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Oyo-Zo dispute: Oyo breached its agreement to Zo Rooms, says SC arbitrator; definitive agreement can be executed

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.

March 08, 2021 / 07:53 AM IST

After three years of conflict, the Supreme Court-appointed arbitrator has finally said that Softbank-backed Oyo was in breach of its agreement for the acquisition of smaller rival Zo Rooms, adding that the latter can proceed to execute the definitive agreement.

"The claimant is entitled to take appropriate proceedings for specific performance and execution of the definitive agreements as envisaged, for itself and its shareholders under the term sheet," the tribunal said in its order.

"The term sheet was a binding document and the claimant did everything within their control to complete their obligations under the same. The claimant cannot be held responsible for the acts and omissions of the respondent and/or its shareholders by virtue of which some of the obligations could not be fulfilled by the claimant. This Tribunal has held that claimant No.1 is entitled to claim/pray for the relief of allotment of shares from the respondent to claimant Nos. 2 to 17," read the order copy.

While Zo Room in a statement claimed that following the ruling it is entitled to a stake of seven percent in the hospitality firm, Oyo has denied the claim stating that the tribunal has granted no specific relief to Zostel in terms of receiving ownership in Oyo.

"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 final award purports to provide Zostel a right to initiate 'appropriate proceedings' and for seeking execution of the definitive agreement," Oyo said in a statement.

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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.

Zo's counsel argued that Oyo benefitted by acquiring Zo's hotel business and committed "deliberate breach of contract". He also demanded compensation for the cost of the entire legal proceeding.

The tribunal has asked Oyo to meet this demand stating that the claimant is entitled to costs in the cause.

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.

The deal 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. Oyo 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.

On the other hand, Zostel alleged that Oyo stole data while conducting due diligence of Zo Rooms during merger talks.

Following the Delhi High Court and a Gurgaon court adjudicating the case in favour of SoftBank-backed hospitality firm Oyo, two years ago, Zostel moved the Supreme Court. The apex court had also appointed an arbitrator in 2018.

The tribunal has also acknowledged the fact that as mentioned in the term sheet Zo performed its part of the obligations while Oyo failed to do so. "On being requested by the claimants for performance of simultaneous obligations such as finalisation and signing of the definitive documents, the respondent kept assuring that the same would be done once Venture Nursery's concerns were addressed. Claimant No.1 continued to perform its obligations in compliance with the term sheet. There is no document on record which shows that the respondent instructed claimant No. 1 to stop taking steps towards fulfillment of the obligations stipulated under the term sheet at any stage. Therefore, there was a legitimate expectation on the part of the claimant that the respondent would also perform its part of the obligations under the term sheet. However, as the respondent failed to perform its obligations, this tribunal holds that respondent committed breach of its obligations under the term sheet," reads the 79-page-long court order.

Moneycontrol reviewed the 2015 term sheet which was signed between Oyo and Zo Rooms. It states that the total shares issued, including preferred stock and equity shares, shall not exceed seven percent of the fully diluted shareholding of the acquirer.

Following the court order dated March 6, Oyo said that it is likely to challenge the award for appropriate proceedings.

Moneycontrol has seen a copy of the order.
Priyanka Sahay

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