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Tribunals soliciting reassessment of bourses approval in Zee Sony Merger raises Investors Anxiety. - MMJC
Introduction
Stock exchanges play a crucial role in ensuring the fair and efficient functioning of capital markets. One important aspect of their responsibility is reviewing and approving schemes of arrangement proposed by companies. These schemes, often designed to facilitate corporate restructuring, mergers, acquisitions, and other significant changes in a company’s corporate structure. In addition to their primary function, stock exchanges are also responsible for scrutinizing and approving various other corporate actions and transactions to protect investor interests.
Zee-Sony Merger Saga
The recent case of the Zee-Sony merger has caught undivided attention of stakeholders whereby stock exchanges are being directed by NCLT to revisit approvals granted and issued fresh no objection certificate, pursuant to some fresh points raised by BSE and NSE related to scheme of merger and SEBI Order on Shirpur Gold refinery where ZEE Promoters name appears in the context of diversion of funds, this has raised curiosity levels amongst investors.
Significance of SEBI LODR 2015 (Regulation 37)
When it comes to schemes of arrangement, stock exchanges play a crucial role in safeguarding the interests of all shareholders. The approval process involves a thorough examination of the scheme, its implications, and the adherence to SEBI’s guidelines. In India, the Securities and Exchange Board of India (SEBI) regulates the functioning of stock exchanges and has formulated guidelines, including Regulation 37 of the Listing Obligations and Disclosure Requirements (LODR) to govern the approval process for such schemes.
SEBI’s Listing Obligations and Disclosure Requirements provides a framework for stock exchanges to assess and approve schemes of arrangement. These regulations outline the key factors that stock exchanges should consider during their review process. Delving into some of the important aspects generally, the stock exchange may look into following key aspects:
- Compliance with applicable laws and regulations: Ensuring that the proposed scheme complies with the provisions of securities laws and requirements of stock exchange. This includes examining compliance with procedural requirements, disclosures, and timelines. (Reg 11)
- Fairness and equity: Assessing the scheme’s fairness and equity, focusing on the treatment of different classes of shareholders, creditors, and other stakeholders. They scrutinize whether the scheme provides an equitable distribution of benefits and safeguards the interests of minority shareholders. (Reg 4 (2)(c))
- Protection of investors’ interests: Review the scheme to ensure that it adequately protects the interests of investors. This includes evaluating the impact of the arrangement on shareholders’ rights, shareholding patterns, and voting rights, among other aspects.
- Disclosure and transparency: Examine whether the company has provided adequate information to enable investors to make informed decisions. This includes disclosure of financials, risks, prospects, and other relevant details.
- Independent expert opinion: Obtain an independent expert opinion, such as a fairness opinion or a valuation report, to validate the scheme’s terms and ensure transparency.
The approval process for schemes of arrangement by stock exchanges is a critical component of the regulatory framework in India. By examining compliance with laws, ensuring fairness and equity, protecting investors’ interests, promoting transparency, and seeking independent expert opinions, stock exchanges aim to maintain market integrity and safeguard the interests of shareholders and other stakeholders. There is a very rare possibility of stock exchanges being asked to revisit the approvals. The usual patterns go as once the shareholders have approved a scheme of arrangement; it is usually uncommon for the stock exchange to be asked to reconsider the approval given.
However, there could be certain exceptional circumstances where a request for reconsideration may arise. These apprehensions may be where there is a material change or a significant event that affects the validity or fairness of the approved scheme. Such apprehensions may include:
- New Material Information: If new material information surfaces after the shareholder approval that significantly impacts the scheme, such as the discovery of undisclosed liabilities or fraudulent activities, it may prompt a request for reconsideration.
- Legal Violations: If it is discovered that the approved scheme violated any applicable laws, regulations, or guidelines, stakeholders or regulatory authorities may request the stock exchange to reconsider the approval.
- Non-Compliance with Conditions: If the merged entity fails to comply with any of the conditions imposed by the stock exchange or regulatory authorities during the approval process, it could lead to a request for reconsideration.
- Procedural Irregularities: If there are procedural irregularities or a breach of due process in the approval process that raises concerns about fairness or transparency, it may trigger a reconsideration request.
In such cases, the party requesting reconsideration, which could be a stakeholder or a regulatory authority, would typically need to provide substantial evidence and demonstrate that there are valid grounds for reconsideration. This was depicted in the Zee Merger Saga where NCLT directed to stock exchanges to reassess approvals granted. The stock exchanges are now expected to evaluate the request based on the specific circumstances and determine the appropriate course of action.
Further, Stock exchange are also directed to review and confirm the non-Compete clause of the scheme. Here interesting fact is whether the payment of non-Compete fees by SPE Mauritius Investment Limited to Zee promoters i.e., Essel Holdings Limited (Defined – Essel Mauritius) will it be equitable treatment on other shareholders under Reg 4(2)(c) of LODR?
The non-compete clause is entered with those people who are ideally capable of entering into business again. Further, the non-compete clause is a separate section of the scheme and not a consideration clause against merger and therefore the question of equitable treatment may not arise.
The approval of Stock exchanges is a significant step in merger process and usually questioning the same by asking to revisit approvals raises anxiety levels for investors.
Stock exchanges act as gatekeepers for companies, ensuring compliance with regulatory requirements and maintaining market integrity. Adherence to these, fosters’ investor confidence, promotes transparency, and ultimately contributes to the overall health and growth of the Indian capital markets. However, the availability and process for reconsideration may vary based on the jurisdiction and the specific regulations governing the stock exchange.
This Composite scheme of arrangement between two media companies has been academic entertainment for students, opportunity for professionals, evolution process for the regulator and judiciary but hard-pressed time for investor.
The article is written by MMJC Partner – Omkar Dindorkar and Hasti – Research Associate and published in Taxman.