In a fresh twist to the ongoing legal battle over the proposed merger between Zee Entertainment and Sony Pictures India, the board of Zee Entertainment Enterprises has concluded that the EGM requisition by key shareholder Invesco is not valid, “as it suffers from multiple legal infirmities.”
The decision, part of a communication to investors Invesco and OFI Global China Fund, was disclosed to the stock exchanges on October 1.
The Zee board’s stance comes a day after the NCLT (National Company Law Tribunal), Mumbai directed the media and entertainment firm to consider the EGM requisition of Invesco under Section 100 of the Companies Act. Invesco, which along with OFI Global China Fund, LLC holds a 17.88 percent stake in Zee, had taken legal recourse at the NCLT and is seeking a board rejig and the ouster of Punit Goenka, the MD & CEO of Zee Entertainment. Significantly, the non-binding pact between Zee and Sony for a merger envisages Goenka staying on in his current role. Invesco had also proposed the names of six independent directors as part of the EGM requisition.
Expressing its “inability to convene the EGM”, Zee Entertainment Enterprises has disclosed as many as 18 reasons which summarise its concerns with respect to Invesco’s EGM requisition.
Let’s break down a few of them –
NOD FROM MINISTRY OF INFORMATION AND BROADCASTING
According to ZEE ‘ prior permission’ is required from the MIB (Ministry of Information and Broadcasting) before effecting any change in the CEO or board of directors. The firm said the MIB guidelines mandate the condition of ‘prior permission’ and that if the proposed appointment by the shareholders is brought into effect, then the scenario would result in a violation of MIB guidelines.
APPOINTMENT OF DIRECTORS & REMOVAL OF MD
Zee has highlighted that the EGM requisition notice says the proposed appointment of directors is subject to approval from the MIB, whereas the same proposal says that the proposal for removal of the Managing Director is not contingent upon any prior nod from the MIB.
NON-COMPLIANCE OF SEBI NORMS, COS ACT & COMPETITION ACT
Zee believes that the proposal of making fundamental changes to the board of directors and key managerial personnel by seeking removal of the executive director and appointment of six new independent directors will result in non-compliance with SEBI’s Takeover Regulations.
Why?
Zee adds that the shareholders are proposing the appointment of one half of the board without the approval of the Nomination and Remuneration Committee (NRC) and the board and without following the process laid down under Companies Act and Sebi norms (Listing Obligations and Disclosure Requirements) for appointment of independent directors.
Zee believes that this move by the shareholders would result in them effecting a change in control of the company without making an open offer.
The firm goes on to add that a proposed change of control of this nature would also result in non-compliance with the Competition Act, 2002.
THE AOA ANGLE
Zee also referred to a hurdle tucked away in its Articles of Association (AoA). It said that according to Article 71 of the AoA, until otherwise determined by a general meeting, the number of directors of the company shall not be less than three and not more than twelve.
It then added, “ Since the resolution proposed in Item No. 1
(for removal of Managing Director) cannot be legally effectuated, in the event, presupposing that the resolutions proposed in Item Nos. 4 to 9 for appointment are effected, the board of directors of the Company would consist of 13 (thirteen) directors which would be contrary to Article 71 of the AoA”
EXECUTIVE DIRECTORS VS NON-EXECUTIVE DIRECTORS
Zee also referred to Section 203 of the Companies Act in its annexure, saying that the section obligates the company to have a managing director, or CEO, or manager and in their absence, a whole-time director. It added that Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 requires the company to have whole-time key managerial personnel.
“If the proposal for removal of MD & CEO and appointment of independent directors is brought into effect, then the entire board of Zee will consist solely of non-executive directors. Can a board run like that?” said a person closely tracking the legal developments on condition of anonymity.
According to Sudip Mahapatra, a partner at law firm S&R Associates, “ Zee's response cites a wide range of possible legal and regulatory issues across various laws and regulations for denying the EGM request. If the litigation progresses further, the courts may have to deal with several complex points in order to decide the matter.”
Moneycontrol is awaiting the response to an email query sent to Invesco.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
