The termination of the Zee-Sony merger deal has put Zee Entertainment Enterprises Ltd (ZEEL) in a more vulnerable position and it may face fresh legal troubles for the alleged breach of contract with Culver Max (Sony), which has already invoked arbitration against the Punit Goenka-led company.

Soon after Sony announced that itcalled off the merger, Zee notified BSE about having received Sony’s termination notice wherein Sony also sought USD 90 million from Zee as termination fee on account of alleged breaches of merger cooperation agreement (MCA) terms.

In its statement, Zee also made it clear that it is evaluating its next steps and will take appropriate legal action in the matter. However, according to legal experts, ZEEL, whose promoters Goenka and Subhash Chandra are already undergoing SEBI investigation, should accept Sony’s decision and not challenge it in any court as it could further dent its reputation.

“In our view, it is better for Zee to peacefully accept the termination notice sent by Sony and the resultant failure of the merger, rather than causing any further dent on their reputation,” said advocate Rajiv Sharma, Partner, Singhania & Co.

According to Sharma, “Neither the long courtship period, nor an engagement to marry is enforceable by either party to marry. However, the expenses incurred during such engagement or damages towards the loss of reputation can be claimed, provided the claimant comes up with a clean hand.”

He said that the repudiation of the proposed merger as well as its consequences are governed by the initial agreement(s) between the parties.

Another legal expert said that with Zee being in a challenging position due to its inability to meet merger conditions, as mentioned by Sony, it may even hinder its ability to pursue legal action against the Japanese company.

“Sony sent a termination letter to Zee over its merger deal signed over 2 years ago in December, 2021. The deal was set to be completed within a period of 24 months from the date of signing.

“Unfortunately, Zee failed to adhere to the agreed terms and conditions, prompting Sony to serve a termination notice. The juxtaposition of the current issue has placed Zee in a challenging position, as their inability to meet certain merger-related conditions resulted in a breach of contract. Consequently, it may hinder Zee's ability to pursue legal action against the Japanese company,” said advocate Yatharth Rohila, Partner, Aeddhaas Legal.

Experts also feel that Sony has taken pre-emptive measures by initiating arbitration and seeking interim reliefs, creating an avenue for Zee to assert its claims in the ongoing proceedings.

“This termination will have a major impact on Zee Entertainment as its promoter is already embroiled in investigative proceedings by SEBI. Sony on the other hand seems to be in a much stronger position since it has a worldwide presence,” said Rohila.

Currently, Zee is fighting several legal battles, including the ones in NCLAT where creditors Axis Finance and IDBI bank had challenged the merger on the grounds that ZEEL had stood guarantee for loans they had given to an Essel group entity, and that they would not be able to recover the loan from ZEEL if the merger progresses. NCLAT, however, had refused to stay the merger last month. The hearings continue.

As per Karan Taurani, Senior VP, Elara Capital, Zee could see a hit from related penalty/legal proceedings due to “battle with Sony over the non-compete fee and the ongoing legal proceedings by various creditors of the Essel group (Axis Finance, IDBI Bank etc.).”

Apart from this, he said that Zee had also signed a contract with Disney Star for a sub franchise of sports rights (ICC tournaments) in linear TV.

According to Taurani, Zee now may not be able to fulfil the commitment with Disney Star which could also initiate litigation against Zee.

“We had estimated related annual losses of Rs 15.2 billion in FY25E and beyond, given the hefty content cost, lower sports ad revenue and cricket content being available free on OTT. Zee may now not fulfil this commitment as it was entered into given its strategic-synergistic contiguity with Z-Sony merger.”

“Also, Zee could see a hit from related penalty/legal proceedings due to battle with Sony over the non-compete fee, ongoing legal proceedings by various creditors of the Essel group and dishonouring of contract with Disney,” he said.

According to an advocate, Zee could potentially challenge the decision before the appropriate legal forum but ramifications of such a step would only lead to protracted litigation which would further complicate the situation for Zee.

Another lawyer said that to take a deal from 'signing' to 'closing', parties have to agree on 'closing conditions'. If the conditions are not satisfied, which in this case Sony alleged that Zee did not, gives the counter-party 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,” the advocate said.