THE ZEE-SONY MARRIAGE – CONCERNS IN CORPORATE GOVERNANCE (By-Vidhya Sankar)
THE ZEE-SONY
MARRIAGE – CONCERNS
IN CORPORATE GOVERNANCE
Authored By-Vidhya
Sankar
Abstract
With
the ZEEL-SONY merger all set to take off, the eyes are riveted on a stand-alone basis on merger and corporate
governance. The most anticipated merger in Indian entertainment market could turn out to be a melancholic drama of a falling empire or otherwise, the rise of the greatest
competitor to Star-Disney collaboration. The only thing that stops the merger from achieving the
latter is its weak corporate governance practices. The essay casts light on the intersection between the ZEEL-SONY
merger and its impact on corporate
governance, analyzing what lies at the cusp of these two prominent phenomena.
At the time when SONY’s gift of
shares to the promoters through methods that remain opaque indicates a looming shareholder – board
conflict and with the already disordered corporate governance leftover to resolve, how would the merger revamp the
corporate governance structure?
Introduction
A
merger just like a marriage is an integration of different ideologies, work
ethics, culture, goals etc. The aim
of both companies is nevertheless the same – to grow and succeed, however the road taken to achieve the same
may differ and it’s the alignment of their routes that would ultimately help them succeed. Thus, the success of
this merger heavily depends on developing a socially responsible business practice
and structured corporate governance.
The merger would have implications on the relationship between the company’s
board members, its management,
its shareholders (both minority and majority) along with other stakeholders of both the companies, hence
for a positive outcome it is necessary to plan a well-designed integration process along with intelligible
discernment of the structure of the corporate
governance. A coherent corporate governance oversees the sustainability issues
that might arise post-merger.
The Tale Of Two Media Conglomerates
Zee
Entertainment Enterprises Limited is one of India's leading media and
entertainment companies. It is amongst
the largest producers
and aggregators of entertainment content
in the world with an
extensive library housing over 250000 hours of television content. As on March 31 2018 the Company had 29 Subsidiaries 2 associates and 1 joint venture Company. Sony Pictures Networks India Pvt
Ltd., on the other hand is an Indian indirect wholly owned subsidiary of Sony Pictures
Entertainment through its India division. 2SPNI manages and operates 26 television channels, 1 OTT
platform, 1 film production arm and 1 independent production venture for original content and IPs for TV and digital media.3
Through
this deal Sony Pictures will pay a non-compete fee to some founders of ZEEL
which will be used to infuse
primary equity capital into SPNI for acquiring shares of Sony. This would be
approximately 2.11% of the share
of the combined company
on a post-closing basis. Sony
Pictures after the closing of the deal will indirectly hold a majority 50.86%
of the combined company; the founder
of Zee Entertainment Enterprises Limited will hold 3.99% and other ZEEL
shareholders will hold a 45.15% stake.4
Due Diligence
& Corporate Governance
The
ZEEL-SONY merger has the potential to make a quantum leap in its profit, market presence,
enable the renegotiation of pricing, creating
a better service
portfolio and a transparent
corporate governance. To witness a favorable outcome, however, the board’s directors ought to oversee the merger
process from its initial stage to the
final integration stage which is
possible only through the practice of the due diligence process. The Zee Entertainment Enterprises Limited
company’s management team derailed from the basic task of periodic discussion let atleast update the board, a member’s
point of view from his experience
and knowledge of the industry, is a part of the fiduciary duty of due care. Due diligence
creates an environment for sound corporate
governance, symbolic of effective integration. Every M&A process should be designed to benefit from the
experienced input of seasoned
directors at the right times, and facilitate keeping the board appropriately
informed throughout the process so it
can fulfill its oversight responsibilities and duty of care to shareholders.5
In the ZEEL-SONY merger, the perceptible absence of periodic discussions
between the board of directors and the shareholders which has vehemently kept the shareholders bewildered. If the merger does not work as presumed then the
liability of the outcome will lie with
the management. ZEEL being a listed firm has to give paramount importance to
the relationship between
the management and shareholders. However,
as with any other company,
SONY will pursue self-interests rather than prioritizing shareholder value maximization, Afterall along with saving the sinking ship the company
is infusing an additional
$1.4 billion into the merger. The result being an inherent conflict of interest
due to misalignment of interests
between shareholders and board of directors of the new alliance. Only a mature
and sophisticated corporate
governance structure within
these companies would avert the likelihood of an inefficacious merger deal.
1 Business Standard, Company
Overview – Zee Entertainment Enterprises Ltd., https://www.business- standard.com/company/zee-entertainmen-3126/info
2 Business Wire India, ‘Sony
Pictures India Enters Into a Licensing Agreement With The Indian Performing Right Society Ltd’, https://www.businesswireindia.com/sony-pictures-networks-india-enters-into-a-licensing- agreement-with-the-indian-performing-right-society-ltd-66885.html , February
7th, 2020, 10:40AM
IST
3 Aveek Datta, Sourav
Majumdar, Fortune India, ‘Sony Pictures Networks: Life after IPL’, https://www.fortuneindia.com/enterprise/sony-pictures-new-revenue-avenues-after-ipl/103691
, October
20, 2019
4 Bar and Bench, Shardul
Amarchand Mangaldas, Trilegal act on Zee-Sony Merger, https://www.barandbench.com/dealstreet/shardul-amarchand-mangaldas-trilegal-act-on-zee-sony-merger 30th December, 12:41pm
5 Deloitte Financial Advisory Services LLP, Corporate Development 2013: Pushing boundaries in M&A, pages
22 and 24
ZEEL
being a large company makes it more difficult for SONY to undertake due
diligence and post-merger integration
would likely be slow and rough. SONY-ZEEL merger is more likely driven by the urge to build a massive empire. There is no
doubt about the existence of managerial egos and need to acquire more power in
decision making. However, looking at the
bright side of this merger a large entity is capable of bringing in more
efficient lawyers, better negotiation
and bargaining strategies thus putting the shareholders out of their current miseries.
I.
The Future
Of Share Holder
Activism And Developing A Shareholder Model Of Corporate Governance
The
company witnessed shareholder activism that saw an open call for the ouster of
the erstwhile promoters (Essel Group)
and appointment of six new independent directors by two of its majority
shareholders OFI China Fund and Invesco Developing markets. The shareholder’s concern over the lack of
information of the process is a failure in fulfilling the oversight responsibilities and the primary
duty of care, which in turn can foreshadow the
benefits that would have been achieved from the merger. Further the
disapproval of Mr. Punit Goenka as the director
can evoke a class action suit against
the company citing mismanagement
or oppression. "There seems to have been a fall-out between Chandra and Invesco Oppenheimer and since the former
is not a part of the board, the axe has fallen on Punit,” says Arun Kejriwal, Founder,
Kejriwal Research & Investment Services.6 The involvement of Mr. Chandra and his
micro-management over the company through Mr. Punit as a puppet has evoked distrust among the shareholders, as it
led to the question of who is actually
in power of decision making in the company. Invesco’s open letter to ZEE
mentions prolonged underperformance
and leadership failures from the side of Mr. Punit Goenka, with SONY re-appointing him as the director
would further agitate the shareholders who are
already harboring fear over transaction terms which enrich Zee’s
promoters (owning 4% shares) keeping
the shareholders holding 98% share at stake. Invesco foresees a bright future for ZEEL provided
a board that has been strengthened with independent voices to guide
ZEEL into a healthy future, deliberate and decide on its leadership
structure, and create a framework for the equitable
evaluation of any potential strategic
alignments.7 The shareholders en masse is convinced that
handing over ZEEL to an independent
team of experienced people from
within the company or from the versatile Indian media market can pull them
out of their current misery.
6 Ajita Shashidhar, Fortune
India, why investors want Punit Goenka out of Zee, https://www.fortuneindia.com/enterprise/what-caused-punit-goenkas-ouster-from-zee/105858
, September 14th,2021
The
merged entity shall ensure that the
shareholders are given an opportunity to be heard after giving sufficient notice prior to taking any action. The
shareholders are responsible to adapt
and support fair strategic alignments that can develop ZEEL into a stronger
media platform, like the merger
itself. A sound corporate governance system can help
the entity raise its existing value. From a corporate governance viewpoint,
with SONY controlling the vast
majority of the board, the promoters including Punit Goenka himself would not
be pulling the strings alone. Hence, it’s a win-win
situation for Invesco
and the future of shareholder activism in India.
II.
PROMOTERS INVOLEMENT POST-MERGER -
The
current CEO Mr. Punit Goenka is presumed to continue his role post-merger.
Ironically, the trouble at ZEE is
conjoined to him holding the office, owing to the fact that the promoters owned
a mere 3.99 percent share but still fully controlled the firm. Rarely do Indian promoters
pass on the company to professional management. But stake is very little
incentive for somebody who is coming
from a business family to continue to work on this.8 A CEO undeniably has a role of that of a bridge between company management and board, proving how crucial they are to have a healthy
corporate governance system both external
and internal.
According
to Gaurav Dua, Head (Capital Market
Strategy), “ZEEL, as listed stock, has suffered due to promoter-related issues
rather than anything related to its operational and financial performance. The
steps taken by the key shareholders
is a positive movement for the stock.9
The Indian industrial watchdogs have raised reasonable suspicion over
untraceable money transaction
between the web of companies that manage Subhash Chandra’s businesses including ZEEL. This suspicion is a
clear red flag for lack of corporate governance in the company. Added to this the lack of clarity in the pre-merger
stage raises suspicion on how things
might unfold. The skepticism surrounding the non-binding agreement that gifts
the promoters with an equity stake of two percent
under the veil of a “non-compete” is interpreted
as a non-viable move. It is not the case that the promoters are deprived of any benefit from the merger as their very own
Mr. Punit Goenka gets to retain his position, so is the largesse in the form of performance linked ESOPs which is acceptable as efficient leadership and work performance should
be duly acknowledged. This gesture from SONY is quite unjust from the shareholders point of view and might be a
reason for future disputes and legal tussles.
7 Justin M. Leverenz, Invesco
Developing Markets Fund Releases Open Letter to Zee Entertainment Shareholders, October 11, 2021
8 Business Standard, Invesco
reiterates demand to oust Punit Goenka from Zee Entertainment, September 25, 2021,
23:21 IST
V. Transparent Corporate
Governance – The Future?
The
merged entity will be a publicly listed company in India.10 The compromised
standards corporate governance during
the lifetime of Zee Entertainment Enterprise Ltd might see an upgrade.
THE BOARD
INDEPENDECE
To
have a stronger internal corporate governance mechanism the company needs a
well- structured board of directors,
the role of the CEO and placing incentive system for the employees work performance analysis and rewards. Since SONY holds greater share in the newly merged company one might expect a
change in how they respond legally and socially. The boards members of the
merged entity have to be diverse, neutral, experienced with a clear insight
over the objectives of this merger.
Mr.
Punit Goenka who will continue as the CEO and MD has directorship holdings in
nine companies including Zee Entertainment Enterprises Limited, ETC Networks Limited,
Prozone Intu Properties Ltd, Zee Digital
Convergence Limited to name a few. So, the question arises whether Goenka
controlling these many companies at the same time would deduce his efficiency and focus over his role and
responsibilities as a CEO in the merger entity
where the stakes are much higher especially in the initial years.
Each director owes fiduciary duties to the corporation and would be liable for any
damages incurred by the corporation
as the result of a transaction.11 Numerous multinational companies
that bought into Indian companies with governance lapses failed to effectively create value in a reasonable time because the
‘clean-up’ consumed a great deal of time.12
Alas,
an independent board will have its own share of advantage as opposed to a
leadership laden with ulterior motives.
9 Krishan Gopalan, Business Today.in, Can beleaguered MD Punit Goenka
stave off shareholders demanding his exit, September 14 2021, 10:09 PM
IST.
10 The Wall Street Journal,
ZEE Entertainment board agrees to merger with Sony India, September 22, 2021, 07:36 PM IST
CORPORATE
CONTROL
An efficient market for corporate control may diminish the managerial
inefficiencies and weak governance in the ZEEL-SONY
merger as it ensures a threat of kicking out the underperformers. The board members would
have to face the wrath through mergers where
they likely would be weeded out and the company by doing so will extract
better profits and synergies. This
threat of untimely oust would ensure a disciplined governance. Corporate control systems have to parallelly take
forward the rewards and punishment systems. The merged entities’ future goal should include to stay out of
threat via aligning the shareholders’ and mangers’
interest and involve the shareholders
in all potential alignments.
Addressing
the internal governance issues that impacts the day-to-day activities such as
the employment practices can be fixed through
maintaining a strong relationship with the employees – providing them due incentives
based on their performance both in ways such as promotion or salary hikes. Acknowledging their work will have
them stick with the company for a
longer period. Yet another issue of ‘hire and fire’ at will can boomerang
against the company as it will
increase the resistance within the company, to avoid such a scenario the firm can
opt for a relationship-based contract with the company’s employees.
It’s
a wait and watch situation for ZEEL who are anxiously looking for light at the
end of the tunnel. For a company
that’s already plagued by the weak corporate governance it would be a challenge for SONY to plan the closing
and post-closing corporate governance issues of ZEE. Prospective investors from both domestic and international
markets would invest their money in
the new merged entity only if they can have faith in the ability of the
entity’s management to act as
trustees and act in their best interests by following quality corporate
governance practices.
11 Anderson Mori and
Tomotsune, Lexology, Corporate Governance, https://www.lexology.com/library/detail.aspx?g=c4ec1f1d-b8af-456e-9a5c-4e1a975824cd
, July 5
2019 12 N Mahalakshmi,
Moneycontrol, ZEEL-Sony deal: non-binding nature, new Sebi regulations reason
for Invesco pressing for EGM,
September 27, 2021, 06:31 PM
IST