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Settlement In Sight?

Posted on: Tuesday, 21 February 2006, 21:00 CST

By Prathaban V

IN the last few months, Shoon C Hor and Benny Khaw of local software firm, NexusEdge Technologies (M) Sdn Bhd (NEM), have been spending more time learning about law than software development. Why? In August last year, one of NEM's key investors, MSC Venture Corp Sdn Bhd (MSCVC) slapped them with a lawsuit, alleging breach of contract in a specific partnership arrangement to distribute their software known as Facado in the United States.

With the suit, filed in the US, MSCVC is claiming US$ 5 million in damages from NEM and a further US$ 1 million each from Shoon and Khaw. In addition, MSCVC is also seeking the source code of Facado. It has already received an injunction from the Californian courts, preventing NEM from selling its software directly in North America and Europe. According to MSCVC, with the courts' ruling, it is sufficient proof that they are in the right. But a party familiar with the companies' dealings says that NEM may not have the financial muscle to defend itself in the US courts.

`We have had to go thorough more than one foot of legal documents since the lawsuit was launched. We had to learn all about the laws concerning the software industry. By the end of it all, we probably would have become experts in law instead,' Shoon jests, though very worried about the future of his company.

`When you break a contract, you have every reason to be worried,' says MSCVC, explaining that abiding by a contract is the very essence of any business partnership. `We are the victims here, we are the aggrieved party and are seeking to recover our loss,' says Esmond Goei, CEO of MSCVC. While the move by MSCVC may seem puzzling, especially since it appeared to be a marriage made in heaven in the early days when MSCVC invested in the fledging high- tech company back in 2003.

Both NEM and MSCVC are obviously not seeing eye to eye on many things. Depending to whom one talks to, all allege that the element of bad faith to be the real cause of the fallout between NEM and MSCVC. And bad faith appears to have different meaning to the parties involved.

To be sure, this is not the first time MSCVC has sued its investee company. `We have sought legal means to recover our interest before,' says MSCVC.

Can a settlement be reached and the matter resolved to benefit all parties? After all, it is Malaysian money that will be spent to recover Malaysian investment, both in NEM and its Silicon Valley entity, NexusEdge Inc (NEUS).

NEM says it is on the verge of falling apart with the suit. This begs a question of why MSCVC is suing NEM, to which the former is a strategic stakeholder.

Unfortunate developments

`We are law abiding people. We deal with the facts. I am protecting Malaysian money because our investment in the US was threatened,' says Goei.

The original investment in NEM was a decision made during the term of Sarina Karim, who headed MSCVC until 2003. Datuk Arif Nun, CEO of MDC, then brought in Goei to lead MSCVC in September 2003. To Goei's credit, he immediately saw the potential of NEM's Facado and had hopes of growing the company to join the league of big boys in Silicon Valley.

NexusEdge was initially a Singapore-based company, working to develop Facado, which is said to provide a rich client experience using a web browser. At that time, its Singapore owners and angel investors hired Malaysians Shoon and Khaw to manage the day-to-day running of the company. With the MSC growing rapidly as a regional base for high-tech companies, they decided to move the company to Cyberjaya. They soon obtained MSC- status and received RM3.4 million in venture funding from MSCVC for a 22% stake. Commerce Technology Ventures (CTV), the VC arm of Commerce Asset Group invested RM1.8 million for an 11% interest in NEM. The joint-VC team of MSCVC and CTV formed NEM's board of directors, with Goei as its chairman. Shoon and Khaw, together with Jason See, CTV's nominee director, formed the rest of the board members.

In early 2004, MSVC and NEM announced boldly that they were going to the Silicon Valley in the US to market Facado. Both parties then had an excellent relationship and many were watching NEM's moves, predicting another Malaysian success story. To market the software in the US, NEUS was formed by MSCVC, pumping in over US$ 3 million as its seed capital. MSCVC owns 100% of NEUS. Goei, who was instrumental in the setting up of NEUS, also assembled a team of professionals to run NEUS. It appears that it was the very formation of the distributor entity in the US, which led the relationship to sour between NEM, MSCVC and NEUS.

However, NEM did not have any stake in NEUS, as the company was not in any financial position to do so. Despite this, MSCVC says it offered a 19% stake in NEUS in the form of warrants to NEM in good faith. `If NEM does not have ownership of the company in the US, it will not motivate them. So, we offered them a 19% stake in the form of warrants,' explains Goei.

See, however, clarifies that it was actually a negotiated offer after a series of three-cornered meetings between NEM, MSCVC and CTV. The relationship between NEM and NEUS is best described as a relationship between a principal and a distributor. NEM is the owner of Facado, while NEUS is to be its exclusive distributor in North America and Europe.

To seal the distributorship deal, NEM and NEUS signed a Technology Licensing Agreement (TLA) in June 2005.

Surprisingly, the terms of the agreement says that NEUS would have an `irrevocable perpetual agreement' with NEM. This means that it is a permanent agreement, leaving NEM with no option to back out of it under any circumstances.

Shoon and Khaw explain that since it is common shareholding between NEM and NEUS, they had no qualms at all in signing such an agreement. After all, if NEUS succeeds, NEM would also succeed, he reasons. In the first year of signing, NEUS is to provide 10% royalty fees to NEM, before gradually reducing to 3% by the third year.

In addition to the TLA, there was also another agreement to be signed by NEM, to seal its interest in the 19% warrants in NEUS. However, Shoon and Khaw declined to sign the deal. They claim that they have little information on NEUS, especially on its structure and how it will be managed. More so, NEUS was reported to have merged with another US software company, CypherMetrix. Details about the merger were not made known to NEM, say Shoon and Khaw.

But with NEM not having any stake in NEUS, MSCVC states that it should not be obliged to reveal the structure and setup of both the US entity.

This was probably the beginning of the simmering displeasure between NEM and MSCVC. NEM claims it is being denied information about NEUS. CTV was also apparently concerned that they too had no knowledge about the developments in the US. While this was playing in the background, business was ongoing between NEUS and NEM. The former was already making some progress with clients expressing interest in using Facado.

But all that changed in April last year. When NEUS asked for a software access code from NEM, the latter declined, preferring instead to provide a temporary access code. MSCVC was flabbergasted at this and sought to negotiate. Here is where things get a little complicated as both parties have their own versions of the developments.

MSCVC views NEM's move to slam the brakes as an act of bad faith, and a breach of the TLA. With communications breaking down, Goei quit as chairman of NEM shortly in April. However, MSCVC still provided a board representation, so as not to cripple NEM's board with a lack of quorum. `I was appointed as one of MSCVC's board member so that we are not accused of trying to stop the operations of NEM. We had every intention to help NEM as much as we could,' says Alan Tan, MSCVC's head of Corporate Counsel.

Shoon, however, counters that MSCVC did not send a board representative for more than three months since April. Things got very difficult for NEM as it could not proceed with various business decisions.

On the other hand, Tan disagrees as there were little to discuss prior to launching the lawsuit. `We met at least three times to negotiate. Each time we meet, NEM claims that their hands are tied pending resolution of the NEUS issue. How can we move on?' asks MSCVC.

In August, MSCVC served NEM with the lawsuit. To make matters worse, MGS informed NEM that it is withholding further disbursements from the R&D grant scheme (MGS had in February last year agreed to provide a grant of RM2.4 million. So far, NEM has received RM500,000 from MGS).

Is there a resolution in sight?

On its part, MSCVC says it is not averse to discussions. However, NEM wants the suit to be dropped first before negotiating. `Negotiation is not something beyond us. We are in business and we need to either minimise losses or maximise gains. But one cannot ask for the lawsuit to be dropped first before talking. What if the negotiations fall through? Are we to initiate legal proceedings all over again?' asks Tan.

For the moment, various parties are said to be involved behind the scenes to work out a settlement. MDC is likely to play a crucial role as an arbitrator in reaching an amicable resolution to the conflict. Meanwhile, while things are developing, MSCVC has reportedly expressed interest in wanting to be bought out. Unconfirmed reports say that the price bandied about was RM5 million, for its entire stake in NEM. Ironically, as one points out, it is unlikely that MSCVC could find a willing buyer, especially with the lawsuit hanging above NEM.

Perhaps the best way forward is for all parties to look for a solution instead of concentrating on the obstacles. It is a pity that it has all come down to a series of unfortunate events for all parties involved. It is a lose-lose situation unless a creative conflict resolution effort takes place.

Source: Malaysian Business

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