Drivezy Vs Yamaha: Behind The Legal Battle Over The $35 Mn Acquisition

Automobile rental startup Drivezy has filed a lawsuit in Bengaluru’s Commercial Court against its key investor Yamaha Motors alleging that the Japanese auto giant deliberately delayed an acquisition bid over a period of three years, and launched a parallel business using its proprietary data.

Drivezy has named Yamaha Motor Co Ltd as well as three of its subsidiaries in India, US and Japan — Yamaha Motor Solution India Pvt Ltd (YMSI), Moto Business Service India Pvt Ltd (MBSI), Yamaha Motors Ventures Silicon Valley (YMVSV) — and directors associated with these companies (MBSI’s Shoji Shiraishi, YMVSV’s Hajime Aota, Yamaha CEO Yoshihiro Hidaka) in the lawsuit.

Broadly speaking, Drivezy has alleged that Yamaha and its subsidiaries entered into the due diligence process with the intention of first investing in the company in 2019 and then proposed an acquisition at $35 Mn in early 2021, but kept stalling the infusion of capital.

Inc42 has seen a copy of the lawsuit along with email communications pertaining to the deal discussions and Yamaha’s history with Drivezy.

The lawsuit was first reported by Entrackr.

Drivezy has alleged that Yamaha was engaged in discussions over a period of three years, first in the form of a potential Series C investment between 2019 and 2021, before proposing an acquisition in early 2021 when the second wave of Covid had further ravaged the business of Drivezy and other auto rental startups such as Zoomcar.

At first, Drivezy claims Yamaha pushed the board to start an insolvency process under India’s prepackaged insolvency rules, which helped Covid-impacted businesses cap their liabilities.

Further, the lawsuit alleges that Yamaha invested in competitors of Drivezy such as Rapido (August 2021) and Royal Brothers (February 2022), even as it gathered confidential information from Drivezy during the due diligence process initiated from later 2019 onwards when talks for Series C began. Additionally, Yamaha is said to have built its own tech platform similar to Drivezy.

The next hearing for the case is set for November 14, 2022. At the last hearing on October 15, 2022, the court allowed Drivezy to serve Yamaha and its subsidiaries with the suit.

Drivezy declined to respond to our questions about its financials in the past three years, which are not immediately clear given the US-based parent entity, or other operational challenges.

A MBSI spokesperson responded to reports of the lawsuit: “MBSI states that these allegations are completely baseless, the lawsuit was initiated by Drivezy against MBSI, we wish to make no further comments on this.”

Investors Seek Clarity

Even as Drivezy has taken the fight to courts, angel investors have alleged that most of them have been kept in the dark about these developments.

At least two angel investors, who had backed Drivezy between 2015 and 2016, told Inc42 that there was scant communication from the founders on the acquisition discussions, after reports had already appeared about a potential $40 Mn deal.

One angel investor told us that there was one email sent to some shareholders on October 18, 2022, a day before the report of the lawsuit appeared.

In contrast, some major shareholders in Drivezy claimed that the company had kept them informed about how the deal was progressing, even if it was not about every little detail. This disparity in communication is likely due to the different information rights for investors with preferred shares.

”As a VC I do not want to interfere in any deal which may impact my returns, so we don’t tell Drivezy what to do and nor can we ask Yamaha even if we know that Yamaha is stalling the deal,” one of the major investors in the company told Inc42.

Yamaha is alleged to have brought some Drivezy employees to its payroll and conducted company-wide meetings where it announced the transition process and the timeline. The Japanese company is even said to have communicated with Drivezy’s bank creditors to assure them of payment of interest on loans by September 2022.

The acquisition was said to be part of Yamaha’s push towards more consumer-centric services in the Indian market. It had also invested in two-wheeler marketplace CredR.

“On the face of it, there was no question that the deal was done. They pulled information and people out of Drivezy saying they were going to take over and then suddenly cancelled the deal,” the investor added.

Besides this, there was some disappointment about a publicly-listed and pedigreed  company such as Yamaha putting a startup in a tough situation.

Does Drivezy Have A Case?

Drivezy’s contention is that as an investor in the company, Yamaha has a fiduciary responsibility to not launch a parallel business till it completely withdraws the acquisition bid or exits its investment.

At least two people we spoke to said it’s similar to the Twitter Elon Musk case. Twitter wants a Delaware court to order SpaceX founder and the world’s richest person Musk to buy the company for $44 Bn, as he promised back in April this year.

Musk has been given until October 28 to follow through on his promise as the court determined that the contract governing the purchase is valid and binding.

While obviously that case will have little implication on the issue in the Commercial Court in Bengaluru, sources told Inc42 Drivezy, Inc, which is the US-based holding entity of Drivezy’s India business, has plans to file a lawsuit in the US as well.

US-based YMVSV has been made a party to the Drivezy case in India.

What Next For Drivezy?

Founded by Ashwarya Pratap Singh, Hemant Kumar Sah, Vasant Verma, Abhishek Mahajan, and Amit Sahu, Drivezy started out in April 2015 as a shared mobility service for four-wheelers, before adding car rental as a service. It also added two-wheeler rentals in 2017.

Overall, it has raised more than $150 Mn from marquee investors such as Y Combinator, Das Capital, Yamaha, Singapore-based Axan Partners, US-based IT-Farm.

In 2019, Drivezy commenced car-sharing services in San Francisco, becoming the first and only Indian vehicle sharing platform to begin operations in the USA.

Before the pandemic brought its business to a halt, it worked with individual owners, asset holding companies, banking and financial services companies and automobile dealerships to boost supply and cater to rental demand.

But post-Covid in 2020, Drivezy completely shifted its focus to the asset-light franchise model, which it had launched in 2019. The company currently has seven franchises and hopes to add three more before the end of the financial year, sources told us. Drivezy currently has just over 30 employees supporting this relatively small scale compared to the millions of users it once had.

As per sources in the company, that business continues to have profitable franchises. A cash infusion, we were informed, might keep Drivezy afloat at a small scale.

Interestingly, the VC quoted above pointed to Zoomcar as an example of the potential of car rental as a business. “We know for example that the traction for daily rentals is good in Bengaluru at least, so there is a high ceiling here.”

Inc42 could not independently verify claims about profitability of Drivezy franchise or the traction in Bengaluru.

There could be some substance to the car rental segment bouncing back. Another startup Revv told us this week that it turned profitable (before tax) on a quarterly basis in September this year. Revv claimed that subscription revenue has shored up the bottomline in a significant way.

But right now, all’s not well in the car rental segment in India, despite its IPO plans, Zoomcar’s India business is in tatters with high losses, multiple failed pivots and is also severely overleveraged in terms of debt from OEMs, NBFCs.

Many startups have also seen several complaints from customers related to refunds, payouts, and quality of service which have cast a pall on the car rental customer experience. Supply of automobiles is also a problem and so is the transition towards electric vehicles.

Drivezy can very well turn things around given that the economy is expected to bounce back by late next year. This could lift the mobility segment in a big way, but first, Drivezy needs to emerge from this legal battle unscathed or at least with some salvage to have a shot.

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