Ebbsfleet Pty Ltd as trustee for Ebbsfleet Superannuation Fund v Semantic Software Asia Pacific Ltd

Supreme Court of NSW|2017-02-09|Before: Stevenson J

Solicitors: Robert James Lawyers (Plaintiffs) File Number(s): SC 2015/15374

Judgment

The plaintiffs, Ebbsfleet Pty Limited and McGee Pty Limited, are the trustees of superannuation funds established for the benefit of Mr Simon Vinson and Ms Theresa Vinson, respectively.
By 10 agreements dated between 31 May 2012 and 26 March 2013, Ebbsfleet and McGee subscribed for 6.5 million shares in the first defendant, Semantic Software Asia Pacific Limited (then known as Tralee Technology Holdings Pty Ltd).
Semantic was then a proprietary company.
At an extraordinary general meeting held on 28 August 2013, the shareholders of Semantic resolved to convert it to an unlisted public company and caused the name of the company to change. Unless the context otherwise requires, I will refer to it as "Semantic".
The second defendant, Mr Mark Bradley, has at all relevant times been a director of Semantic and in effective control of Semantic's business activities. At the hearing before me, Mr Bradley appeared for himself and on behalf of Semantic.

The plaintiffs' claims

Ebbsfleet and McGee claim that Semantic and Mr Bradley are in breach of a promise made in each of the Share Issue Agreements that the shares for which they subscribed in Semantic would triple in value within two years of issue. Ebbbsfleet and McGee claim that far from the shares having tripled in value, they were after two years, and still are, almost worthless.
Ebbsfleet and McGee also allege that Mr Bradley, on his own behalf, and on behalf of Semantic, represented (amongst other things) that the shares would so triple in value. Ebbsfleet and McGee allege that such a representation was made in respect of a future matter, that Mr Bradley had no reasonable basis to make the representation, and that accordingly, by reason of s 4 of the Australian Consumer Law (set out in Sch 2 of the Competition and Consumer Act 2010 (Cth)) it was misleading for the purposes of the proscription in s 18 of the Australian Consumer Law against engaging in misleading or deceptive conduct in trade or commerce.

Decision

In my opinion, Ebbsfleet and McGee have made out both of these claims and are entitled to damages accordingly.

The Investor Pack

The Investor Pack that Mr Vinson received included the Information Memorandum and the two "Pre - IPO Offering" documents referred to at [10].
The Information Memorandum is dated January 2012. Mr Bradley was its author.
It contained the following statements: 1. "We currently earn income by selling shares in the company for 25 cents in the expectation the shares will be worth at least $2.50 in three years"; 2. "[Semantic] believes our patents and patents pending have considerable value and that some of that value will crystallise for Shareholders in 2012"; 3. "[Semantic] is currently selling shares to raise capital of up to $500,000 from private investors. We anticipate substantial returns for these investors, including a minimum three-fold return guarantee within two years as described in our Share Issue Agreement"; and 4. "It is unusual for Australian private investors to have an opportunity to participate in such a transaction, where we believe substantial investment returns can be gained in a relatively short timeframe. I commend this investment opportunity to you without hesitation."
The Information Memorandum stated that one aim for 2012 was to "sell the company to a US software industry leader" and that "we believe it is likely" that IBM, Microsoft, Oracle, HP or Google "will seek to purchase [Semantic] in 2012".
The latter statement was consistent with a statement Mr Vinson reported Mr Bradley to have made at the 29 May 2012 meeting referred to at [11], to the effect that the sale of Semantic some time in 2012 was a "very real prospect" (with a resultant "sizeable return" to shareholders) and with a statement Mr Bradley made to me during the hearing that "our strategy is not to build a profitable company in the short term; our strategy is to get bought".
The Information Memorandum emphasised the dealings that Semantic claimed it had had with various US software industry leaders and stated that: 1. during the "past two years we have been in dialogue with IBM, Microsoft, Oracle, HP...and others"; 2. "our technology has attracted the attention of software industry leaders including IBM, Microsoft and HP"; 3. IBM had stated it was "studying Semantic for a 'potential acquisition or partnership'"; 4. during 2011 Semantic had "meetings with Microsoft, Oracle, HP and Google at senior executive levels"; and 5. "IBM in particular has devoted considerable resources to evaluating the potential to utilise [Semantic] technology in their products".
The Tralee Software Pre-IPO Offering (dated May 2012) stated, inter alia: "It is not proposed that there will be any further capital raisings prior to the trade sale/IPO".
The Tralee Software Pre-IPO Offering (Short Summary) stated, inter alia: "We have raised substantial capital during the past twelve months and this is the final round. … Shares in the company are priced with an expectation of a five-fold to ten-fold return within three years or sooner. Investors are offered a guaranteed minimum threefold increase in value within 2 years as detailed in our standard Share Issue Agreement. This is considered a low risk investment with high returns. … An attractive Trade Sale in 2012 would see high returns within a year."

The Representations

Ebbsfleet and McGee allege that, by reason of these documents, and statements made by Mr Bradley at the 29 May 2012 meeting referred to at [11], Mr Bradley, on his own behalf and on behalf of Semantic, represented to Mr Vinson in his capacity as a director of Ebbsfleet, and as agent for McGee, in trade and commerce that: 1. Semantic had strong prospects of success; 2. the value of the shares in Semantic would increase; 3. he guaranteed a minimum threefold increase in the value of the shares purchased in Semantic within a two year period from the date of purchase; 4. shareholders in Semantic would realise significant benefits in 2012; and 5. there would be no further capital raisings by Semantic.
The making of representations (1), (2) and (3) is admitted on the pleadings. The making of representations (4) and (5) is not admitted on the pleadings but is established by the documents to which I have referred

The Share Issue Agreements

The 10 Share Issue Agreements entered into by the Ebbsfleet and McGee were, relevantly, identical.
Each contained this clause: "46. The Director of the Company, Mark William Bradley, a Party to this Agreement as Guarantor in respect of this clause, warrants that Investor's Issue Shares shall triple in value within two years from the date of this Agreement and should Issues [sic] Shares not so triple in value, Mark William Bradley must transfer additional shares from his personal and/or beneficial shareholdings sufficient to effect said tripling in the value of Investor's Issue Shares. The company and Mark William Bradley warrant that Mark William Bradley is the beneficial owner of 53,362,987 shares in the company, excluding options mentioned earlier. Mark William Bradley further warrants that he must retain at least 10,000,000 shares in his beneficial ownership to satisfy this Guarantee until such time as Investors Issue Shares have a freely tradable [sic] market value of at least triple the Purchase Price, at which time the effect of this clause will cease."
The guarantee thus contained four warranties given by Mr Bradley and one given by Semantic as follows: 1. by Mr Bradley, that the shares the subject of the agreement "shall triple in value within two years"; 2. by Mr Bradley, that if the shares did not triple in value within two years he would transfer additional shares from his personal and/or beneficial shareholding sufficient to effect a tripling in value of the shares the subject of the agreement; 3. by Semantic and Mr Bradley, that Mr Bradley was the beneficial owner of 53,362,987 shares (excluding options) in Semantic (there were then some 135 million ordinary shares on issue); and 4. by Mr Bradley, that he would retain at least 10 million shares in his beneficial ownership until such time as the shares the subject of the agreement had a "freely tradable [sic] market value" of at least triple the purchase price.
In addition, Semantic gave the following express warranties in each of the Share Issue Agreements: 1. that all of the information given in the schedules to the agreement (including cl 46) was true, full, accurate, complete and not misleading (cl 6.3); and 2. the warranties (including that in cl 46) were "true and accurate in all respects" (cl 6.4).
Thus, in effect, Semantic joined in the making of all the warranties comprised at cl 46.
Clause 5.1 provided: "Each of the Warranties is without prejudice to any other Warranty and, except where expressly stated otherwise, no paragraph of this agreement shall govern or limit the extent or application of any other paragraph".
Clause 5.2 provided: "The Investor acknowledges that they have not been induced to enter this agreement by any representation or warranty other than [those in the Share Issue Agreement itself]".
Semantic and Mr Bradley relied on this clause in their Amended Commercial List Response and pleaded that any representations were "overtaken and subsumed" by the Share Issue Agreements themselves. This aspect was not developed by Mr Bradley in his closing submissions. However, the clause cannot operate to insulate Semantic or Mr Bradley from the consequences of any breach of the Australian Consumer Law: Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546 at 560 (Lockhart J).
Clause 6.5 of the Share Issue Agreements provided: "The Warranties…are limited in time to 12 months from the signing of this agreement and to a monetary value equal to the Purchase Price plus 25%".
Semantic and Mr Bradley relied on this clause in the Amended Commercial List Response. Again, this matter was not mentioned by Mr Bradley in his closing submissions. It gives rise to an issue as to the proper construction of the Share Issue Agreements. I return to this below.
Clause 9 provided: "Each sub paragraph in this agreement is independent and severable from each other paragraph and therefore separately enforceable. If any restriction is unenforceable for any reason but would be enforceable if part of the wording were deleted, it will apply with such deletions as may be necessary to make it valid and enforceable."
Schedule 2 of the Share Issue Agreement contained a "Disclaimer" which included: "To the maximum extent permitted by law, the companies, their officers, employees or the professional advisers of the companies do not accept any liability or responsibility for any loss of [sic] damage whatsoever suffered by the Investor or by any other person howsoever caused (other than through deliberate fraud) in relation to this advice".
Semantic and Mr Bradley also relied on this clause in the Amended Commercial List Response. Again, Mr Bradley did not refer to it in his final submissions. The clause does not have the effect insulating Semantic or Mr Bradley from the consequences of any breach of the Share Issue Agreement itself, or from any breach of the provisions of the Australian Consumer Law: see [33] above.

The proper construction of the Share Issue Agreements

One matter concerning the proper construction of the Share Issue Agreements is agreed. It is common ground that the warranty given by Mr Bradley in cl 46 of the Share Issue Agreements (see [27] above) (which warranty was, in turn, warranted by Semantic to be "true and accurate in all respects: see [29] above) that the shares issued to Ebbsfleet and McGee "would triple in value within two years" meant that "the shares would be worth 75 cents in value" and "would become worth 75 cents" within two years (to adopt language used by or accepted by Mr Bradley).
There was no dispute before me as to the principles relevant to the construction of a commercial contract such as the Share Issue Agreements.
In construing the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable business person would have understood those terms to mean. This requires consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract: Mount Bruce Mining v Wright Prospecting (2015) 256 CLR 104 at [47] (French CJ, Nettle and Gordon JJ).
The first issue concerning the proper construction of the Share Issue Agreements is the significance of the statement in cl 6.5 that the warranties in Sch 1 of the Agreements (which included the warranty in cl 46) were "limited in time to 12 months from the signing of the agreement and to a monetary value equal to the Purchase Price plus 25%" (see [34] above).
As I have said, this provision was pleaded by Semantic and Mr Bradley, but not referred to in Mr Bradley's closing submissions.
There is a clear tension between that purported limitation and the warranty given by Mr Bradley in cl 46 that the shares would "triple in value within two years" and that he would retain at least 10 million of his shares in Semantic until such time as the relevant investor's shares "have a freely tradable [sic] market value of at least triple the Purchase Price".
I do not see either of cll 5.1 or 9 (see [31] and [36] above) of assistance in resolving this issue.
Ms Collins SC, who appeared for Ebbsfleet and McGee, submitted that the effect of cl 5.1 was that "the general words in cl 6.5 are not to limit the extent or application of paragraph 46". I do not agree. Clause 5.1 is expressed to be subject to any provision of the agreement that "expressly state[s] otherwise". Clause 6.5 is such a provision.
Clause 9 is directed to matters of enforceability rather than inconsistency. It does not operate to resolve the inconsistency to which I have referred.
The restriction in cl 6.5 can happily apply to many of the warranties in Sch 1. For example cl 1 of Sch 1 contains a warranty that no governmental investigations are pending in relation to Semantic. It is understandable that Semantic would wish to restrict the time during which that warranty subsisted as, unbeknownst to its directors at the time of entry into any particular Share Issue Agreement, a governmental inquiry might later arise.
However, the restriction in cl 6.5 cannot have been intended by the parties to apply in relation to the warranties in cl 46 as otherwise they would destroy the effect of that warranty.
If cl 6.5 had the effect of limiting the warranty in cl 46, it would be inconsistent with a fundamental promise made by Mr Bradley (and Semantic) in the Share Issue Agreement, namely, that the value of the shares would triple in two years.
In my opinion, reasonable persons in the position of the parties would understand that the general words of cl 6.5 must give way to the particular words of the warranty in cl 46 and not operate to, in effect, deprive it of any substantial meaning.
To put it another way, in my opinion, a reasonable business person in the position of the parties would understand the specific promise made in cl 46 to qualify the generality of the limitation in cl 6.5.
The next question of construction relates to cl 46 itself.
The question is whether the promises made by Mr Bradley (and thus by Semantic) as to what Mr Bradley would do with his shareholding in the event that the shares in Semantic did not triple in value within two years (see [28(2), (3) and (4)] above) were intended by the parties to constitute an exhaustive statement of the remedies available to investors such as Ebbsfleet and McGee.
The question is significant because although it is clear that Mr Bradley is in breach of his obligations under these provisions (as he has now transferred his shareholding in Semantic to his family trust and thus placed himself in a position where he cannot comply with his obligations under these provisions) if, as Ebbsfleet and McGee contend, the shares are now worthless, the relevant promises in cl 46 are themselves worthless.
The conclusion to which I have come is that a reasonable business person in the position of the parties would not have understood cl 46 to operate this way.
This is for a number of reasons.
First, cl 46 does not say, in terms, that a transfer from Mr Bradley of "additional shares" is to be an investor's exclusive remedy in the event that the shares did not triple in value within two years.
Second, to so understand cl 46 would be to deprive it of any substantial value as, to the extent that the shares did not increase in value, the promise by Mr Bradley to transfer "additional shares" would decline.
The parties could not have intended this result.

Did the shares triple in value within two years?

Ebbsfleet and McGee adduced evidence as to the value of the shares from a forensic accountant, Ms Elizabeth Smith. Mr Bradley and Semantic adduced corresponding evidence from another forensic accountant, Mr Matthew Gwynne.
In his report, Mr Gwynne stated that he had assumed the correctness of an opinion purportedly expressed by Dr Steven Herscovici as to the value of the patents owned by Semantic's wholly owned subsidiary.
For the reasons stated in an interlocutory judgment I delivered in these proceedings on 6 February 2016 (Ebbsfleet Pty Ltd as trustee for Ebbsfleet Superannuation Fund v Semantic Software Asia Pacific Ltd (No 2) (Supreme Court (NSW), 6 February 2017, unrep)) I rejected the tender of Dr Herscovici's report.
It followed that I also rejected the tender of those parts of Mr Gwynne's report that assumed the correctness of the matters in Dr Herscovici's report (in accordance with the "proof of assumption rule" referred to by Heydon J in Dasreef Pty Limited v Hawchar (2011) 243 CLR 588 at [90]).
I heard the evidence of Ms Smith and Mr Gwynne concurrently. Both agreed that the appropriate methodology to value the shares in Semantic was an adjusted net assets basis.
Semantic's financial statements reveal that it was operating at a significant (and ever increasing loss), with its only revenue being receipt of subscriptions for shares, interest and some research and development tax incentives.
Its loss for the financial years from 30 June 2013 onwards was:

FY 2013: $1.728 million
FY 2014: $1.848 million
FY 2015: $2.309 million
FY 2016: $3.105 million

In each of those years Semantic reported that it had an excess of assets over liabilities.
However, Semantic's balance sheet failed to take into account a contingent liability it had by reason of warranties it gave in Share Issue Agreements issued from and after FY 2014, in which it warranted (in lieu of the warranty given by Mr Bradley in cl 46 of the Share Issue Agreements entered into by Ebbsfleet and McGee) that if its shares did not triple in value within two years from issue, it would buy back the shares at three times the purchase price.
Ms Smith opined (and Mr Gwynne agreed), that the company's liability under the warranties should have been brought to account in its balance sheet as current or non-current liabilities, with a significant effect on the balance sheet.
In its balance sheets, Semantic accounted for its interest in the patents owned by a subsidiary as "intangible assets" on an amortised cost basis.
Both Ms Smith and Mr Gwynne agreed that, under the relevant accounting standards, this was the appropriate accounting treatment for the patents.
What divided the parties was whether, notwithstanding that accounting treatment, the patents had a value such as would compel the conclusion that Semantic's shares had tripled in value in the two years following their issue.
In that regard, the only evidence before me was that of Ms Smith.
Mr Bradley suggested to Ms Smith during the concurrent evidence, and emphasised in his final submissions, that Ms Smith had not adopted the "market approach" referred to in a publication of the International Valuation Standards Council (which Ms Smith explained was a US valuation body), and that Ms Smith did not have expertise in the "sophisticated emerging technologies" that he said were implicit in the patents.
Mr Bradley also submitted that Ms Smith had focussed attention on the value of the shares, rather than of the patents themselves.
However, Mr Bradley did not challenge Ms Smith during the concurrent evidence as to the basis she gave for having that opinion. Indeed, in final submissions Mr Bradley incorrectly stated that Ms Smith had not specified what information had caused her to opine that, at least at the moment, the patents have no substantial value.
Ms Smith drew attention to evidence given by Mr Albert Tonkin, the chief technology officer of Semantic, to the effect that the "big data and Semantic data…area of the industry is still largely theoretical" and to evidence of Mr Bradley that Semantic's focus from September 2012 was "on developing a software product for future commercialisation".
In those circumstances, Ms Smith opined that: "I consider it unlikely that an informed and knowledgeable investor in the Company would place any material value on the Patents, given: a) The industry was still largely theoretical (as stated by Mr Tonkin in paragraph 11 of this Affidavit); b) The Company did not appear to have a product that was available for commercialisation (refer to paragraph 172 of Mr Bradley's Affidavit); c) The Company was not generating any operating revenues and there is no evidence in Mr Bradley's Affidavit of any advanced discussions with any potential customers; d) Significant further costs will most likely need to be incurred in order to develop a product that can be commercialised. Based on the loss generated in the 2012 financial year, it would appear that [the] Company would continue to 'burn cash' at the rate of at least $400,000 per year; and e) The Company will need to raise further capital to support the development of its products and the ongoing operations of the business. Such capital raisings will dilute the value of the shares held by any existing shareholders."
Ms Smith continued: "In my opinion, any future value associated with the Patents was too 'blue sky' to be attributed a value by a knowledgeable and informed investor. Accordingly, it is also my opinion, that no value should be attributed to the Patents in an Asset Based Approach."
That was the only opinion expressed in evidence before me as to the current value of the patents and I see no reason not to accept it. It is inherently probable.
Ms Smith emphasised in concurrent evidence that a patent will usually be valued by reference to the income it is likely to generate. In that regard, the evidence before me established that: 1. Semantic had earned no income from any of its patents; 2. Semantic had secured no contracts to commercialise any of the patents; and 3. there was (notwithstanding the statements in the Information Memorandum, to which I will return) no commitment from any large technology company, or at all, to acquire Semantic's intellectual property or to invest in Semantic's intellectual property.
My conclusion is that at the moment, and certainly throughout the two year period following the issue by Semantic of its shares to Ebbsfleet and McGee, Semantic's interest in the patents was valued at no more than is recorded in its financial statements (that is, on an amortised cost basis).
Mr Gwynne agreed that, if that was so, Ms Smith's opinion that the shares in Semantic, at all relevant times since their issue, were of negligible or no value, was correct.
It follows that the shares in Semantic have not tripled in value since their issue; far from it.
It also follows that Mr Bradley, and thus Semantic, are in breach of the warranty contained in cl 46 of the Share Issue Agreements; and that Mr Bradley's admitted representation (made on his own behalf and on behalf of Semantic) that the shares would triple in value within that time, was incorrect.

Breach of contract

Ebbsfleet and McGee have thus established a breach by Semantic and Mr Bradley of the warranty given by both of them in cl 46 (read with cll 6.3 and 6.4) of the Share Issue Agreements.

Did Mr Bradley have reasonable grounds to represent that the shares would triple in value in two years?

I have found that Mr Bradley made a number of representations, but in view of my findings about the value of the shares, I need only deal with his admitted representation that the shares in Semantic would triple in value in two years.
That representation was to a future matter.
Section 4(1) of the Australian Consumer Law provides that if a person makes a representation as to a future matter, and does not have reasonable grounds for making the representation, the representation is taken to be misleading for the purposes of the proscription in s 18 of the Australian Consumer Law against engaging in misleading or deceptive conduct in trade or commerce.
As Ms Collins submitted, whether or not a representation was made on reasonable grounds is to be assessed as at the date of the representation, and by reference to the information that was available at the time that the statement was made: McGrath and Honey as joint liquidators of Pan Pharmaceuticals Ltd v Australian Naturalcare Products Pty Ltd (2008) 165 FCR 230 at [198] (Allsop J, as his Honour then was). The test is an objective one; were the grounds on which the representation was in fact made objectively reasonable: Butcher v Lachlan Elder Realty Pty Limited (2004) 218 CLR 592 at [109] (per McHugh J). The fact that the representor held an honest belief in the accuracy of the representation does not establish that the representor had reasonable grounds for that belief; the belief may be misguided, or even perverse: Cummings v Lewis (1993) 41 FCR 559 at 565 (Sheppard and Neaves JJ).
Mr Bradley said that the basis that he had for making the representation that the value of the shares in Semantic would triple within two years of issue was as follows: 1. that Semantic then held the Australian and United States patents; 2. that he believed the pending US patent would soon be issued; 3. that Mr Tonkin, who formerly worked at IBM and was an "IBM Gold Consultant", had joined Semantic as its chief technology officer and that Mr Tonkin had spoken optimistically about the potential of the patents; 4. that two other "IBM Gold Consultants" (Mr Colin White and Mr Michael Ferguson) had "reviewed the patent" and that Mr White had expressed the opinion that there was "no other technique known today that could perform the "data integration" functions summarised at [9] above; 5. that Semantic's patent consultant, Mr Richard Ehrlickman had expressed the opinion that "once you get the second patent issued, it will be worth considerably more, and it will be difficult for IBM to ignore"; 6. that by late 2012 he had been encouraged by Mr Ehrlickman to "build the company into a research and development company" thus avoiding Semantic being labelled as a "patent troll" (a company which does not actively develop, exploit or employ patents for commercial return but merely with the object of suing companies who infringe the patent) so that "Semantic would be more of a threat to a company infringing a Semantic patent, and be able to achieve a better price on any sale or patent litigation outcome"; 7. by late 2011, he was aware of a number of further inventions within the specifications of Semantic's existing patents which could be patented; 8. he believed that IBM knew of the value of Semantic's technology, that IBM "may infringe" Semantic's patent and that, in that event, "if IBM did not make a reasonable offer to buy the patents or the company, there may be a claim to be paid by IBM for patent infringement" and that if Semantic sued IBM for infringement "IBM would probably offer to buy the company, so as to avoid litigation"; 9. that in May 2012, he had caused Semantic to enter into contracts with three software engineers for the development of a health system management software which "would be Semantic in the market place, and demonstrate to the world what the software could do"; 10. he knew that Semantic would "soon be applying for a number of further patents which would add further value to the patent portfolio; and 11. he believed that the value of Semantic would be based on the value of its intellectual property assets (that is, the patents) and that "the technology on which we are working had great potential".
In my opinion, these matters did not constitute a sound or reasonable basis upon which Mr Bradley could make the prediction that the shares in Semantic would triple in value within two years.
The fact is that, despite the matters on which Mr Bradley said he relied, throughout the period during which Ebbsfleet and McGee subscribed for shares in Semantic (from May 2012 to March 2013), Semantic: 1. had no income; 2. had secured no contracts to commercialise its products; and 3. had not obtained commitment from any large technology company, or anyone, to acquire its intellectual property or invest in Semantic.
As Mr Bradley's affidavit, and his statements in the Information Memorandum make clear, Mr Bradley placed great store on what he evidently hoped would be IBM's interest in Semantic's intellectual property.
As I have set out above, the Information Memorandum stated that Semantic had been in dialogue with IBM "during the last two years", that its "technology had attracted the attention of software industry leaders including IBM" and that IBM had stated that it was "studying [Semantic] for a potential acquisition or partnership". It also stated that Semantic believed that one of the six stated companies (including IBM) was "likely to seek to purchase [Semantic] in 2012" or alternatively, "likely to seek to licence our technology in 2012".
The dealings that, on the evidence before me, Semantic had had with IBM as at early 2012 did not justify Mr Bradley's optimism about IBM's likely interest in the patents or the statements that he made in the Information Memorandum about that matter.
In August 2009, Mr Bradley submitted to IBM what he described as an "overview" of Semantic's then current intellectual property. This submission was unsolicited by IBM. Mr Bradley agreed it was a "cold call" that he submitted to IBM via its website.
Mr Bradley followed up on that "cold call" by email in September 2009 and, ultimately, spoke to a Mr Hirshon at IBM in November 2009. Evidently, that conversation did not trigger any action by IBM. Mr Bradley followed the matter up by email in February 2010.
On 10 February 2010, Mr Hirshon sent Mr Bradley an email: "After giving careful consideration to your information, I can confirm that there is not sufficient interest in acquiring a licence to [Semantic's US patent] at this time. We will continue to look at additional information that you send us including the white paper".
Mr Hirshon's reference to a "white paper" was to a document that Mr Bradley had informed him was to be produced by Semantic "in the next month or so".
Mr Bradley forwarded Mr Hirshon the white paper, without eliciting any further response from Mr Hirshon.
Ultimately, Semantic's patent broker, Mr Ehrlickman contacted Dr John Kelly at IBM. Mr Ehrlickman had formerly worked at IBM reporting to Dr Kelly.
On 17 November 2010, Mr Ehrlickman wrote to Dr Kelly attaching an "Executive Summary" concerning Semantic's intellectual property and asking Dr Kelly to put him in touch with the appropriate "business executive" at IBM.
On 19 November 2010, Dr Kelly replied: "Ron Lauderdale is connecting to the right software exec to look at the…technology as a potential partnership or acquisition candidate."
Mr Bradley incorporated the last few words of that email in the Information Memorandum in the context of the assertion (set out at [21(3)] above) that IBM had said it was "studying Semantic for a 'potential partnership or acquisition'". That is not what Dr Kelly said in the email. He said no more than he was arranging for the appropriate person within IBM to "look at" Semantic's technology "as a potential partnership or acquisition candidate".
In any event, so far as the evidence reveals, the "connecting" to which Dr Kelly referred came to nothing.
A year later, in November/December 2011, Mr Bradley sent updates to shareholders which (as he accepted in cross-examination) conveyed that discussions with IBM were effectively on hold pending the issue of Semantic's second US patent.
That patent did not issue until late 2013.
Thereafter Mr Ehrlickman resumed contact with IBM. The result was that on 25 April 2014, IBM wrote to Mr Ehrlickman: "Thank you for bringing this acquisition opportunity to IBM. We have reviewed the company [i.e. Semantic] with the business leaders and they are going to pass on the opportunity at this time. While the company did have strategic relevance, it did not rank at the top of our priorities."
Mr Bradley stated in his final submissions that the statement in this email that IBM would "pass on the opportunity at this time" was "IBM speak for come back with a lower offer price". I see no reason to read the email that way. IBM was saying, albeit politely, that it had no interest in acquiring Semantic.
So far as the evidence reveals, Semantic's efforts to excite the interest of other "industry leaders" (Microsoft, Oracle and HP) were similarly unsuccessful.
The optimistic statements made in the Information Memorandum (set out at [21] above) were overstated and misleading. And the Information Memorandum made no mention of the fact that several years earlier, in 2010, IBM had stated in writing that it had no interest in acquiring Semantic's US patent.
I accept that, to adopt Ms Collins' language, Mr Bradley was, and is, a "true believer" in the value and potential of Semantic's intellectual property, and in particular its patents.
However, not only did Mr Bradley overstate in the Information Memorandum the dealings that Semantic had had with "industry leaders" concerning that intellectual property, he had no reasonable basis on which to represent that the value of Semantic's shares would triple in two years.
In substance, that representation was based on what may well have been Mr Bradley's genuine belief that IBM, or some like company, would within that two year period, acquire either Semantic or Semantic's intellectual property.
That was no doubt Mr Bradley's earnest hope. But, at least at that stage, there was no reasonable prospect that it would come to pass.
The result is that I conclude that, by making the representation that Semantic's shares would triple in value within two years, Mr Bradley, and thus Semantic, engaged in misleading or deceptive conduct for the purpose of s 18 of the Australian Consumer law.

Reliance

I have no doubt that Mr Vinson, and through him Ms Vinson, relied on Mr Bradley's representation when making his (and thus her) decision to cause the plaintiffs to invest in Semantic.
Mr Bradley did not challenge the evidence given by both Mr and Ms Vinson that had the representation not been made, they would not have caused Ebbsfleet and McGee to execute the various Share Issue Agreements.
In any event, that evidence of reliance is inherently probable. Mr Bradley's representation was unequivocal and it was backed up the promise he made, in the same terms, in the Share Issue Agreements.
In answer to questions from me, both Mr and Ms Vinson agreed that they understood that there could be a relationship between return and risk and that the high return the subject of Mr Bradley's representation and promise bespoke the possibility of a commensurate risk.
But that evidence points strongly to the probability that, as they said, they relied on Mr Bradley's representation and promise.

Causation

But for the giving of the warranties, and the making of the representation, I am satisfied that Mr and Ms Vinson would not have caused Ebbsfleet or McGee to invest their funds in Semantic.
Both Ebbsfleet and McGee used funds in interest bearing accounts to invest in Semantic for the purposes of subscribing for shares. I accept Ms Collins' submission that it was unnecessary for Ebbsfleet or McGee to prove what would have happened to any possible alternative investment, as no loss of opportunity was claimed, and as it was not put by Mr Bradley to either Mr and Ms Vinson that there was any basis to think that any alternative investment would have been unsound.

Damages

So far as concerns Semantic's and Mr Bradley's breach of the contractual warranty in cl 46 of the Share Issue Agreements, Ebbsfleet and McGee are entitled to damages sufficient to place them in a position as if the contract had been performed; that as if the warranty had been made good: for example, Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 at 286 (French CJ, Gummow, Heydon, Crennan and Kiefel JJ).
Those damages are, prima facie, to be calculated so as to put Ebbsfleet and McGee in the position they would have been in had the promise in cl 46 been fulfilled; namely that their shares in Semantic had tripled in value within two years of issue.
As to the loss suffered by Ebbsfleet and McGee by reason of the misleading or deceptive conduct, that loss is the value of their investment. But for the representation, neither Ebbsfleet nor McGee would have subscribed for the shares. As the shares are worthless, or practically worthless, they have lost virtually all of that investment.
I will hear submissions as to the precise amount that should be awarded and on the question of whether, in exchange for an award of damages, Ebbsfleet and McGee should transfer their shares in Semantic to Mr Bradley, or at his direction.
I will also hear submissions as to costs and as to the final orders to be made.

Amendments 15 February 2017 - [53] - Typographical error corrected. 15 February 2017 - [52] - Typographical error corrected. 16 February 2017 - [125] - Typographical error corrected. 16 February 2017 - [126] - Typographical error corrected. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 16 February 2017

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