The ruling, delivered on Saturday by the Arbitral Tribunal comprising former Chief Justice of India A.M. Ahmadi, found the term sheet signed by Oyo to acquire rival Zo Rooms in November 2015 to be a binding agreement. Although the deal failed to fructify, the arbitrator said that the claimant, Zo Room’s parent Zostel Hospitality, was entitled to claim relief in the form of allotment of shares from the respondent—Oyo’s parent company Oravel Stays.
The order also said that Zo Rooms was entitled to claim the cost of its case.
“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.
The arbitrator, however, struck down Zo’s pleas for $17 million in damages, a $1 million payment to the founders of the company and an alternative settlement of around $89 million.
“We welcome the judgement by the Hon’ble tribunal. Beyond the monetary compensation, it was a fight for our rights and reputation,” said Paavan Nanda, who cofounded Zo Rooms, and led the legal process.
Stating that Oyo had breached the term sheet signed on November 26, 2015 by not executing the deal, Zo Rooms pointed out that the term sheet had promised shareholders of Zo Rooms a 7% stake in the acquiring company.
ET reviewed a copy of the term sheet between Zo Rooms and Oyo, which states that the total shares issued both preference stock and equity shares shall not exceed 7% of the fully diluted shareholding of the acquirer (Oyo).
Oyo strongly refuted the claims by Zo Rooms that the Arbitration Tribunal had granted any relief in terms of receiving ownership in Oyo.
The Gurgaon-based company was last valued at an estimated $9 billion when it raised Rs 54 crore from Hindustan Media Ventures Ltd. as part of its Series F1 round in January this year. This is down from a peak valuation of $10 billion when the company raised $1.5 billion from founder Ritesh Agarwal, Softbank Group and other investors in October 2019.
“The final award purports to provide Zostel a right to initiate “appropriate proceedings” and for seeking execution of the definitive agreement while no specific remedy for the same was granted except against their prayer for a cost, which OYO will vehemently oppose in all avenues available under the law of the land,” Oyo said in a statement.
The company added that it was “evaluating legal remedies” to challenge the tribunal’s ruling as it treated a non-binding document such as a term sheet as a binding document.
The order comes after a three-year-long legal spat between Oyo and Zo Rooms following the failure of the proposed acquisition owing to issues with an early investor in Oyo – Venture Nursery. Following the breakdown of the deal, Zo Rooms claimed it was owed a 7% stake in Oyo’s parent Oravel Stays and approached the Supreme Court for a legal remedy.
The Court, in October 2018, further directed arbitration to settle the dispute and appointed Justice Ahmadi as the sole arbitrator in the petition filed by Zo Rooms.
Some legal experts are of the view that Saturday’s ruling does in fact require Oyo to allot 7% shareholding to Zo Rooms and its shareholders including New York-based investment firm Tiger Global and Orios Venture Partners.
“The tribunal gave importance to the overall intent of the term sheet rather than the written words which stated that term sheet is non-binding,” Shiju PV, Sr Partner, IndiaLaw LLP said.
However, legal opinion on the matter was divided with Nilesh Tribhuvann, Managing Partner at White and Brief Advocates and Solicitors saying that “the term sheet is binding only to the parties who are signatories.”
“In my opinion the claimant ought not to have initiated arbitration proceedings against the non-signatories to the term sheet. The basic requirement of sending a notice prior to initiation of the arbitration proceedings are also not being complied with. This itself is a legal and subjective ground to vitiate the entire proceedings,” he said.
Zo Rooms in its statement said that if the arbitration order is taken into effect and its shareholders are allotted 7% stake in Oyo at its current valuation of $9 billion, it would be counted as the biggest exit in India’s startup ecosystem, surpassing the $400 million Snapdeal Freecharge deal in 2015.
Oyo on the other hand said that Zo Rooms continues to “misrepresent and latch on to OYO”, maintaining that both the parties were still in the discussion stage and no definitive agreements were finalised.