Zostel's plea in HC adds twist to Oyo's IPO saga

Oyo Hotels & Homes, which is preparing to file a draft prospectus for a $1-$1.2 billion initial public offering (IPO),has a legal hurdle ahead that is being posed by once rival Zostel (Zo Rooms) over a botched acquisition deal, which is due to come up for a court hearing on Wednesday. Hospitality startup Zo — which claims that Oyo is in breach of a binding agreement for a buyout deal dating back six years — has now approached the Delhi High Court seeking redressal in a move that could potentially be a spanner in the works for the IPO-bound Oyo.Speaking to ET, the legal counsel for Zo Rooms said it moved a court application in late August, “seeking an interim order to restrain or injunct Oyo from modifying its shareholding structure or cap table including by way of an IPO.” ET has reviewed a copy of Zo Rooms application.The Delhi HC, which is expected to hear the matter on Wednesday, willalso take up a plea by Oyo to grant a stay on an earlier order from a Supreme Court-appointed arbitrator who had said that Oyo was in breach of its agreement with smaller rival Zo Rooms over the proposed acquisition. Both the pleas have been clubbed for a hearing on Wednesday.In his ruling on the matter in March, AM Ahamadi, a former chief justice of India, had said that the term sheet between Oyo and Zo was binding and that Oyo, after a point, stopped taking steps to fulfil obligations under the term sheet. ET had earlier reported that Gurugram-based Oyo is aiming to file its draft red herring prospectus (DRHP) this week but it could spill over to the next week as well. Oyo, since the dispute landed in court, has maintained that the disputed term sheet was non-binding, it has challenged the arbitrator’s order, with the hearing now expected to take place on Wednesday. The arbitrator’s order had said Zo is 'entitled' to make 'appropriate proceedings' for its rights and work towards executing the ‘definitive agreement’ with Oyo for itself and its shareholders.In its plea to the Delhi HC in August, Zo Rooms has cited Oyo’s investments from Microsoft as well as reports on its planned IPO. "An issuer shall not be eligible to make an initial public offer if there are any outstanding convertible securities or any other right which would entitle any person with any option to receive equity shares of the issuer..”“This makes it adequately clear that Oyo shall not be eligible to make an IPO as Zostel (Zo Rooms) shall certainly qualify to have “any other right which would entitle Zostel with any option to receive equity shares of Oyo,” Zo's legal counsel told ET. Ideally, therefore, 'Oyo should not be permitted to file the DRHP till such time that its challenge to the award is decided,” he added.Oyo's CounterIn turn, Oyo’s legal counsel told ET that the petition by Zostel has been filed ‘seeking reliefs which are beyond the scope of the Award’.“The Award does not provide any relief to Zostel or its shareholders that entitles them to seek Oyo to freeze its shareholding pattern, in any manner whatsoever. Oyo’s stand is that this petition is not maintainable and in any case without merit,” it said. Old DisputeThe dispute between SoftBank-backed Oyo ( formerly Oravel Stays) and Zo Rooms goes back to 2015 when the two companies had begun negotiations for a merger but the talks fell through. This eventually led to the arbitration.Zo, citing the arbitrator's order, has said it is eligible for a 7% stake in Oravel. Oyo has always denied the validity of any such claims. ET reported last week that Oyo is aiming at a valuation of around $12-$15 billion in the IPO. Oyo’s last valuation was $9.6 billion in September and a 7% stake in it would be valued at around $672 million. Oyo in its statement to ET denied Zo’s comments before the hearing and said, ‘after multiple attempts in the courts and arbitration tribunal, Zostel has continued its attempts to create a wrong perception’. This shows a pattern of Zostel trying to distract Oyo from pursuing its business goals, the statement from Oyo said. Responding to ET’s queries on Zo’s claims to stall Oyo’s DRHP, the legal representative for Oyo stated that this was incorrect and ‘totally misleading and based on surmises’. “Without considering the grounds of challenge by Oyo of the Award, the Award in itself has not issued Zostel or any of its shareholders any shares in Oyo,” the person said.As per Oyo’s legal counsel, “the only relief, apart from costs, which has been granted to Zostel, is to initiate “appropriate proceedings” to execute definitive agreements and seek specific performance of the Term Sheet,” the statement noted.“As such, till the time that parties do not come to an agreement on the terms of the definitive agreements and the same are not executed, no right whatsoever arises in favour of any party for any type of shares to be issued in Oyo.”The company reiterated that the entire process (acquisition) was merely at the stage of exploratory discussions, and no definitive agreements were finalized or executed between the parties.

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