Australian AI Software Startup Overturns Court Judgement in Landmark Appeal.
By: Mark Bradley
Tags: Terri Vinson, Startup, Simon Vinson, Funding, Legal

Be careful who you take money from.

In 2015 two of our Shareholders sued our small start-up company, Semantic Software Asia Pacific Limited, “SSAP”. The Shareholders were the superannuation funds of a husband and wife, Simon and Terri Vinson, now divorced. In 2012 Simon Vinson invested $1.25 million in SSAP through his superannuation fund and persuaded Terri Vinson to invest $312,500 through her superannuation fund in 2012 and 2013. In March and May 2014, Simon invested a further $290,000.

After making the initial investments, in early 2013 Terri Vinson requested that Simon Vinson be given a senior role in the Company. Simon was an accountant and property developer, which was not a full-time role, and Terri Vinson felt that an executive role in SSAP would be a suitable role for him and a recognition of their investment. SSAP offered Simon Vinson a Board Adviser role in order to assess his suitability for a Directorship. In mid-2013 the Board decided not to offer Simon a Directorship. Simon appeared relaxed about it but that was not the case with Terri. At a subsequent Annual General Meeting, Terri Vinson made it clear that she was very angry that Simon was not given a substantial role or Board Directorship.

Notwithstanding Terri’s anger, Simon Vinson continued to support SSAP by raising capital for the Company from his friends and business associates from 2012 to early 2014. In late 2014 the relationship with Simon broke down and in early 2015 Simon and Terri Vinson, via their Superannuation Funds, sued both SSAP and its Founder and Managing Director, Mark Bradley, for Breach of Contract and Misleading and Deceptive Conduct. They claimed that the assets of the company, patents and patent applications, had no value and that therefore the Company had failed to meet a guarantee that their shares would triple in value within two years of their investment.

The commencement of litigation had a definite negative impact on the ability of SSAP to raise capital, as the litigation was declared in our Financial Statements. That made life tough for us.

In late 2015 we commissioned a valuation from one of the leading United States valuers of intellectual property. Boston based Brattle Group are frequently appointed as expert witnesses in high profile disputes around the world and were recommended by our US Patent Attorneys as “the best in the US”. Brattle valued our patent portfolio at US$246 million. On a value per share basis that was eight times what Terri Vinson and Simon Vinson paid for their shares. Despite this, the Vinsons continued their course.

In 2016 attempts were made to settle the matter but Simon, representing the Plaintiffs, made demands that were far in excess of the obligations the Company had to the Plaintiffs. In a Court ordered mediation, Simon told the Mediator, in a loud profanity-laden declaration that “if I don’t get what I want I will smash this company to pieces”.

The magnitude of demands made by Simon Vinson and Terri Vinson through late 2016 and early 2017 increased to the extent that they were impossible for SSAP to meet. Despite our offers to buy their shares back at the guaranteed value, all of our many settlement offers were rejected. Instead, Simon demanded a remedy that, in effect, would pass control of the Company and its valuable patent portfolio to them.

Meanwhile in 2016, unbeknown to us, Terry Vinson had filed for divorce from Simon. She had developed a property and was also in Victoria’s Supreme Court refusing to pay the Builder his final payment in Vinson v Neerim Properties Developments Pty Ltd [2016] VSC 321, (9 June 2016).

The SSAP matter was heard in the NSW Supreme Court in early 2017.

The Plaintiffs, the respective superannuation funds of Simon Vinson and Terri Vinson, were represented by Senior and Junior Counsel. The Senior Counsel, Elizabeth Collins, had been Junior Counsel to the Presiding Judge when he was a Senior Counsel. The Judge presumably felt that this did not create any conflict of interest.

The Defendants, SSAP and Mark Bradley, were represented by Mark Bradley (who is not a lawyer).

The Plaintiffs argument, supported by a Melbourne suburban accountant, was that the SSAP shares were “worthless” because SSAP’s extensive patent portfolio was “worthless”.

The Defendants argument was that we had obtained a valuation from a highly credentialed and respected US company that was expert in valuing Intellectual Property for the US Supreme Court, and that the authoritative valuation of our patent portfolio was “at least US$246 million”.

The Presiding Judge, the Honourable Justice James Stevenson advised that he would not allow our expert valuation witness to participate via video-conference, insisting that he travel from Boston to appear early the following week. That proved impossible, so the Presiding Judge struck out our valuation, and all reference to it, from evidence.

During the trial, the Plaintiffs’ Solicitor approached SSAP with offers of settlement that would see damages awarded of more than three times the investment made by the Plaintiffs, that SSAP would be required to enter into an aggressive payment timetable, and that they would be able to keep their “worthless” shares. This would effectively hand ownership of the Company’s patents and software to these two small shareholders and leave the other 200 shareholders with nothing.

On behalf of the Defendants and our Shareholders, Mark Bradley argued to the Court that the claims of the Plaintiffs amounted to a scam, and that they actually believed that the shares were very valuable because the patent portfolio was very valuable, and that they sought to own the patents. In final submissions, the Plaintiffs argued that they should be awarded damages plus be able to keep their shares. Mark Bradley argued that it is a fundamental principle of law that “you can’t have your cake and eat it too”.

Justice Stevenson delivered a Judgement and Orders on February 24, 2017 that was strongly adverse to SSAP and Mark Bradley. However, in awarding damages to the Plaintiffs against SSAP and Mark Bradley, Justice Stevenson supported Mark Bradley’s submissions that, according to Australian Law, the Plaintiffs must surrender their shares in exchange for the claimed damages; that indeed they could not have their cake and eat it too.

As had been foreshadowed to Justice Stevenson, on May 5, 2017 the Defendants filed an Appeal against his Judgement.

On February 14, 2018 the NSW Court of Appeal overturned all judgements against SSAP. [ see judgement here]. The Court also overturned the judgement against Mark Bradley for misleading and deceptive conduct.

Justice was served

In the Appeal Hearing the Barrister for SSAP and Mark Bradley argued that in striking out the SSAP valuation, Justice Stevenson had failed to provide ‘ procedural fairness ‘ which was required of him according to the procedural rules of the Court. A request for leave to appeal to the High Court on this argument of procedural fairness was subsequently made, but in June 2018 leave to Appeal was not granted.

While this whole matter made capital raising very difficult and working capital tight, we managed to struggle through. We had to lower the price at which we sell shares to considerably below true value. Existing Shareholders were very supportive, contributing an additional amount of around $3 million in each of the three years following the Court Case.

We are now working on substantial growth funding and migrating to a US public listing in 2021.

The number of US Patents issued to us has increased nine-fold since the US$246 million valuation. These are very important “Premium Patents” that describe core fundamental technologies for the next generation of computing, Artificial Intelligence.

After 8 years of R&D and some $40 million invested, in January 2000 we released our world-leading “ cognitiveAI” Artificial Intelligence platform on Amazon Web Services. With sophisticated Semantic Technologies based on Ontologies and Semantic Graph “triple stores” at its core, our customers can quite easily build knowledge bases for much more robust and automated Artificial Intelligence. In short, you can build more sophisticated Artificial Intelligence, more quickly, at lower costs, and become self-sufficient sooner.

Forrester Research published “ TechRadar: Artificial Intelligence Technologies Q1 2017” in 2017. They opined “This (Semantic Computing) technology is on a trajectory of moderate success. However this could move to significant success if the market and buyers hit an inflection point where they realize the importance of semantic technologies in making AI systems more robust and automated.”

On Reddit in 2019, Microsoft Founder Bill Gates said “The most amazing thing will be when computers can read and understand the text like humans do. Today computers can do simple things like search for specific words but concepts like vacation or career or family are not “understood”. It has always been kind of a holy grail of software particularly now that vision and speech are largely solved”

Experts’ reading of the market is that in 2021 and beyond Semantic Technologies will be at the heart of the next major advances in Artificial Intelligence because the market has hit Forrester’s “inflection point”, and is now becoming aware that you can’t have Artificial Intelligence without the computer understanding , to recognize the meaning of words and phrases, necessary for true cognitive computing. Bill Gates calls it “the holy grail of software”.

“IDC forecasts the overall AI software market to approach $240.27 billion in revenue in 2024 with a CAGR of 16.7%, with the AI-centric part of it to approach $43.7 billion with a CAGR of 22.4% over the entire period.” — “I have a dream for the Web [in which computers] become capable of analysing all the data on the Web, the content, links, and transactions between people and computers. A Semantic Web, which should make this possible, has yet to emerge, but when it does, the day-to-day mechanisms of trade, bureaucracy and our daily lives will be handled by machines talking to machines. The intelligent agents’ people have touted for ages will finally materialize.” Ritu Jyoti, program vice president, AI research, IDC

Today we are working on some of the most advanced applications of natural language processing in the world today, combining the strengths of semantic technologies and deep learning to gain very deep insights into technical data, both text documents and digital databases. The applications for such technology are broad and the potential benefits are massive, typically productivity gains well above 100% per annum.

To achieve what we did, we had to reinvent the vision of Professor Sir Tim Berners-Lee when he said in 1999

We are firmly of the view that we can build a large global software and services company headquartered in the US and building on the rich ingenuity and skills of Australian researchers and developers in our Australian software lab.

I am often asked what happened to Simon and Terri Vinson after the Appeal. Not only do they remain as Shareholders, in 2019 Terri’s Lawyers advised that as part of their divorce settlement Simon had agreed to transfer sufficient of his shares in the Company so that he and Terri had split the “worthless shares” 50/50. Neither Simon or Terri have ever met requests to sell their shares back to the Company or indicated any desire to do so.

As my grandmother used to say, “be careful who you take money from”.