dismissal of the applications made by the creditors and the reasoning behind its order, IDBI Bank Limited and Axis Finance Limited have both filed appeals against the order before the National Company Law Appellate Tribunal, Delhi, and the hearing of the matter has been adjourned to December 6, 2023. Given that this deal will result in the creation of India’s largest television network company, bringing together 70 (seventy) television channels, 2 (two) film studios and 2 (two) video streaming services, industry talk suggests that Sony has begun discussions with the Walt Disney Company on a potential acquisition of its business in India as a contingency plan, further updates in this regard will be of interest, particularly to see if the deal will reach its culmination. This order of the NCLT will also stand as a precedent in terms of the implementation of Section 230 of the Companies Act, 2013 while giving legitimacy and credibility to the decisions of the shareholders in determining the future of a company.
Authors : Aishwarya H., Chinmayi Venkatesh
Publication Date : November 30, 2023
Endnotes
[i] C.A. (CAA)/204/MB/2022