IPO: Zo asks Delhi High Court to protect its rights; Oyo alleges forum shopping

In fresh trouble for IPO-bound Oyo, rival Zo Rooms which has been fighting a legal battle with Oyo has filed an appeal in the Delhi High Court seeking protection of its rights against the company.

The court will hear the matter on September 29.

The issues between the two companies date back to 2015 when Zo Rooms, the budget hotel accommodation chain owned by Zostel Hospitality, was shut down after merger talks between the two companies failed.

At a time when Softbank-backed Oyo is preparing to file the draft prospectus for its initial public offering, Zo has approached the High Court seeking redressal.

"The award dated March 6, 2021, clearly holds that the term sheet between Oyo and Zostel was a binding contract. It also holds that while Zostel performed all its obligations under the term sheet and transferred its business to Oyo, however, Oyo breached the contract by not executing the definitive agreements and not transferring the seven percent shares to the shareholders of Zostel, as committed," Zo's legal counsel told Moneycontrol.

"Zostel had attempted similar subversive tactics in August 2021 by filing a barrage of petitions in the Delhi High Court even while its previous petitions seeking similar relief were pending. Specifically, Zostel had received a notice as part of Oyo’s Section 34 appeal and yet has gone ahead and filed under Section 9 for interim relief. The repeated reliefs being sought are not consistent with an award by the Arbitration Tribunal from March 2021 which has not granted any award for issue of any shareholding in OYO to Zostel," it added.

The two companies had entered into talks for an acquisition in 2015 executing an agreement on November 26.

Zo claims that it completed its obligation under the agreement and transferred the business but Oyo "failed to transfer seven percent to its shareholders" which eventually led to the arbitration.

In March, this year, nearly three years after the deal between the two companies collapsed, a Supreme Court-appointed arbitrator had finally said that Oyo was in breach of its agreement for the acquisition of Zo Rooms, adding that the latter can proceed to execute the definitive agreement.

However while Zo claims that it is entitled to a stake of seven percent in Oyo, the latter denied the claim stating that the tribunal had granted no specific relief to Zostel in terms of receiving ownership in Oyo.

Also read: Explained | Oyo-Zo dispute: On what grounds did SC arbitrator announce the award that favours Zo Rooms & what lies ahead?

The deal between the two companies was expected to be an asset sale with Zo Rooms founders and lead investor Tiger Global receiving a combined stake of seven percent in Oyo. The deal never took place, fuelling a bitter war between the two parties.

Oyo backed off from the deal talks citing liabilities of Zo Rooms. It claims that it had identified several issues during the due diligence process, where significant liabilities and unpaid dues, as well as undisclosed contingent liabilities came to the fore.

Complaints and counter complaints followed and in January 2018, Oyo filed a criminal complaint against the founders of Zostel. The case pertained to criminal breach of trust, cheating, and misrepresentation of data. Prior to this, Oyo had also filed other criminal cases under IT and copyright acts with the Economic Offences Wing and cybercrime department against senior employees of Zostel for stealing data and other assets.

Zo's legal counsel is also thrusting on the Securities and Exchange Board of India (SEBI) rules that states that an issuer shall not be eligible to make an initial public offer if there are any outstanding convertible securities or any other right which would entitle any person with any option to receive "equity shares of the issuer."

According to him, this makes it adequately clear that Oyo shall not be eligible to make an IPO as Zostel shall certainly qualify to have “any other right which would entitle Zostel with any option to receive equity shares of OYO”.

Oyo is all set to file for an IPO as early as this week, Moneycontrol reported on September 23.

In July, Moneycontrol first reported that the company was aspiring for an IPO by the end of 2021.

Citing that the matter was sub-judice Oyo's legal counsel said in its blog that the above mentioned award does not provide any relief that entitles Zo to seek to freeze Oyo’s shareholding pattern.

"This petition is not maintainable and in any case without merit," he said.