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Hostel startup Zostel claims victory in 3-year battle, but OYO denies claim

Backpacker hostel startup Zostel Hospitality, which was embroiled in a legal battle with OYO for the last three years after merger talks broke down, on Sunday claimed that it had won against Oravel Stays, which owns and operates hotel chain OYO, and was entitled to get a cost from the hospitality unicorn.

However, speaking to YS, OYO denied the claim and said there was no relief to ZO Rooms in terms of getting any OYO share ownership.

Zostel had accused OYO of breaching a binding agreement after the acquisition. According to Zostel, ZO Rooms and OYO had entered talks for a merger in 2015, executing an agreement on November 26, 2015. While ZO Rooms completed its obligation under the agreement and transferred the business, but OYO failed to transfer 7 percent to ZO Room’s shareholder, which eventually led to the recently concluded arbitration, Zostel said in an official statement. 

OYO responded with its own statement, saying it had noted some messages being circulated by Zostel and “in the interest of setting the record straight, we are stating that the Arbitration Tribunal has granted no specific relief to Zostel in terms of receiving ownership in OYO”.

It further explained that the arbitration had not 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 had 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.

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The Arbitration Tribunal’s award

The Arbitration Tribunal’s 79-page award dated March 6, 2021, reads that, “documents placed on the record show that the parties were inclined to close the deal. It is evident that the revision of Definitive Documents and .. their finalisation was significantly affected by the events pertaining to the issues raised by Venture Nursery. Objections raised by Venture Nursery disturbed the normal course of finalisation of the Definitive Documents. No documents have been placed on record, which suggest a contrary view.”  

However, the award purports to provide Zostel a right to initiate “appropriate proceedings” and for seeking execution of the definitive agreement. The award read that the tribunal holds that the claimant (Zostel) is entitled to specific performance of the respondent’s obligations under term sheet dated 26.11.2015.

“However, as definitive agreements have yet to be executed, the tribunal holds that 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. Further, the claimant is entitled to costs in the cause,” it added.

Legal experts that YS spoke to said Zostel can claim the said percentage of shares from OYO only if documents pertaining to the “definitive agreement” are submitted in further proceedings.

According to OYO, 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, given significant dependencies, due diligence, commercial alignment, transferability and transfer of business, third party approvals, corporate approvals from the board and shareholders, including but not limited to specific conditions of shareholder agreements signed by the respective companies. 

OYO pointed out that the tribunal, while giving direction for seeking specific performance of the non-binding term sheet, 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 neither ever agreed mutually and executed,” as per the OYO’s statement.

OYO said it was 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.


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