[By Lakshita Bhatt]
The author is a student of Kes Shri Jayantilal H. Patel Law College.
Introduction
The much-anticipated merger between Sony Entertainment, herein referred to as “Sony,” and Zee Entertainment, herein referred to as “Zee,” faced numerous challenges that ultimately led to its unravelling fate. Although the merger had the potential to transform the Indian media and entertainment sector, internal conflicts and regulatory challenges stalled its progress. In this article, the author delves into the intricacies surrounding the unsuccessful merger between Sony and Zee Entertainment. Following that, the author clarifies how this merger, aimed at establishing dominance in the Indian market, encountered obstacles due to internal disputes, regulatory probes, and legal entanglements. In the end, the author elucidates the aftermath of this merger, highlighting broader concerns regarding corporate governance and financial resilience within the Indian Media sector.
Overview of Sony-Zee Merger
Initially valued at $10 billion in 2021, the merger aimed to create the dominant force in the Indian market by combining a wide range of channels and streaming platforms, with Sony holding the majority of the stake, adding up to 52.93%, and Zee holding 47.07% of the stake. However, tensions arose between Punit Goenka, the Managing Director (MD) and Chief Executive Officer (CEO) of Zee, and Sony Executives over the directorial position of the future merged entity. These internal disputes became a significant obstacle to the merger’s success. Investigations into alleged financial improprieties cast a shadow over the merger, adding to the challenges faced by both companies and eventually leading to the cancellation of the merger. As negotiations faltered, legal disputes emerged, with Sony demanding a $90 million termination fee for what they perceived as breaches of merger agreements. What could have been a billion-dollar revenue-generating merger has now become a legal dispute. Furthermore, it has broader implications for the media and entertainment industry in India. As Zee faced ongoing scrutiny and financial challenges, this left the company vulnerable in India’s booming streaming market, which is highly competitive and offers significant profit potential.
Legal Disputes and Regulatory Scrutiny
The merger between Zee Entertainment and Sony Entertainment India in September 2021 marked a pivotal moment, combining the strengths of Sony, a prominent Japanese media company, with Zee Entertainment to create a formidable entity in the media landscape. However, the trajectory of events took a tragic turn with the National Company Law Tribunal (NCLT) accepting the insolvency proceedings against Zee on 22 February 2023, followed by a petition by IndusInd Bank citing a substantial default of Rs. 83.08 crore attributed to Subhash Chandra, Zee’s founder. This decision came after a series of prior events, including the approval of the merger with Bangla Entertainment by Zee’s Board of Directors in December 2021 and the subsequent filing for insolvency proceedings in February 2022, which was contested with an application for dismissal. Despite gaining approval from the Bombay Stock Exchange (BSE), the National Stock Exchange (NSE), and the Competition Commission of India (CCI) in 2022, challenges persisted, notably with the IDBI bank initiating insolvency proceedings against Zee in December 2022, seeking to recover dues of Rs. 149.60 crores. The NCLT’s directive in May 2023, led to a re-evaluation of initial merger approval by the Stock Exchanges. Despite objections from creditors, the NCLT eventually approved the merger in August 2023, dismissing objections from entities like Axis Finance and JC Flower Asset Reconstruction Co.
However, the Securities and Exchange Board of India (SEBI) confirmatory order in August 2023 barred Punit Goenka, and Subash Chandra, founders of Zee, from holding any key positions within Zee. Amidst ongoing legal battles, a one-time settlement with JC Flower allowed Chandra to regain ownership of family assets in October 2023, while the Securities Appellate Tribunal (SAT) overturned SEBI’s order restraining Goenka from holding a directorial position in the company. Legal disputes continued with appeals lodged against NCLT’s approval by IDBI Trusteeship and others, culminating in notices issued by the NCALT in December 2023, though no staying on the merger process was granted during the proceeding. Additionally, a SEBI probe unveiled allegations of Rs. 1000 crore being signed from the Sony-Zee deal post-merger cancellation.
The aftermath of the merger’s incompletion
Transitioning from the legal disputes to the aftermath of the merger’s incompletion, the leadership struggles between Sony and Zee came to the forefront. Sony expressed a clear intention to bolster its reputation and leadership role within the amalgamated entity. Concurrently, Sony conveyed dissatisfaction with the alternative proposals preferred by Zee. Sony’s resolve for a stronger presence and leadership position in the merger enterprise was unmistakable, as evidenced by its proposal to designate NP Singh, Sony’s India head, as the CEO of the amalgamated entity. However, discord arose when Zee expressed disapproval of this arrangement. Subsequently, Sony announced the cessation of negotiations through an official statement, citing unmet merger conditions and a failure to meet the stipulated deadline. Legal action ensued, with Sony initiating litigation against Zee, seeking damages, amounting to approximately $ 90 million. Sony contends that Zee violated the merger agreement terms as the period for completion of the merger ended in January 2024 and still the merger was not completed, whereas Zee maintains its adherence to the agreement in good faith. Simultaneously, Zee has initiated legal action in both India’s and Singapore’s jurisdictions to enforce the merger terms and prompt Sony to fulfill its obligations. The matter now rests with the court to decide the fate of the proposed merger. Additionally, Zee is facing regulatory scrutiny, particularly from the Enforcement Directorate (ED), a government agency combating economic crime, concerning allegations of financial impropriety involving its founders. Sony’s departure precipitated a decline in Zee’s shares, following the merger’s dissolution, resulting in a significant sell-off. Zee’s shares depreciated by 30%, reportedly marking the largest decline in Sony stock values within the market over five years. Institutional investors, entities managing substantial capital on the client’s behalf, seek clarifications. Reports indicate ongoing deliberation, contemplating avenues such as an extraordinary general meeting, potentially determining Punit Goenka’s tenure. The Zee founders are under duress to promptly chart a course until they address the shareholder’s distress.
The Anticipated potential of the merger
In light of recent events leading to the termination of the proposed merger, it is imperative to conduct a comprehensive analysis of its potential impact on the Indian media sector. An examination of relevant statistical data reveals that Sony and Zee, with 31 and 45 channels, respectively, hold substantial market shares. Noteworthy is that both entities operate their streaming platforms, namely Zee5 and SonyLIV, boosting subscriber bases of approximately 7 and 12 million, respectively. The potential amalgamation of these entities would have resulted in the formation of a significant entity, a matter of considerable importance given the current market trend, which experts predict will see substantial growth in the streaming media sector. The proposed merger was driven by the promising financial prospects it offered, with projections indicating an infusion of capital amounting to $1.5 billion. This injection would have provided the prospective entity with multiple opportunities for diversification, enhancement of interface, expansion of content offering, and increased coverage of life and sports events. Concurrently, many media enterprises like Hotstar and Viacom 18 recognised the governing potential of the digital media sector, thus supporting the strategic rationale behind the proposed merger. However, the cancellation of the merger is a setback for the Indian media industry, raising concerns about corporate governance within the domestic landscape.
Conclusion
The failed merger between Sony and Zee Entertainment was a result of various internal and external challenges, ultimately leading to legal disputes and regulatory scrutiny. Despite the initial excitement surrounding the merger, internal conflicts between Punit Goenka and Sony executives over leadership emerged as a significant obstacle. Additionally, regulatory scrutiny from SEBI further complicated the matter, with investigations into alleged financial improprieties casting a shadow over the merger process. Sony’s dissatisfaction with alternative proposals from Zee, coupled with allegations of breach of merger agreements, led to the termination of negotiations and subsequent legal action.
The cancellation of the merger indeed has significant implications for both companies, particularly Zee, given its recent legal challenges. This setback could hamper their financial recovery efforts and potentially prolong their path to stability. Additionally, the cancellation brings to light broader issues surrounding corporate governance within the Indian media industry, particularly concerning the management of funds within large entities. Recent revelations implicating Zee in alleged malfeasance highlight the urgent need for transparency and adherence to ethical corporate practices, which are necessary for maintaining investor’s trust and ensuring the long-term sustainability of businesses in the sector. It serves as a reminder that addressing these issues early on is crucial to avoid the unravelling of potentially valuable partnerships. Furthermore, the termination of the merger deprives the Indian media industry of the potential benefits that the entity could have brought, including increased capital infusion, diversification, opportunities, and enhanced content offerings. Moving forward, companies in these sectors must prioritize effective corporate governance, regulatory compliance, and the early resolution of disputes to avoid similar pitfalls in the future.