On August 10, 2023, the National Company Law Tribunal, Mumbai (“NCLT“) greenlit the merger of Zee Entertainment Enterprises Limited (“Zee“) with Culver Max Entertainment Private Limited (formerly Sony Pictures Networks India) (“Sony“) (hereinafter referred to as the “Zee-Sony Merger“). Following the merger, the resulting entity will be the second largest entertainment network after Disney Star.

While the scheme of arrangement between Zee and Sony was endorsed by the required majority of creditors and 99.99% of Zee’s shareholders, it was met with a slew of objections when tabled before the NCLT for its approval. However, the NCLT disregarded the arguments placed by the applicants and authorised the scheme in its order dated August 10, 2023 (“Order“)1.

While the matter was being heard by the NCLT, a number of entities (such as Axis Finance Limited, IBDI Trusteeship Services Limited, IMAX Corporation, IDBI Bank Limited and JC Flowers Asset Reconstruction Private Limited) that were creditors of Essel Group (which includes Zee) raised objections against the merger scheme. These creditors/petitioners raised two principal objections to the Zee-Sony Merger. First, they claimed that a Mauritius-based entity which was part of the Sony group had given Essel Mauritius, an entity of the Essel Group, a non-compete fee of more than INR 1,100 crores. Such a non-compete payment, according to the objectors, is bogus and a disguised mechanism to cheat lenders and the public shareholders of Zee. The creditors prayed that the funds used to pay this non-compete fee be used to recover the debts owed to the creditors. The creditors also argued that since Zee and other Essel Group entities to which such creditors had extended credit facilities belonged to the same group of companies, being under the common control and management of the same promoters, all such entities should be treated as one and accordingly, the creditors were qualified to raise their claims against Zee.

The NCLT in its Order found that the amounts owed to the objecting creditors/petitioners were due to such creditors by different entities of Essel Group and, in fact, Zee owed no debt to such creditors. The NCLT noted that there was no contractual relationship between the creditors and Zee, and was further of the opinion that the creditors may effectively be taking advantage of the Zee-Sony Merger to recover their outstanding debts, which were unrelated to the scheme before the NCLT. The NCLT was of the view that since none of the petitioners were direct creditors of Zee nor had any privity of contract with Zee whose scheme of merger was pending for approval before the bench, such creditors were not permitted to take part in the decision-making process for a scheme of arrangement. The NCLT categorically stated that the petitioners having failed in ensuring recovery of their alleged dues from other entities through legal proceedings initiated by them against such entities were opposing the scheme of Zee as a last resort for their recoveries.

According to Section 230(4) of the Companies Act, 2013 (“Act“), only a person who holds at least 10% (ten percent) of a company’s shareholding, or has an outstanding debt of at least 5% (five percent), is eligible to raise objections to an arrangement. The NCLT observed that none of the creditors met these minimum requirements to have any locus standi in the proceedings. While the Order is predicated upon the facts and circumstances relating to each of the creditor’s objections or ties to the merger, the Order reiterates the requirements provided in Sections 230 to 232 of the Act.

The NCLT in the Order held that Zee is one of the entities of Essel Group and each entity of Essel group has its independent legal status with separate assets and liabilities and therefore, the scheme of merger of Zee which was approved by 99.997% of shareholders cannot be halted upon for the outstanding liabilities, if any, of the other entities of the same group. The NCLT also observed that since the merger scheme contemplates that all debts and liabilities of Zee will be transferred without any compromise to the resulting entity, even if a creditor had a valid claim against Zee, no objections could be raised by such a creditor to the merger scheme given that it had already been approved by the required majority of shareholders and creditors.

While ruling on the non-compete fee, the NCLT noted that had it not been for the payment of the non-compete fees to Essel Mauritius, the promoters of Zee could have competed with the business of the merged entity which would then be to the detriment of the shareholders of the merged entity. Therefore, in the opinion of the NCLT, the payment of the non-compete fee actually protects the shareholders of Zee (who will be shareholders of the merged entity). Further, since the non-compete fees payable to Essel Mauritius could only be utilised by it to purchase securities of the merged entity, payment of the non-compete fees can only be seen as a move beneficial to the shareholders of Zee. The NCLT opined that if there was anyone who could have objected to the merger scheme, that would be the shareholders of Zee, if they were able to show that they are receiving lesser number of shares in the merged entity as a result of the payment of the non-compete fee.

The NCLT in its Order cited the well-recognized rules outlined in the landmark case of Miheer Mafatlal v. Mafatlal Industries Limited, in which it was held that the NCLT is only permitted to interfere with the commercial wisdom of the shareholders and creditors who have approved a scheme only if that scheme is, ‘unconscionable, illegal, unfair, or unjust to the class of shareholders or creditors for whom it is intended‘. The NCLT observed that the petitioners had failed to prove the legal requirement set out in the above landmark case and therefore the NCLT did not feel the need to intervene in respect of certain terms of the merger scheme, such as the non-compete clause, especially since the scheme had already received support from the requisite majority of shareholders and creditors.

The second principal contention that was raised before the NCLT was with respect to the appointment of Mr. Punit Goenka as Managing Director and CEO for 5 (five) years of the resulting entity. This objection as placed before the NCLT in light of an interim order of the Securities Exchange Board of India (“SEBI“) prohibiting Mr. Goenka from holding a position of a director in any publicly traded company.  The NCLT observed that since the merger scheme had been approved by the boards of Zee and Sony much before the SEBI order, the NCLT left it to the boards of the Zee and Sony to review the nomination of Mr. Goenka as Managing Director and CEO of the resulting entity.

While the merger scheme has now been approved by NCLT, the merged entity is required make the requisite filings with the Registrar of Companies within 30 (thirty) days of NCLT approval. It will then also need to receive the approval of the Ministry of Information and Broadcasting.

1 https://nclt.gov.in/gen_pdf.php?filepath=/Efile_Document/ncltdoc/casedoc/2709138081482022/04/Order-Challenge/04_order-Challange_004_1691750743105139567564d61157a7c97.pdf