As the $10-billion mega merger between Zee and Sony is once again at the precipice of breakdown with reports of the latter taking a U-turn, legal fraternity feels this could pinch the Punit Goenka-led company more than Sony. Experts, however, say Zee Entertainment Enterprises Ltd (ZEEL) could take the legal route and challenge Sony’s decision if it goes ahead and terminates the agreement.

According to legal experts, the merger agreement allowsZee and Sonyto push the merger deadline three times. In case Sony decides to pull out, it may have to pay a termination fee as much as the whole cost of the deal.

According to reports, Sony is likely to send thetermination noticeto Zee before January 20 and the merger could be cancelled due to the standoff between the companies over the leadership of the merged entity. While Sony has expressed reservations over Punit Goenka’s appointment as the CEO of the merged powerhouse due to the ongoing regulatory investigations against him, Zee has been sticking to its original contract condition of making Goenka the head.

Vipul Jai, Partner, PSL Advocates and Solicitors, said, “The cancellation of theZee-Sony mergerwould be a significant development in the Indian media landscape, and the reasons behind it are multifaceted with disagreements over leadership structure and control of the merged entity emerging at the forefront, particularly regarding the status ofPunit Goenka.”

“In the event Sony decides to terminate the agreement, Zee could potentially challenge the decision before the appropriate legal forum, alleging breach of contract and/or unfair business practices. The ramifications of such a step would only lead to protracted litigation which would further complicate the situation,” Jai said.

The merger would have created amedia behemothwith an enviable market share and thus, even though the termination is likely to hurt both the parties, Zee would definitely feel the pinch more than Sony, he added.

According to Elara Capital Senior VP Karan Taurani, “ZEEL has moved up 50% over the last one year, despite a muted financial performance, largely on the back of valuation multiple re-rating due to the merger with Sony Corp. Any potential risk of the merger getting called off by Sony will have a significant negative impact on valuations.”

However, contrary to the popular opinion, Taurani expressed confidence that the deal will most likely go ahead without Punit Goenka as CEO with final clarity expected by the third week of January.

“Conversations continue to happen for both parties, however no final outcome has been reached yet on terms of the deal. We continue to believe that the deal is equally important for both entities with competitive intensity growing due to Disney/RIL talks gaining traction,” he said.

The prolonged Zee-Sony merger process was initiated in 2021 and has already missed two deadlines with Zee seeking extension of the timeline. The merger was to be completed byDecember 22, 2023.

According to Ravi Singhania, Managing Partner, Singhania and Partners LLP, merger deals usually have a time period between the signing of a definitive acquisition agreement and the closing of the acquisition.

“To take a deal from 'signing' to 'closing' parties have to agree on 'closing conditions'. The conditions must either be satisfied, unless they are waived, for the deal to close. Failure to satisfy a closing condition gives the counterparty the right of refusal to close. It also does not make the failing party liable to the refusing party, unless the failure resulted in, or caused, a separate breach in the agreement,” Singhania said, adding that the merger seems to have failed despite both strategic promise and regulatory alignment.

Rajiv Sharma, Partner, Singhania & Co opined thatSonymust be concerned about losing its hard-earned goodwill after the merger under the ZEEL representative.

“The entities who wish to undergo merger always have growth of business and revenue as major concerns. Sony and Zee are two big empires in the entertainment & media industry. The tussle on who becomes the king of the unified empire could not be resolved. Sony perhaps is not only sceptical of anticipated growth of the proposed merged entity but also losing its hard- earned goodwill under the kingship of Zeel’s representative,” Sharma said.

On the possible termination of the agreement by Sony, he said, “An agreement is not only an agreement to agree but also an agreement to disagree. Marriages are solemnized upon mutual consent but divorces are often sought unilaterally. Likewise, a merger is proposed mutually, however it can be called off unilaterally.”

According to Taurani, Sony will not agree on Goenka becoming CEO, due to the ongoing investigation against him and there is a “very small chance of Goenka putting the deal at risk due to him wanting to become CEO, even if the term sheet and deal condition mentions the same.”

Post the change in the deal terms, ROC (Registrar of Companies) and Ministry of Information and Broadcasting approval may be needed which may only take a few weeks.

“Our legal experts indicate that a fresh NCLT/CCI approval will not be needed for change in CEO of the merged company and the NCLT/CCI approval isn’t time bound, which means any potential extension has no negative impact on the merger,” Taurani said.