Prolonged battle ahead as ZEE Entertainment takes Invesco to court

Lawyers said how the high court treats Zee's civil suit for dismissal of Invesco's demand for an EGM would set tone for how legal battle would unfold in coming days

A prolonged legal battle, up to the Supreme Court, may be in the offing as the corporate battle between Zee Entertainment Enterprises (ZEEL) and institutional investors, led by Invesco, spills over from the boardroom to the high court.
 
Zee announced on Saturday that it moved Bombay High Court against Invesco for seeking an extraordinary general meeting (EGM) of shareholders for removing managing director (MD) and chief executive officer (CEO) Punit Goenka and appointing six of its nominees as directors.
 
Earlier, the ZEEL board had rejected Invesco’s request for an EGM after the Oppenheimer-backed funds made a demand for board restructuring.
 
Lawyers said how the high court treats Zee’s civil suit for dismissal of Invesco’s demand for an EGM would set the tone for how the legal battle would unfold in the coming days.
 
First, the HC’s accepting or rejecting the petition could have an impact on the proceedings in the National Company Law Tribunal (NCLT), where the matter is slated to be heard on Monday.  
 
Lawyers point out that Zee approaching the Bombay HC should be seen as a move to create a parallel line of litigation to what is currently being examined by the NCLT.
 
“The high court could decide that what is framed as a civil suit is really under the domain of the company law, that is currently under the consideration of the NCLT. This can decide the alleged illegality of requisitioning the EGM. If found proper, it could direct the EGM to be held, and even appoint a chairman to ensure impartiality in the conduct of the meeting,” said corporate lawyer Murali Neelakantan.
 
With the Zee board expressing inability to convene the EGM, the option for Invesco is to ask NCLT to invoke Section 98 of the Companies Act and order an EGM, said Mohit Saraf, founder & managing partner, Saraf & Partners.

 Experts also expect Invesco to parallely run an auction process for its shares, and sell to maximise gains.
 
However, questions remain even if Invesco gets its way with convening an EGM, will it be able to effect sweeping changes in Zee board, and at the helm? 
 
“Invesco-led group's majority equity stake (18 per cent) in Zee gives it the right to call for an EGM and the NCLT will probably be asked to order that the EGM be held. However, whether that can be construed as giving it control of the board remains to be seen,” said Neelakantan.
 
One of the reasons cited by Zee for its inability to convene the EGM is that the proposed Invesco resolution for change of board members is likely to trigger open offer requirements, according to securities market guidelines.
 
Saraf, however, does not agree with this line of thinking. “Open offer happens not when there is change of control, but when there is an acquirer who takes control. There is no acquirer here. It’s an independent board that does not have voting rights. There is no question of a takeover offer,” he said.
 
Experts point towards the Fortis Healthcare case, where shareholders removed the board of directors appointed by tainted promoters.
 
They appointed new members, and then brought in an investor after an auction process.
 
Zee is likely to argue (before the HC) for a stay of the NCLT proceedings in view of the purported illegality of the requisition notice. “They would probably have made the ministry of information and broadcasting as well as the ministry of corporate affairs respondents in view of their arguments that the agenda item proposed by Invesco would violate Indian laws,” said Nirav Shah, partner, DSK Legal.
 
However, in this battle for control of Zee Entertainment Enterprises, both the parties have been economical with the truth, said JN Gupta, founder & MD, Stakeholders Empowerment Services, a proxy advisory firm.
 
“If you are removing the board and the CEO, who will run the company? There is no game plan or road map (that Invesco has shared),” said Gupta.
 
In a situation where shareholders are faced with uncertainty caused by the Invesco-Zee battle, they are more likely to prefer the merger plan with Sony as that gives continuity to business, point out experts.
 
However, most legal experts feel the reasons given by Zee for not convening the EGM are frivolous. The real issue, they feel, is that if the merger negotiations with Sony are done by the Zee family, the later will get a lot of rights and benefits from the deal.
 
“It is a zero-sum game. If Zee family gets the benefits, some other shareholders will miss out,” said a lawyer, who has been party to many such negotiations.
 
Some legal experts expect Invesco to take a more aggressive stand, going forward.