Shareholders have rights under company law, not fiduciary duties. That burden falls on a company's management and board of directors. In this case that's Punit Goenka, chief executive officer and managing director and the board of Zee Entertainment Enterprises Ltd., said legal experts in a discussion on BloombergQuint.
The Zee Entertainment board has questioned the role of the company's largest shareholder, Invesco Developing Markets Fund, in negotiating a merger on behalf of the company with media entities owned by Reliance Industries Ltd.
The Reliance proposal was taken by Invesco representatives to Punit Goenka in February 2021, as revealed by Goenka recently. Invesco didn't disclose they were negotiating a deal on behalf of the company without any authority, the board said in a filing with stock exchanges.
According to Invesco, it was only facilitating talks between Reliance Industries' entities and Goenka, also son of Zee Entertainment's promoter Subhash Chandra.
Goenka Should Have Told The Zee Board Earlier?
Nothing prevents a shareholder from initiating or facilitating a transaction so long as everybody is clear that the final approval of the transaction has to come from the board, Umakanth Varottil, associate professor of law at the National University of Singapore, told BloombergQuint. Once approached by Invesco and Reliance, it was Goenka who should have informed the board, he said.
"A merger is a life-changing transaction for the company and however preliminary that stage of discussions were, perhaps it would have been a case for the managing director of the company to have informed the board."
A director, as a fiduciary, has an obligation to act in a transparent fashion, Varottil emphasised.
Goenka has said the deal overd the Reliance entities and was short on information, hence he didn't take it to the Zee Entertainment board. But, a Reliance Industries statement indicates the merger talks failed due to differences between Invesco and Goenka on the issue of promoter stake.
This underscores why Goenka should have taken the deal to the board to decide, instead of rejecting it himself, said corporate lawyer Murali Neelakantan.
"...definitely Goenka should have been taken it to the board to say, here are the issues—we think there's a valuation issue but there's also these other things that we are discussing which will hurt me and my family as promoters. That's the level that I would expect from any director in any company to have as a fiduciary duty."
Who determines whether the transaction is fair to the company or not, it should be the board... after obtaining advice from let's say, financial advisors, who are experts in this. But none of that happened in this case. One gentleman decided that the transaction was fair or not and that was the basis on which that entire transaction fell through.Umakanth Varottil, Associate Professor of Law, NUS
Disgruntled Invesco?
Both Goenka and the Zee Entertainment board have attributed Invesco's subsequent actions to disgruntlement that its proposed merger failed.
In September, the foreign fund, that along with affiliate OFI Global China Fund holds 17.88% in Zee Entertainment, sought an extraordinary general meeting of shareholders to oust Goenka and appoint six new independent directors. The incumbent Zee Entertainment board has rejected the EGM requisition and the matter is in court.
Maybe the failed deal prompted Invesco to act more aggressively towards Goenka and the board, but nowhere is it required that the party has to come with clean hands, Varottil said. "You can ask for an EGM, that's a right available to a shareholder..."
They (shareholders) have rights under the Companies Act, they have no fiduciary duties under the Companies Act. They have rights, which are not tied to a previous duty. So, their right to call a requisition of a meeting, their right to change at least the proposed numbers on the board, all that is not tacked to previous good behaviour. So, let's not mix the two up and try and weigh them on the same scale.Murali Neelakantan, Principal Lawyer, Amicus
The Zee Entertainment board has questioned why Invesco did not disclose the merger proposal or its role in it, in February or even when in September when it sought the EGM.
Both Varottil and Neelakantan said that obligation lies on the company's management and board, not a shareholder. "In fact, Invesco may be jumping the gun if they (were to) go ahead and make a disclosure that the company was in fact supposed to disclose, Varottil said.
The law doesn't require Invesco to make disclosures. Actually, the law prevents Invesco from making disclosures because the obligation on disclosures, the timing of it... is all with the company, Neelakantan said.
According to him, "the board comes out looking very bad and the managing director comes out looking really awful in this whole exercise".
Invesco's EGM Requisition
The Zee Entertainment board has rejected Invesco's EGM requisition on grounds that is it illegal and invalid.
Among its key objections are:
Prior approval from Ministry of Information and Broadcasting needed on changes to CEO/directors.
Non-compliance with Takeover Regulations.
Non-compliance with Competition Act.
Non-compliance with SEBI listing regulations.
Against Articles of Association.
No explanatory statement justifying candidate choice.
Both lawyers opined that, broadly speaking, Invesco has a strong case as none of these are reason enough to deny an EGM requisition.
Under company law, any shareholder with not less than 10% can requisition an EGM.
Prior MIB Clearance
Appointment of directors, as Invesco has sought, can be voted on by shareholders subject to clearance by the ministry of information and broadcasting, both said.
Based on precedent, Neelakantan said, "The view that we have to take is MIB only requires permission to be taken before the actual appointment (directors start functioning on the board), not before putting lists of names on a board by a shareholder for the EGM to approve."
It seems impractical to go to the ministry beforehand, Varottil said.
The MIB may very well not agree to go through it because the first question they may ask is, have shareholders approved? Why should we waste our time going through these potential candidates who may or may not have been approved by the shareholders?Umakanth Varottil, Associate Professor of Law, NUS
Takeover Regulations
The six new independent directors proposed by Invesco for appointment to the Zee Entertainment board, should be independent of the company and Invesco, he pointed out. If they are independent, in seeking to appoint them Invesco is only exercising a shareholder right, and the Takeover Regulations do not get triggered, Varottil said.
"Control has to be a right that exists, Invesco doesn’t have a right to appoint half the board, or even one on the board," Neelakantan said in agreement.
Other Issues
Besides prior MIB clearance and a violation of Takeover Regulations, the Zee board has raised several other objections based on company law and SEBI's Listing Regulations - for instance, the lack of any explanatory statement accompanying the proposal to appoint the 6 new independent directors.
There is an explicit provision that says when shareholders requisition a meeting they do not need to provide an explanatory statement, and in fact they can disclose the reasons for what they are raising at the meeting itself, Varottil said.
That said, he agreed that some of the issues raised by the board could create complexities.
"I think Invesco's right to call an EGM and hold an EGM is on a very strong ground, but what outcome they are going to get out of it is subject to a lot of conditions."
Zee's Board Needs To Be "Independent" And "Transparent"
Even if Invesco succeeds in calling an EGM and shareholders vote in favour of the independent directors it has proposed, this matter is far from resolved, both agreed.
Now that the company board is aware of the Reliance merger proposal, it should examine it alongside the merger proposal with Sony that the board recently approved.
"What the board needs to do ultimately is to see whether this is in the interests of the shareholders as a whole, not just the individual shareholders—whether the currently diluted promoter or Invesco," said Varottil.
Currently, the board looks like it's being controlled by Goenka, said Neelakantan. The only way it can redeem itself is by behaving like an independent board and being transparent with shareholders, he said.
What the board should be doing is call the EGM, have this discussion and present the case to the shareholders. Running away from shareholders, not calling the EGM, just looks terrible for the board.Murali Neelakantan, Principal Lawyer, Amicus
Even since Invesco made its first move to revamp the Zee Entertainment board, the company's stock has risen over 50%. Much of that can also be attributed to the proposed merger with Sony India, currently under negotiation. A second suitor may add to that momentum as investors get an opportunity to examine the best offer on hand.
Watch the full discussion with Umakanth Varottil and Murali Neelakantan here.
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