Zostel-OYO Failed Merger: Delhi HC Sets Aside Arbitration Tribunal’s Ruling

The Delhi High Court has set aside an arbitration tribunal’s ruling in an ongoing dispute over a failed merger between hospitality major OYO and rival Zostel Hospitality. 

In a statement, OYO said that the HC ruled in its favour as it did not act in breach of an agreement following acquisition discussions with Zostel. 

As per a report by Bar and Bench, Delhi HC’s Justice Sachin Datta passed the order on a plea filed by OYO under Section 34 of the Arbitration and Conciliation Act, 1996, challenging the ruling. 

Justice Datta said that the final order “will be uploaded in a couple of days after the typographical errors are rectified”.

“The Delhi High Court’s order substantiates OYO’s position that no part of Zostel’s business was transferred to OYO and that a determinable contract cannot be specifically enforced, in line with established precedents from the Supreme Court of India. It also dismissed Zostel’s execution petition,” OYO said in a statement. 

In March 2021, a tribunal headed by former Chief Justice of India (CJI) Aziz Mushabber Ahmadi had ruled that Oravel Stays, OYO’s parent, acted in breach of a binding agreement to acquire Zostel. 

The Long Legal Battle Between OYO & Zostel 

At the heart of the battle is an agreement signed between the two parties in 2015 for acquisition of Zostel’s budget hotel offering, ZO Rooms, by OYO. As part of the deal, ZO Rooms’ shareholders were supposed to receive a 7% equity stake in OYO. 

However, the transaction did not materialise due to failure of the due diligence process and lack of consensus in the deal terms documentation.

But, after two years, the Delhi NCR-based travel tech major, in a statement in 2017, said that it was no longer involved in talks with Zostel for the potential acquisition after entering into an alleged “non-binding term sheet”.

At the time, the Ritesh Agarwal-led company said that both companies mutually agreed to terminate the non-binding term sheet (NBTS) due to issues including non-completion of the due diligence process and transaction structuring by Zostel.

However, Zostel claimed that the travel tech major put the deal on the backburner after acquiring the data of its employees, assets, and hotel properties under the pretext of accelerating the process of acquisition. Subsequently, in February 2018, Zostel filed a petition, before the arbitration tribunal, seeking $1 Mn in relief and 7% shareholding in OYO as promised under the term sheet.

In March 2021, the arbitral tribunal noted that OYO acted in breach of the binding agreement and allowed Zostel to pursue appropriate proceedings for execution of the definitive agreements.

Subsequently, Zostel filed a plea before the Delhi HC to restrain OYO from altering its shareholding, including via its proposed IPO, saying that any such process would “frustrate enforcement of the arbitral award”.

Around the same time, Zostel wrote to SEBI to inform about its dispute with OYO, which was then gearing up for its IPO. 

In February 2022, a division bench of the Delhi HC bench dismissed Zostel’s petition and observed that the arbitration award did not crystallise into an enforceable right to shares for Zostel. At the time, the HC said that there were no “fruits” of the award (7% stake) that required protection.

A month later, another bench of the Delhi HC disposed of an appeal by Zostel seeking a stay on OYO’s IPO.

In its statement,  OYO adds that the Delhi HC ruling “vindicates” its position, putting rest to he contention that there was any binding, definitive agreement between the parties. “The court has recognised that no definitive agreements were executed, no consensus was reached, and essential commercial aspects of the potential transaction were never finalised,” the IPO-bound startup noted.