Zee-Sony merger deal not in interest of small shareholders: Invesco

Invesco, the largest shareholder of Zee Entertainment Enterprises (ZEEL), has raised questions over the company’s proposed merger with Sony Pictures, saying the transaction is not in the best interest of all shareholders and will benefit only the promoters, who have defaulted on bank loans.

The US fund said the non-binding agreement between ZEEL and Sony “gifts” a 2 per cent equity stake to the promoters of Zee in the guise of “non-compete” fee, even though the current managing director and chief executive officer, Punit Goenka, would continue to run the merged entity for the next five years.

“This is dilutive to all other shareholders, which we consider unfair. At the very least, we would expect such largesse to be contingent on the MD/CEO leaving the said position (thus raising the scenario of ‘non-compete’) or be structured in the form of time vesting and performance-linked ESOPs, which we as shareholders welcome as a transparent way to reward performance and leadership,” Invesco, which holds 18 per cent in ZEEL, said in an open letter to the company’s shareholders.

Invesco, which is fighting a legal battle with the ZEEL board, said the Zee-Sony announcement casually mentioned that the Zee promoter family would have the right to raise their stake from 4 per cent to 20 per cent, without specifying any manner in which this meaningful change would actually happen. “Will this change the majority control of Sony in the merged entity? Will it involve open market purchases, warrants, or some other financial instrument? If the latter, will the said instruments/warrants to the promoter family be priced so as to advantage them at the cost of ordinary shareholders?” it asked.

The corporate battle broke out after Invesco sought the removal of three directors, including Goenka, just a few days before the annual general meeting (AGM), citing lack of corporate governance. While two directors, Manish Chokhani and Ashok Kurien, quit the board a day before the AGM, Goenka stayed on. Within days, the ZEEL board cleared a merger proposal with Japanese technology and entertainment major Sony Pictures. Following a court order, ZEEL called a board meeting and rejected Invesco’s proposal to call an extraordinary general meeting of shareholders to remove Goenka and appoint six of its nominees.

UPPING THE ANTE

• 
  Zee board/management has destroyed shareholder value
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  EGM denial shows Zee leadership’s apathy to shareholder rights
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  Sony-Zee merger is welcome but must be fair to all shareholders
• 
  Good governance can steer Zee to a bright future

In its letter on Monday, Invesco said the lack of clarity around key aspects of the Zee-Sony announcement should concern all shareholders. “We will gladly evaluate the transaction in a constructive spirit if and when additional information is made available. However, we have also noted the timing of this announcement and its non-binding nature. As a result, we currently consider it to be no more than camouflage on the part of Zee to divert and distract from the primary issues before the company,” the Oppenheimer-backed company said.

Invesco said since its EGM requisition on September 11, it had witnessed the strange spectacle of Zee’s management, with the support of its current Board, going to great lengths to deny statutory rights of ordinary shareholders. “These actions, which ostensibly are being taken in the ‘best interests of all shareholders’, as Zee’s communications claim, are, in fact, indicative of a management team that places self-interest over the interest of the institution it leads, its employees and all other shareholders, as well as a board whose permissive culture has enabled this behaviour and its consequences,” Invesco said.

“This is precisely why we believe Zee’s board needs to be strengthened with independent directors who take their jobs seriously, who robustly debate vital decisions and who serve as guardians of all shareholder interests,” the fund said.

The letter written by Justin Leverenz, chief investment officer, developing markets equities, said it has been a significant shareholder in ZEEL for over a decade and thinks Zee has a good future. “We are disappointed that the leadership of Zee has resorted to a reckless public relations campaign in response to the overwhelming demand from shareholders for leadership changes at Zee,” it said.

“Our initiative is driven by our belief that the promoter family of Zee, with the support of its current board of directors, continues to evade accountability to its ordinary shareholders, who own 96 per cent of Zee’s equity. This lack of governance oversight by Zee’s current board has permitted Zee’s deep entanglement with the financial distress of its founding family, as identified in Sebi’s letter of June 17, 2021,” it said.