Recently, an arbitral tribunal ruled in favour of Zostel Hospitality, a chain of backpackers' hostels, in its three-year-old legal battle with SoftBank backed-Oyo Hotels and Homes. Under the deal, Oyo was supposed to acquire Zostel's business. In return, it was expected to give 7 per cent shareholding to Zostel. Zostel claimed that it has transferred its entire business but Oyo refused to transfer shareholding.
Now as per the tribunal order, both parties were acting upon a term sheet. But here's the catch. The tribunal has held that even though the term sheet is binding both parties still have to execute definitive agreement. "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," says the order.
What does it mean? Oyo can refuse to execute the definitive agreement with Zostel, and hence the chances of shareholding transfer are still uncertain. Already, Oyo has said that it will challenge the tribunal order as it calls a non-binding agreement as binding and gives rights to Zostel for the execution of the definitive agreement. "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," said the Oyo statement.
A Zostel source says that since the arbitration was carried by former Chief Justice of India A.M. Ahmadi, there are meagre chances that the High Court will admit Oyo's appeal. "Even if they admit the appeal, it's not going to take more than 3-4 hearings before their appeal is dismissed. We have already filed a caveat in High Court so that we will get to know about their appeal," says a Zostel source.
Some legal experts say that Zostel is still on a sticky wicket because it transferred the business to Oyo without executing the definitive agreement. Zostel source says that they transferred the business in good faith, and yet Oyo failed to perform its obligations which are in breach of the term sheet - as mentioned in the tribunal award. "However, as the respondent [Oyo] failed to perform its obligations, this tribunal holds that respondents [Oyo] committed breach of its obligations under the term sheet," says the order.
The matter goes back to 2015 when Zo Rooms and Ritesh Agarwal-led Oyo started merger talks. Next year, the deal was called off by Oyo. In 2018, Zo approached the Supreme Court which directed to start the arbitration process.
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