OYO vs Zo Rooms: Hostel chain Zostel claims victory, but OYO refutes

OYO and Zo have been fighting after OYO called off its acquisition of Zo Rooms in 2015.
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In a stretched battle, hospitality major OYO Hotels & Homes and hostel chain Zostel are at loggerheads over an arbitration award as OYO said that the Arbitration Tribunal adjudicating the dispute between two entities has granted no specific relief to Zostel in terms of receiving ownership in the hospitality major.

In an announcement on Sunday evening, OYO said: "We are stating that the Arbitration Tribunal has granted no specific relief to Zostel in terms of receiving ownership in OYO." However, Zostel in a statement also claimed victory in the matter.

"OYO acted in breach of its binding agreement after its acquisition of rival Zostel Hospitality, ruled the Arbitral Tribunal, directing OYO to sign the documents and issue the shareholding as committed in the Term Sheet," it said.

The term sheet executed between the two parties on November 26, 2015, promised ZO Rooms' shareholders 7% of OYO. Paavan Nanda, ex co-founder of Zostel, said: "We welcome the judgement by the Hon'ble tribunal. Beyond the monetary compensation, it was a fight for our rights and reputation. We are extremely relieved with the judgement that the arbitral tribunal has pronounced after diligently evaluating the merits and evidences produced by us over the last 3 years."

The arbitrations' panel delivered the ruling on Saturday. OYO said that that the arbitration hasn't given any direction for issuance of shares as the definitive agreement was neither agreed nor consummated and therefore, "closing conditions were far from being achieved and the same has been acknowledged by the Arbitrator".

The tribunal has ruled and categorically acknowledged that the definitive agreements, which are extremely important documents for any M&A transaction, were neither finalised nor agreed upon, according to OYO.

The final award, however, purports to provide Zostel a right to initiate "appropriate proceedings" and for seeking execution of the definitive agreement while no specific for the same was granted except against their prayer for a cost which OYO will "vehemeremedy ntly" oppose in all avenues available under the law of the land, it said.

“This tribunal holds that claimant is entitled to specific performance of the respondent's obligations under Term Sheet data on November 26, 2015. However, as definitive agreements have yet to be executed, the tribunal holds that the claimant is entitled to appropriate proceedings for specific performance and execution of the definitive agreement as envisaged for itself and its shareholders under the term sheet, " said the award.

It noted that globally, M&A transactions take place through non-binding term sheets to initiate an exploratory process to decide on a deal and even to proceed to sign or not definitive agreements and they are by far not considered binding in nature.

“Experts also believe that not just transactions going forward will find it hard to negotiate due to the inability to be sure if the Non-Binding term sheet will remain non-binding or not, such an award will not be executable, given multiple stakeholders, multi stage complexities and agree on a definitive agreement as of date where most of the terms are no longer possible of being completed by the claimants,” OYO said.

As per OYO's statement, while giving direction for seeking specific performance of the non-binding term sheet, the tribunal has not acceded to the request of Zostel and its shareholders demanding monetary damage from OYO. It was clearly stated that the relief seeking $1 million by Zostel couldn't be granted as the same is dependent on the fulfilment of post-closing obligations and the definitive agreements where post-closing obligations were to be negotiated and agreed were not agreed mutually and executed, OYO said.

OYO said it is presently evaluating legal remedies for challenging the award in as much as it appears to treat a clearly Non-Binding Term Sheet as a binding document giving rights or remedies to Zostel or its shareholders for the execution of the definitive agreement.

"OYO continues to strongly hold its position that the parties were merely at the stage of discussions and no definitive agreements were finalized between the parties, as has also been confirmed by the Tribunal," said the blog.

OYO and Zo have been fighting it after OYO called off its acquisition of Zo Rooms citing inability to reach an outcome to identify potential value in Zo's business after thorough due diligence.

Zo Rooms and OYO entered into talks for a merger in 2015 and executed an agreement on 26th November 2015. In its statement, Zo Rooms said it completed its obligation under the agreement and transferred the business but OYO failed to transfer 7% to the Zo Room’s shareholder, which eventually led to the arbitration.

Zostel in its statement said: "If the order from the Arbitrator is to be given effect, allotment of 7 per cent to ZO Rooms' shareholders will make this outcome the biggest exit in the Indian startup ecosystem."

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