Broken promises: Deals close not because agreements provide for them but because the parties want to 

A gigantic merger that could have been one of India’s largest at a whopping $10 billion was called off recently. The parties involved, Sony and Zee, after having inked the merger agreement two years back saw it ending up on a bitter note. They are now caught up in a messy legal battle.

Sony has terminated the deal and alleged that Zee couldn’t meet certain financial conditions and breached the terms of merger agreement. It has demanded $90 million as termination fee and referred the matter to arbitration. Zee, denying all allegations, has accused Sony of acting in ‘bad faith’. Calling the termination wrongful and legally untenable, Zee wants the termination and $90 million claim withdrawn. Zee has approached National Company Law Tribunal (NCLT) to implement the merger, as it was approved by them. On Zee’s plea, NCLT has sought Sony’s response within three weeks.

The matter will next be heard on March 12. This begs this question. Can regulators and authorities implement mergers approved by them? Mostly, all mergers have a clause that provides that once all regulatory clearances are obtained, the merger will be effective when all other pre-conditions (‘Conditions Precedent’) are met. So, regulators may be unable to push the merger with a scheme having such a clause.

Conditions precedents (CP) include legal, financial, business, regulatory and other conditions. If they are not met, a party is free to walk away without incurring any liabilities, unless a liability clause is provided in the contract. Further, unless parties choose to have a contractual remedy, such as, a break away or termination fee, usually, agreements do not have any remedy for non-closure of a deal if CPs are not met.

Generally, in all deals there’s an interval between the signing and closing of a deal for parties to meet the pre-agreed conditions, seek lenders’ and shareholders’ consent and other regulatory clearances. Deals with a long period have stringent standstill obligations, certain valuation assumptions, impact of unforeseen material adverse events, which add up to deal uncertainty making it fragile. So, it is advisable that such clauses are carefully drafted and wherever possible suitable resolution mechanisms should be provided. Further, parties must try to shorten this deal period and expedite closure.

In listed entity deals, this problem gets aggravated. Imagine if a deal results in an open offer — which is legally required to be launched on the signing date and not the closing date. What would happen to the deal if the open offer is successful but the underlying deal (that triggered the open offer) is itself in trouble. It would be a mess. Also, the news of aborted deal would lead to a sharp fall in stock prices.

An unfortunate part of the Sony-Zee’s case is that despite having shareholders’ nod and clearance from the Competition Commission of India, stock exchanges/SEBI and NCLT, it could not materialise as parties couldn’t reconcile their differences.

In any merger, the most critical part is the intention of parties to close. Deals close not because agreements provide for it but because parties want to. A disruption to a deal can be overcome by finding amicable ways, such as adjustment of valuation (where required), compensating a party for its loss, resolving differences with good intentions. So, it is best to resolve and avoid long legal tussles.

(The author is a partner in JSA. Views are personal)

Published on February 25, 2024