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Explained: What’s going on between Zee and Invesco?

A complete rundown of the tussle which has Zee’s board of directors at the heart, reveals how Reliance found its way into the mess.

Zee’s tagline “Extraordinary Together” doesn’t seem to apply when it comes to its largest shareholder Invesco. Both the companies are embroiled in a hot mess that has escalated in the last two days. In a strongly worded letter, Invesco on October 11 lashed out at the company’s promoters, board of directors, and management and reiterated its demands to hold a shareholders meeting to vote on the removal of the CEO Punit Goenka from the board as well as for the appointment of six new independent members to the board.

Last evening, Zee shared a note from CEO Goenka accusing Invesco of pitching a merger deal with a “large Indian company” in February that would have harmed the company’s shareholders and benefited the promoter family. The note also claims double standards as Invesco repeatedly acknowledged Goenka’s “reputation, experience, and capability as a profession” and as recently as September 2020 voted to reappoint him as MD and CEO. Invesco this morning revealed that the large company was Reliance and that the deal was negotiated between Zee and the promoter family.

Here’s a complete rundown of the debacle at hand:

Why does this matter?

These developments come at a time when Zee is looking at a merger with Sony. Zee’s finances have struggled under the dual blow of declining viewer revenues and cut marketing spend from advertisers and the merger was expected to offer a lifeline as well as create a force to reckon with in the world of entertainment. In addition to benefiting Zee’s traditional broadcasting services, both Sony LIV and Zee 5, which have a significant share of the budding online streaming space in India, were expected to benefit from the combined entity’s reach and catalog. But Invesco’s open criticism of the Zee board and the Sony deal will likely delay the merger.

Who is Invesco and what does it want?

Invesco is a US-headquartered investment firm and its Developing Markets Fund and OFI Global China Fund LLC own a 17.88 percent stake in Zee. Invesco also has holdings in other major Indian companies like HDFC, Kotak Mahindra Bank, TCS, and Infosys.

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In a letter dated September 11, Invesco asked Zee to hold an extraordinary general meeting (EGM) of the company’s shareholders to consider the following demands:

  • Removal of CEO Punit Goenka from the board
  • Removal of Manish Chokhani from the board
  • Removal of Ashok Kurien from board
  • Appointment of six new independent board members.

At the heart of the issue is the fact that Zee’s promoters have significant control over the company despite only holding about a 4 percent stake. Invesco is asking for more independence in the company’s functioning.

Due to a lack of response from Zee on the letter, Invesco’s lawyer approached the National Company Law Tribunal (NCLT) on September 29 saying that the Zee is “not running as it should run in accord with the directions or for the welfare of the shareholders” and that Invesco was worried its “investment will go down the drain.”

Where does Zee stand on Invesco’s demands?

Zee’s board on October 1 rejected Invesco’s demands a day after the NCLT said that the company must consider Invesco’s request to hold an EGM. “The Board has arrived at a conclusion that the requisition is invalid and illegal,” Zee said.  The company reasoned that it cannot hold the EGM because the request “suffers from multiples legal infirmities” including lacking compliance with guidelines of SEBI and the Ministry of Information and Broadcasting. The company elaborated on these reasons in its letter to Invesco.

Zee also said that Manish Chokhani and Ashok Kurien have already resigned from the board on September 13, making Invesco’s second and third demands “infructuous.” The two members resigned after a proxy advisory firm recommended their removal, but Zee maintains that they left for personal reasons.

On October 2, Zee also moved Bombay High Court requesting Invesco’s demand for an EGM to be deemed as “illegal and invalid”.

On October 6, Zee founder Subhash Chandra, father of CEO Goenka, and whose family owns 3.99% of the company, made an unusual prime time appearance on Zee’s Hindi news channel criticising Invesco and accusing the investment firm of plotting a hostile takeover. “In 1994, I was offered $500 million by an international media baron. I told him, India is not for sale. Today, when we are in a similar situation, I will tell them the same thing,” Chandra said. Following Chandra’s appearance, some from Bollywood rallied behind Zee.

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What’s next: Invesco approaches NCLT, Zee approaches NCLAT

Following Zee’s refusal, Invesco approached the NCLT for relief and the tribunal on October 5 ordered Zee to respond to Invesco’s petition by October 7. The investment firm stated that under the company law, shareholders holding more than 10% stake can requisition an EGM and the company has to hold one within 45 days.

Zee, however, approached the National Company Law Appellate Tribunal (NCLAT) seeking more time to file its response and the NCLT agreed to give Zee until October 22 to file its reply.

Invesco’s open letter to Zee’s shareholders

In the meanwhile, Invesco published an open letter to Zee’s shareholders on October 11.

Through this letter, we are writing to (1) reiterate the urgent need for independent perspectives on Zee’s Board given the Company’s governance failures and prolonged underperformance; (2) reaffirm our resolve to pursue an extraordinary general meeting of shareholders (EGM) to hold the Board and management accountable; and (3) express our concerns over some of the terms of Sony’s proposed alignment with Zee, which unfairly favor the founding family at the expense of other shareholders.

“We are calling on Zee shareholders to join us in asking why the founding family, which holds under 4% of the company’s shares, should benefit at the expense of the investors who hold the remaining 96%,” Justin M. Leverenz, Chief Investment Officer of Invesco Developing Markets Equities, wrote.

Here are some highlights from the letter:

  • Sony merger deal raises two significant concerns: “We have noted and welcomed the announcement of the non-binding term sheet reflecting Sony’s interest in a strategic alignment with Zee,” but the deals raises two concerns:
    • Agreement gifts 2 percent equity stake to promoters: “This non-binding agreement gifts a 2% equity stake to the promoters of Zee in the guise of a “non-compete,” even though the current MD & CEO of Zee will continue to run the proposed merged entity for the next five years. This is dilutive to all other shareholders, which we consider unfair.”
    • Allows promoter family to raise stake from 4% to 20% without any clarity on how: “The Zee-Sony announcement casually mentions that the Zee promoter family will have the right to raise their stake from 4% to 20%, without specifying any manner in which this meaningful change will actually happen.”
  • New board will evaluate Sony deal for fairness to all shareholders: “The new board could appoint an investment bank to evaluate all proposals for strategic alignments that might be probable, including the Sony proposal in its current or any revised format, as Sony might choose to present. […] We will firmly oppose any strategic deal structure that unfairly rewards select shareholders, such as the promoter family, at the expense of ordinary shareholders.”
  • Zee’s board and management have demonstrably destroyed shareholder value: “On the eve of Invesco’s EGM requisition on 11 September 2021, Indian stock market indices had more than doubled in the preceding five years, while Zee’s stock had more than halved in the same period. The 40% stock increase in response to the EGM requisition action indicates years of frustration among shareholders and an appetite for change.”
  • SEBI earlier concluded actions of the company not in best interest of shareholders: “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 17 June 2021. In this extraordinary regulatory rebuke, SEBI mentioned “large outstanding dues from related parties,” “letters of comfort issued by Directors of the Company without informing the Board,” and alongside other observations, concluded that “actions of the Company are not in the best interest of shareholders.”
  • Board needs independent directors who take their jobs seriously: “Since our EGM requisition, we have witnessed the strange spectacle of Zee’s management, with the support of its current Board, going to great lengths to deny what Indian law deems a statutory right to ordinary shareholders. […] This is precisely why we believe Zee’s Board needs to be strengthened with independent directors who take their jobs seriously.”
  • Better governed Zee would have been at a different pedestal: “The foundations of good governance lie in the demarcation between individuals and institutions, and the reconciliation of self-interest with the paramount goal of furthering shareholder interests. It is our belief that a better governed Zee would have been at a very different pedestal than where it finds itself today. “

Here is a copy of the full letter with more details.

Zee CEO’s note to board

On October 12, Zee disclosed the contents of a note shared by CEO Goenka to the board. Here are some key highlights from the note:

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  • Invesco presented Zee a merger deal with a large Indian group: Invesco in February 2021 presented a merger deal to Zee in which an Indian large group (Strategic Group) would become the majority stakeholder of the merged entity.
  • Goenka expressed concerns about the deal, but Invesco said there was no further room for negotiations: The note stated that Goenka “expressed his apprehension to Invesco that as the merging entities of the Strategic Group were over-valued, it would result in a loss to the stakeholders of the Company.” In response, Invesco told Goenka that the valuations were agreed by Invesco and “there was no room for further negotiations on the commercial terms of the deal and no data would be forthcoming to diligence and verify the valuation being attributed to the entities belonging to the Strategic Group.” “If the proposed deal would have been approved, the shareholders of the Company would have suffered a loss of at least INR 10,000 crores,” the note stated.
  • Invesco acknowledged Goenka’s reputation, experience, and capability as a professional: The note said that Invesco wanted Goenka to be MD and CEO of the merged entity and that it had acknowledged “Mr. Goenka’s reputation, experience, and capability as a professional and insisted that he would be paramount in leading the operations and business of the Merged Entity.” The note further added that Invesco voted in favor of the re-appointment of Goenka as the MD and CEO of the company, as recently as September 2020 “demonstrating their continued faith in Mr. Goenka’s leadership and the Board’s handling of the various governance-related matters.”
  • Invesco said deal will be consummated with or without Goenka: In response to Goenka’s objections to the deal, “he was informed by Invesco that the deal would be consummated with or without him, even though Invesco believed that he was best suited to lead the Merged Entity and his absence would erode shareholder value. Invesco time and again reminded Mr. Goenka that if he were to refuse to progress the deal, he and his family,” the note stated.
  • Deal would have benefited promoter family: The merger deal would have given Goenka employee stock options representing about 4% of the merged entity, giving the promoter group a 7-8% share in the merged company. “Invesco’s stance in their Open Letter that they “will firmly oppose any strategic deal structure that unfairly rewards select shareholders, such as the promoter family, at the expense of ordinary shareholders”, runs contrary to the very deal Invesco was proposing itself a few months ago,” the note stated. “Accordingly, public securities markets have been misinformed by Invesco.”
  • Invesco’s conduct leads to violation of various laws: “In light of the above, I believe that the manner in which Invesco conducted itself leads to violations of various laws including securities laws. At an appropriate stage, various regulatory and investigating authorities may also need to be involved,” Goenka wrote in the note.
  • Recent events show Invesco’s blatant attempt to assume de-facto control of Zee: “The Requisition Notice and the events that have followed since, reaffirm the position taken by the Board that this is a blatant attempt by Invesco to assume de-facto control of the Company, in violation of applicable takeover regulations,” the note concluded.

Here is a copy of the full note with more details.

The latest: Reliance finds its way into the mess

On October 13, Invesco informed that the large group Zee was referring to was Reliance and said that the deal was negotiated by Zee’s promoter family unlike what was presented by CEO Goenka in his note to the board.

“We wish to make clear that the potential transaction proposed by Reliance (the “Strategic Group” referenced but not disclosed in the 12 October 2021 communication by Zee) was negotiated by and between Reliance and Mr. Goenka and others associated with Zee’s promoter family. The role of Invesco, as Zee’s single largest shareholder, was to help facilitate that potential transaction and nothing more” – Invesco

“We specifically note that the implication that we as a shareholder would seek out a transaction for Zee that is dilutive to the long-term interests of ordinary shareholders, including ourselves, simply defies logic,” Invesco said.

“Zee’s October 12 disclosure is yet another tactic to delay an EGM that will give shareholders their right under Indian law to vote for a slate of independent trustees and pave the way for a healthier future for Zee,” Invesco added.

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