Zostel, a backpacker hostel chain (1) involved in a legal tussle with OYO for over the past three years after the merger talks between the two broke down, claimed last Sunday that it had won against Oravel Stay, the parent company of the hotel chain OYO. However, OYO has refuted these claims.
Zostel stated that ‘Honorable Tribunal held that the term sheet between the two companies, OYO was a binding agreement. The order stated that OYO had breached the term sheet by not definitive executive documents because of its internal conflicts. Moreover, the tribunal has also recognized that the transaction was consummated since Zo Rooms had transferred the entire business in 2016.’
The arbitrations panel had delivered the ruling on Saturday.
Zostel further added that Zo had completed its obligation under the agreement and transferred the business. However, OYO failed to transfer a 7% stake in Oravel Stays to the Zo Room’s stakeholders, eventually leading to the recently concluded arbitration. Notably, Zo Rooms was India’s budget room aggregator, incepted by Zostel’s founders.
Paavan Nanda, the ex co-founder of Zostel (2), who also led the process, stated that the company welcomes the Honorable Tribunal’s judgment. The fight was about their reputation and rights, which is beyond monetary compensation.
Nanda further added that the company is extremely relieved as the arbitral tribunal’s judgment has marked after careful evaluation of the merits and evidence the company offered over the past three years.
However, OYO has denied these claims and stated that the arbitration tribunal had granted no such specific relief to Zostel regarding the receiving OYO ownership. It has not given any direction for share issuance as the definitive agreement was neither consummated nor agreed upon. Hence, closing conditions were far from being achieved, and the arbitrator has acknowledged the same.
While commenting further in response to Zostel’s claim, OYO also stated that the tribunal has ruled and categorically admitted that the definitive agreements, which are significant important documents for M&A transactions, were neither agreed upon nor finalized.
According to the company’s claim, OYO is evaluating legal remedies to challenge the arbitration tribunal award as it seems to treat a ‘clearly non-binding term sheet as binding documents, providing remedies or rights to Zostel and its stakeholders for the definitive agreement’s execution.’
However, the final award purports to offer Zostel a right to initiate appropriate proceedings and seek the definitive agreement’s execution. Simultaneously, there is no specific remedy for the same granted except against its prayer for a cost that OYO would ‘vehemently’ oppose in all available avenues under the land’s law.
The award stated that ‘the tribunal holds that claimant is entitled to specific performance of the respondent’s obligation under the term sheet data on November 20, 2015. But, as definitive agreements are yet to be executed, the tribunal holds that the claimant is entitled to appropriate proceedings for the definitive agreement’s specific execution and performance as envisaged for its stakeholders and itself under the term sheet.’
It is worth highlighting that the arbitration process is confidential.
Zostel further stated that if the arbitrator’s order comes into effect, it would mean 7% of Oravel’s 9 billion USD valuation allotment to ZO Rooms stakeholder. Notably, it would work out to a settlement upward of 600 million USD (3).
It is worth highlighting that globally, M&A transactions take place via non-binding term sheets to begin an exploratory process to resolve a deal and even proceed to sign or not definitive agreements. And they are not considered binding in nature (4).
According to OYO (5), experts also believe that not only transactions in the future would find it difficult to negotiate because of the inability to confirm if the non-binding term sheet would remain non-binding or not. And such an award would not be executable, considering multiple shareholders, multi-stage complexities, and agreement on a definitive agreement as of date where most of the terms are no longer possible to complete by the claimants.
According to OYO’s blog (6), while offering direction for seeking the non-binding term sheet’s specific performance, the tribunal has not acceded to Zostel and its stakeholders’ request to demand monetary damage from OYO.
A clear statement that the relief seeking 1 million USD by Zostel couldn’t be granted as the same depends on the post-closing fulfillment obligation and the definitive agreements where post-closing obligations were to be negotiated and agreements were not mutually agreed and executed.
The blog further read that OYO would continue to hold its position strongly that both parties were merely at the discussion stage. No definitive agreements were finalized between the parties. The tribunal has also confirmed the same.
The Fight Between OYO and Zo
OYO and Zo have been in a battle since OYO called off its Zo Rooms acquisition, citing their inability to reach an outcome to find potential value in Zo’s business after detailed due diligence.
As per Zostel’s claims, Zo Rooms had completed its obligations according to the agreement and had transferred the business. However, OYO failed to transfer 7% to the Zo Room’s stakeholders, eventually leading to the arbitration process.
In a statement, Zostel stated that if the order from the arbitrator is given effect, allotment of 7% to Zo Rooms stakeholders will make the outcome the biggest exit in the Indian startup ecosystem (7). Notably, it would surpass the Snapdeal-Freecharge deal worth 400 million USD back in 2015.
It is worth highlighting that both Zo Rooms and Oravel Stays had entered merger talks in 2015. However, their talk broke down, as OYO stated that Zostel misled its revenue, while Zostel claimed that OYO stole its data while auditing it.
A. M. Ahmadi, former Indian chief justice, was the sole arbitrator following an apex court order in October 2018. The said verdict came on March 6.
Lawyers such as Dr. Abhishek Manu Singhvi, Salman Khurshid, among others, represented OYO. While Abhishek Malhotra, Managing Partner at TMT Law Practice, a Delhi-based law firm, represented Zo Rooms (8).
According to legal experts, given Saturday’s ruling, OYO would require to allot 7% shareholding to Zo and its shareholders, including Tiger Global, a New York-based investment firm, and Orios Venture Partners.
According to Shiju PV, Senior Partner at IndiaLaw LLP (9), the tribunal give significance to the overall term sheet’s intent instead of the written words, which stated that the term sheet is non-binding.
The Divided Legal Opinion
On Saturday, the verdict of the arbitral tribunal comprising A M Ahmadi found that the term sheet signed in November 2015, signed by OYO, backed by SoftBank to acquire Zo to be binding.
Even though the OYO and Zo Rooms deal failed to see the day’s light, the arbitrator stated that claimant Zo Room’s parent, Zostel Hospitality, was entitled to claim relief in the shares allotment form from the respondent, OYO parent, Oravel Stays. The order also stated that Zo Rooms was entitled to claim its case’s cost.
The order read that the claimant cannot be held responsible for the respondent’s omissions and acts and its stakeholders, by which some of the obligations couldn’t be fulfilled by the claimant. The tribunal has held that the claimant is entitled to claim or pray to relieve shares’ allotment from the respondent.
However, the arbitrator has struck down Zo’s pleas for 17 million USD in damages, a 1 million payment to the company’s founders, and an alternative settlement of about 89 million USD.
However, the legal opinion is divided with Nilesh Tribhuvann, the managing partner at White and Brief Advocates and Solicitors (10), stating that the term sheet is binding only to signatories.
He pointed out that, in his opinion, the claimant ought not to have initiated arbitration proceedings against non-signatories to the term sheet. The basic need of sending a notice before the initiation of the arbitration proceedings is also not complied with. It is a legal and subjective ground to vitiate the entire proceedings.
OYO was strongly refuting the claims and stated that Zo Rooms is continuously misrepresented and latched onto OYO. It added that both firms were still in the discussion stage and did not finalize any definitive agreement (11).
How the Battle Heated Up?
As per OYO, during the due diligence process, there was no response from Zostel to a list of issues the company identified, including significant liabilities, unpaid dues, and undisclosed contingent liabilities. The company claimed that getting into a deal with such a background would have been harmful to its business and reputation.
However, Zostel, on its part, claimed that OYO did acquire the business, properties, analytics, customer data, access, and even passwords. It further claimed that OYO had used its strong financial and PR muscle to silence its voice and hide behind technicalities to purchase time to avoid telling the truth.
When OYO claimed that the deal didn’t make any economic sense, Zostel was confident of the evidence it possessed against OYO.
Zostel’s council stated that it is only a matter of time when the entire barrage of evidence of the business transfer of OYO, including employees, properties, data, future bookings, access, and passwords, would come out in light of the authorities.
Zostel also claimed that no fresh complaint was filed by OYO again, further adding that the frivolous complaint filed way back in 2015 is brought into the media repeatedly to tarnish the company’s reputation and people associated with it.
According to Zostel, the complaint is frivolous, and OYO is only trying to gain the public’s undeserved favors.
According to Zostel, after incepting Zo Rooms, the venture was expanded to 52 cities, 12 offices, 800 hotels, and 700 employees within one and half years.
In November 2015, the company held talks with Ritesh Aggarwal, the founder and CEO of OYO (12), and signed a term sheet with OYO to acquire its business in return for 7% of OYO’s ownership. The company claims that investors approved it on both sides.
And for the next three months, the company claimed that every team member of Zo Rooms worked with OYO’s team in different cities to transfer the entire business.
In contradiction to Oyo’s claim, Zostel stated that OYO Rooms acquired its partner hostel all across India, employees, the entire customer data, analytics, access, passwords, and future bookings.
Previously, OYO stated that to ramp up its tactics, Zostel, as part of its counter-strategy, filed a misconceived and baseless Section 9 arbitration petition in Gurugram court in February 2018. It has made false allegations against OYO, including but not limited to allegations around several hotels, employee, and customer asset transfers. These allegations are related to a long expired and non-binding term sheet.
Zostel claimed that it has evidence suggesting it has handed all sensitive data about hotels across all cities, customer data, employees, future bookings, analytics, password, and access to OYO.
It further stated that they had organized mass meetings between Ritesh Agrawal, his HR team, and core team members with their employees, who then hand-picked them in big numbers to join OYO.
They did the exercise at a founder and core team level. Still, almost every employee has played their part efficiently to transfer the business across the country’s length and breadth to OYO by February 2016.
According to Zostel, with reports of Softbank announcing the acquisition all across the social media and final agreement on the table for signature, in February 2016, OYO suddenly, after getting Zo to purchase stamp papers to allocate shares, came up with a request for a slight delay in share allocations owing to some internal investor issues.
Until mid-2017, OYO kept the company engaged, citing one excuse after another to delay the dues after performing its duties pertaining to the deal.
Considering Ritesh’s assurance and credibility of names involved, the company waited patiently while copies of several definitive documents kept flowing between the two companies and their offices.
And by October 2016, OYO outright declined to issue 7% shares of OYO according to the deal. Zostel claimed that OYO had acquired the entire business more than one and half years ago, which now suddenly stated that the deal didn’t make economic sense after a careful evaluation.
Zostel stated that the company had transferred its entire business in good faith to OYO and the term sheet signed by them. Once they transferred their entire business and left with empty hands, OYO decided not to fulfill the obligation and sign the definitive agreement as contemplated by the term sheet.
OYO: A Ponzi Scheme?
It is not the first time that OYO found itself in a fraudulent or a cheating case. There have been multiple such cheating cases incidents over the past few years across the country. In the United States also, OYO has faced, if not such, swindling but similar issues.
OYO Hotels, the Indian unicorn that has gone international, has been going through such bad times for over the past two years now.
While Ritesh Agarwal is attempting to hit the ambitious target of being the largest hotel chain globally, it is facing multiple cheating cases.
In 2019, a Bengaluru hotelier had filed a cheating case against Agarwal and others and claimed that OYO hadn’t paid him dues. According to the complaint, the hotelier had claimed that OYO was to pay him 7 lakh INR a month for room booking but failed to do so since May 2019 (13).
In a response, OYO had stated it would look into the matter and would take strong legal action if these claims are incorrect and defamatory.
Incidents at OYO
During the same period, reportedly, a national-level shooter was found dead in an OYO hotel because of electrocution.
There was another accusation that an OYO hotel based in Gurugram had raped a guest.
In both cases, OYO stated that it is working with the authorities with the investigation (14).
Moreover, hotel partners had also raised their concerns about OYO quite a few times, with some even calling it the biggest online fraud (15). Hoteliers had organized multiple protests against OYO across India, and most of these protests have been about dues clearance.
Another point hotel owners raised is that while OYO charges a 20% franchise fee on room revenues, it takes more money via different sources, which it did not initially disclose.
Trouble in the US
After a great run in China, OYO had expanded to the US with even taking over a Hooters hotel in Las Vegas and rebranding it to be an OYO hotel.
According to Skift (16), a US-based media outlet, several hotel owners have complained that OYO’s partner management system doesn’t work properly and non-payment dues.
The Competition Commission of India took MakeMyTrip and OYO’s commercial agreement under investigation amid alleged dominance that they would enjoy.
Since MakeMyTrip is considered dominant in the online travel market, with OYO holding the same position in the hotel market, the partnership’s combined effect and how it could alter the market operations went under the officials’ scanner (17).
Toxic Work Culture and Questionable Practices
The rise of OYO in India has questions about its practices and its business’s health, as per the financial filings, interviews, and court documents.
According to the company’s former employees, OYO offers rooms from unavailable hotels, inflating the number of rooms listed on OYO’s site. Moreover, thousands of these rooms are from unlicensed guesthouses and hotels. The company also offers free lodging to the police and other officials.
There are several allegations against OYO for imposing extra fees on hotels and refusal to pay the hotels full amounts they owe.
Agarwal had also acknowledged that the company’s listings include hotels that it no longer works within an interview. He also stated that the company left those lists and marked them sold out as it tries to woo them back.
It is worth highlighting that OYO is expanding its operations globally and overs more than 1.2 million rooms across 80 countries. It has more than 20,000 people working under its wings and has secured over 2.5 billion USD in funding.
But according to current and former employees, OYO has never been an easy place to work, and the pressure has increased over the past year. Some of the employees have even spent all day and night in front of a computer to meet deadlines.
In some cases, the company even tried to squeeze hotel overs into renegotiating contracts deemed unprofitable. In others, OYO wished to save money and figured that most owners would not press for full payment.
According to Saurabh Sharma, who worked for OYO from 2014 to 2018, his managers told him that if 1,000 people shout, they will pay 200.
In a police complaint filed in November 2019, Betz Fernandez, owner of the Roxel Inn, Bangalore, said OYO owed him 49,000 USD and acted with ‘intention to cheat and cause wrongful loss’ via encumbering him for nonexistent guests and declining to pay the contracted minimum monthly payment. Meanwhile, OYO stated the dispute was in arbitration (18).
Alleged Fraud Case with Vikas Gupta
In September 2020, Vikash Gupta, a Chandigarh-based businessman, alleged that OYO’s top management wriggled out of an agreement illegally and with criminal intent. He even registered the case in Dera Bassi police against Ritesh Agarwal and Sandeep Lodha, CEO of Weddingz.in (19), under Section 420 and 120-B of the IPC, Indian Penal Code.
Notably, Gupta had signed an agreement in 2019 with OYO and allowed the company to run his Casa Villaz Resorts. He also claimed that he had submitted all the documents in a press conference, and OYO’s top management was satisfied with the paperwork.
Gupta alleged that everything was running smoothly until the coronavirus outbreak. OYO, fearing losses, hatched a premeditated conspiracy and, against the agreement terms, sent him a notice on March 3, 2020, to submit all the documents again within a 15-day notice period.
However, the agreement stipulated a 30-day notice period in case any party wishes to end the agreement. Soon, however, OYO terminated the agreement.
Gupta further alleged that instead of paying him the damage for ending the agreement, OYO slapped him with a five crore INR penalty as part of a criminal conspiracy to make easy and huge money using pressure tactics.
However, OYO had denied the allegations and called them baseless and publicity-oriented claims (20).
While OYO is the only startup that went global at such a rapid scale from India, there are some serious doubts about its business model.
We will keep you updated as the matter further develops. Till then, stay tuned!