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The legal battles engulfing Web Summit are going to result in an “expensive and complicated” hearing, the Commercial Court was warned on Monday in circumstances where a new spin-off suit has been lodged against the company and its majority shareholder Paddy Cosgrave.
Manders Terrace, the firm behind the internationally renowned tech events business, and Cosgrave, its chief executive, are already beset by lawsuits brought by the company’s former directors Daire Hickey, of PR firm 150 Bond, and David Kelly, who works in financial services, both of whom claim their rights as minority stakeholders have been oppressed.
Separately the company is suing Kelly, a friend of Cosgrave’s from his boarding school days in Glenstal Abbey, after the two fell out over a venture capital side-project. Cosgrave alleges Kelly secretly set up an investment fund, Amaranthine 2, for his own gain by using Web Summit’s resources.
In all three cases, the allegations are hotly disputed.
On the back of those cases, a new summons was filed against Web Summit last week arising from a 2011 profit-share agreement, which Kelly claims was not fully honoured. Hickey, who stood down as a director in 2019, has already filed a similar action as a side suit against the firm.
Bernard Dunleavy, senior counsel for Cosgrave and Web Summit, is pushing for the different strands of the oppression dispute to travel together, with all cards on the table, so that his clients don’t have tactical lawsuits in the wings waiting to be activated. And the indications are that is likely to happen consensually.
In the meantime, the paperwork engulfing the parties embroiled in the row is already voluminous: two strong boxes of lever arch files containing affidavits, exhibits, correspondence, pleadings and transcripts. And that’s before the completion of the discovery process, currently underway, where documents needed to resolve the various disputes are exchanged.
With proper engagement, lawyers can narrow down discovery demands but in commercial rows, the process can also spark vast digital trawls that yield thousands – sometimes hundreds of thousands – of records of dubious litigation value. One former Commercial Court judge once likened discovery to open cast mining.
Discovery looms
As things stand in the oppression suits, lawyers for Daire Hickey have requested 47 categories of documents from Web Summit to back up his action. The PR man’s side have made claims of a ‘full-blooded conspiracy’ to damage him with a view to forcing him out of the company. Hickey is seeking everything from financial statements and business plans to details evidencing the tech events CEO’s alleged “toxic conduct and bullying of staff”, and his alleged inappropriate use of company funds to dig up information on the HSE, settle a personal defamation claim and establish Ditch Media.
Of course, the mud has been thrown both ways and Hickey, through his lawyers Dentons Ireland, also wants any documents in support of Cosgrave’s claims against him. These include allegations that Hickey exhibited a grave lack of fidelity to the company, was an ineffective director and employee, displayed behavioural issues and was demoted and stripped of management roles due to a lack of interest. Cosgrave also denies that Hickey was a co-founder of Web Summit and alleges that he was only allowed present himself as such to assist him in the performance of his duties which involved securing speakers for tech events.
Hickey rejects the allegations. Specifically he rejects the claim that he sourced speakers for non-Web Summit events from the company’s contacts database for personal financial gain. He does however admit, in court filings, that he sourced a small number of speakers for Goodwood, a private event for the automotive industry that he says was not in competition with the tech conference.
For its part, law firm Clark Hill, on behalf of Web Summit, has sought a more modest 11 categories of discovery in the oppression proceedings. However the categories have multiple parts amounting to around 60 individual requests covering the various allegations made by and against Cosgrave including that he hacked a rival conference and waged vendettas against businessman Denis O’Brien and Tanaiste Leo Vardadkar.
Combing through the responses to the various discovery demands, attempts have been made to refuse, reformulate or narrow requests by lawyers on both sides of the dispute.
The Currency has been going through the existing paperwork – including a previously unreported defence filed on behalf of Kelly in the VC dispute.
Money and peace of mind
More than a decade on from Web Summit’s incorporation, only Cosgrave remains active in the business. Hickey, co-founder of 150 Bond and member of the RTE board, left as an employee in 2017. Kelly also left the business and resigned as a director in Spring of last year.
Hickey’s departure from the staff of Web Summit is said to have followed his alleged demotion in 2014, when he was based in New York. Court filings show a purported text exchange between the PR boss and a personal contact around this time on September 3, 2014. Hickey is told: “It sounds like you have no objection to the demotion other than that it’s not practical. Your objection is that it’s a demotion and that’s that.”
He is advised to speak up for himself in respect of his position in the organisation chart or risk being excluded from management meetings: “this is like the palestine israel conflict, if you accept the two state solution (the new structure) you are crystallizing your lower position”. Hickey purportedly replies: “ they already exclude me from lots of things” before adding that “it’s about two things for me money and peace of mind”.
In this alleged exchange, Hickey is likened to Sergey – presumably Sergey Brin, Google’s co-founder. “You still work as an engineer but you’re position is equal. I think you need to say that.” he is advised. The reply is: “I think that’s a good comparison. In reality other people ran the rest of the organisation.”
In another alleged exchange from September 2014, again with a person outside of the company, Hickey is advised to start making an exit plan and be seen to be the injured party, playing up the “crazy Paddy angle” while love bombing everyone else. The purported reply to much of that advice was “Mmm”.
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Web Summit maintains it was Hickey’s own conduct that caused relations to sour. Court filings include an email purportedly sent by David Kelly to Cosgrave on March 23, 2018 containing notes on Hickey’s behaviour and on his consultancy firm 150 Bond engaging tech clients which Kelly believed could lead to a conflict of interest. The notes include a comment that Hickey inviting property developer Deirdre Foley to the Portuguese President’s Web Summit reception was not “in the best interests of the business” at a time when she was facing District Court charges, later dropped, over staff redundancies that followed the takeover of Clerys department store in 2015.
A new group structure
Exhibits seen by The Currency include a KPMG draft document from September 2020 on reorganising the corporate structure of the Web Summit group which Hickey claims was part of a plot to prejudice his interests by transferring potentially valuable intellectual property out of the company.
As matters stand, Cosgrave is the dominant shareholder in Manders Terrace with a majority stake of 81.03 per cent which he holds through a company called Proto Roto; Kelly has an 11.97 per cent stake held in Graiguearidda Ltd and the final 7 per cent belong’s to Hickey through the company Lazvisax.
The aim of the proposed KPMG restructuring proposal was to create a new holding company for the group and a new IP company for the firm’s virtual conferencing software built by a subsidiary Connected Intelligence Ltd at an alleged cost of around €10 million.
The KPMG draft report suggested incorporating the new IP firm either in Jersey or Isle of Man to minimise the public disclosure of commercially sensitive information while remaining tax resident in Ireland. The deal would also be structured to avoid capital gains tax and Irish stamp duty (which would not arise as the IP company would be non Irish incorporated).
Once the IP company was established, Manders Terrace would transfer ownership to a new Irish holding company sitting outside of the existing group for €3.4 million. The consideration would remain outstanding.
Meanwhile Proto Roto and Graiguearidda Ltd would swop their shares in Manders Terrace for shares in the new holding company with the €3.4 million to be settled in due course.
A highly unique platform
Other documents thrown up in the dispute include details of the €15 million investment offer from venture capital fund Inflexion in 2020, blocked by Cosgrave allegedly against his fellow shareholder’s interests; and a spreadsheet created by Kelly, last edited in September 2020, projecting net losses of over €13 million in 2021 from the company’s main events; Web Summit in Lisbon, Collision in North America and RISE in Asia. The document notes the same events yielded net revenue of €9.1 million in 2019, before the coronavirus struck.
The Inflexion proposal describes Web Summit as a “highly unique platform and a clear leader in its space” that will be most robust and “bounce back quickest” after the pandemic. The brochure praises the firm’s exceptional brand positioning, its unique relationships with governments, evidenced by the Lisbon deal; its lean cost structure and capabilities for virtual only events minimising the cash burn during lockdown and its experienced management team that have scaled Web Summit from a single event to a global tech summit business.
What Inflexion offered was M&A expertise and local experts on the ground in Brazil, China, India and the US to turbo charge growth and “actively support you on your internationalisation strategy”. The vc firm offered €15 million of its own money plus bank loans of €10 million, in exchange for an initial stake of of between 9.9 and 13.9 per cent. The deal valued Web Summit at €92.4 million, ten times its 2019 EBITDA. Management would have retained the day to day running of the business while shareholders would have been offered up to €10 million of the money on offer to cash out their position.
The second front
Recent filings also set out David Kelly’s position in the VC row that has sparked litigation in the US as well as in Ireland. In 2017, Kelly and Cosgrave started work on Amaranthine Fund I, a tech investment fund established in Delaware, managed and co-founded by Patrick Murphy, a former venture investor with Universal Music.
A 20-page funding deck prepared to raise money for Amaranthine drew heavily on its connections to Web Summit. Its team has “curated the world’s leading community of tech founders; and invested & advised on $ billions of tech deals,” it notes.
The fund closed $30 million initially and performed exceptionally well backing huge success stories like Hopin, an events software unicorn, and Pointy, which was sold for $160 million to Google. After 24 months, it had an internal rate of return of 115 per cent and was valued at 2.7 times its marked value.
In 2021, moves were afoot to capitalise on its success and launch Amaranthine II. But a row was brewing in the background. When it got to court, Cosgrave alleged he had been ousted without cause from the first fund which had been set up to “leverage” Web Summit’s resources.
He said Web Summit was integral to the first fund’s success investing $2 million in return for 30 per cent of its realised profits; Murphy put in $250,000 while Kelly made no personal capital contribution.
The nub of the claim is that Kelly and Murphy misled him by taking advantage of the fund’s success and secretly setting up their own follow up fund Amaranthine II that “improperly usurped Web Summit’s brand, resources and assets”.
Cosgrave alleged that Kelly, as a director of Web Summit, breached his statutory fiduciary duties.
The value of an experienced fund manager
All of the allegations are denied and have been addressed in a defence filed last December by Kelly. The former Web Summit director, who lives in Cascais in Portugal, makes no concessions to claims by Cosgrave the success of Amaranthine I was down to the company’s “analytical rigour, reputation, and network of contacts”.
Instead he gives much of the credit to Murphy, who as managing partner of the fund, was “entirely separate to and distinct from Web Summit”, court filings claim. Murphy is described by Kelly’s legal team as being “fundamental” to the project and the only person in the fund with significant prior venture capital experience having spent over five years working with Goldman Sachs in technology mergers and acquisitions and having started a fund for Universal Music Group, the world’s largest music label, which today has a market capitalisation of over $50 billion. “It would not have been possible to establish and operate Fund 1 without Mr Murphy,” the defence filing says.
By comparison, Kelly says an early Web Summit investment effort with third parties in 2014 ended unsuccessfully. This was followed up by Cosgrave and himself setting up the Comeragh Partnership in March 2015 as a side project to make early stage venture capital investments. According to Kelly, the investment vehicle was wound up after 10 months due to the lack of deal flow, an issue they could not resolve without due time and attention.
The Amaranthine capital fund in 2018 was clearly different. While Kelly accepts that it was set up to utilise Web Summit’s knowledge and access to source investment for tech start ups, he denies it was a creature of the company’s plans. The firm was , he says, a participant in the fund, and not the “sponsor” “lead investor” and “provider of all necessary resources”.
Web Summit committed $2 million to a pool of $30 million while other third party investors committed up to $10 million individually, Kelly claims. The company did not drive strategy and had “no role whatsoever” in the fund’s investment decisions, he maintains.
Put simply, he says it was “not Web Summit’s fund”, nor, he claims, was it seen that way.
Kelly also denies that he was appointed to the board of the first Amaranthine fund as Web Summit’s nominee, a characterisation he describes as “incorrect, disingenuous and opportunistic”.
Claims that Kelly and Murphy consulted on a weekly basis with the start up and investor teams at Web Summit are rejected. Kelly says these teams are set up to sell tickets to Web Summit events and are “staffed by recent graduates with limited professional experience”.
A second bite
Kelly admits that he did not personally invest in Fund I but claims Web Summit was, and remains, contractually obliged to allocate $300,000 of the $2 million invested by the company in his name, an allocation he claims is still owing. He denies being granted a significant salary and profit share for his work on the fund, maintaining instead that he was entitled to 30 per cent of the carried interest of the fund separate to and distinct from Web Summit.
In respect of plans for Amaranthine II, Kelly denies this was expressly a follow-on fund to its namesake Amaranthine I, although Cosgrave and Web Summit were involved in discussions on its formation after the success of the first round. “Each investment fund is a separate legal entity,” Kelly’s lawyers state in court papers.
However the conversations that did take place with Web Summit on setting up a second fund were not a “sham”, he says. Instead he claims that in February 2021, Cosgrave proposed adjustments to the structure of Amaranthine II that led to a breakdown in relations between the parties. Cosgrave allegedly wanted the carried interest to be allocated to Web Summit increased to 50 per cent. Kelly rejects claims by Cosgrave that what motivated the suggestion was the ceo’s desire to grant some of the carried interest to Web Summit staff working on the fund. This he claims was a “pretext”.
When Kelly objected to the proposal as unlikely to be acceptable to the fund’s limited partners, a day later he was sent an “astonishing stream of text messages” involving claims of “kompromat” in a “transparent attempt” to intimidate him, he claims.
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Snippets from a recorded phone conversation between Cosgrave and Kelly
PC: I don’t know how you think the fund is going to work out. But it’s just not going to work out. And it’s going to become deeply deeply problematic for Web Summit. You failed completely….
And you can keep on just running away from problems and not owning things….you’ve had the easy life for years and years. You haven’t had to do literally anything and..
DK: I will go out of my way Paddy if you do any shit to me, right? Like you just like make up whatever you want. But I’m done with it right? .. you want to threaten me with stuff on Daire, go for it, please bring it on..
You are a scumbag Paddy to bring that shit up to me, and everything you know? That stuff is like, yeah, you have bullied me? You have tormented me, you have mindfucked me.
PC: I’ve looked after you for years
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The “grossly opportunistic” nature of the tech entrepreneur’s claim was alleged to be illustrated by Cosgrave’s follow up proposal to allocate 22.5 per cent of Fund 2’s carried interest to Web Summit employees by way of a trust and 22.5 per cent to him personally despite the ceo having no link to Fund 1 outside of the tech event company.
Kelly says Cosgrave’s carried interest proposal was discussed on a group telephone call on March 8 2021 which allegedly ended with Cosgrave telling Murphy that they were not going to be able to work together. He claims Web Summit unilaterally withdrew from the negotiations regarding the creation of Fund II on the same day.
Three days later, Cosgrave is alleged to have told Kelly he was going to “let” Murphy run Fund I and that he planned to launch a new investment fund with a notable capital partner in the US.
A rejoinder
On March 22, last year Kelly says he stood down as a director of Web Summit. He denies ever breaching his fiduciary duties or causing the company substantial loss or that there was ever any basis for a belief by Web Summit that neither Murphy nor him would set up a successor fund.
In May last, Murphy and Kelly launched Semble. They deny marketing the fund to investors as a follow up to Amaranthine I, or that they secretly and improperly used Web Summit’s data, network, brand, goodwill and intellectual property in its production.
There was however a crossover of interest from investors in the first fund to Semble. Kelly’s lawyers argue this is acceptable as they claim the commercial opportunities arising from Amaranthine I did not belong exclusively to Web Summit.
Defence documents flag Kelly’s intentions to call expert witnesses at trial to testify on venture capital funds, the technology industry and corporate governance.
In a rejoinder, lawyers for Web Summit take exception to Kelly’s account of Amaranthine’s structure and the events leading up to the establishment of the Semble fund; not least Kelly’s description of Murphy’s vc expertise. The company calls Murphy a “middle or back office operative” who had “either very little or no relevant experience” as a fund manager and who would not have had the opportunity to work in the role without Web Summit. Kelly is said to have had “no experience whatsoever in venture capital” and was allegedly placed as a partner under a 2018 agreement to ensure Web Summit’s control of Fund I.
Lawyers for the firm highlight Web Summit’s allegedly instrumental role in the success of the first Amaranthine fund in identifying start-ups and securing investors.
Kelly’s description of the breakdown in relations with Cosgrave regarding Fund II is said to be mischaracterised. The tech ceo specifically denies trying to allocate more carried interest to himself or that he sent messages intended to intimidate Kelly. The so-called “kompromat” conversation is said to have been intended to comfort Kelly that Cosgrave had been shown an embarrassing picture of him by Daire Hickey and that it wasn’t as damaging as might be supposed.
Cosgrave says the long follow up call on March 8 – recorded by Kelly – was not about trying to find a way for the three men to continue working together on a new fund but rather was about Kelly trying to take Web Summit’s opportunity for his own profit. He claims the former director was always aware that the work carried out by him and Murphy belonged to the company and would be continued by Web Summit after his departure.
The CEO of the tech events firm accepted that Murphy and Kelly might wish to establish a new fund from scratch “but at no time was it contemplated” that they would “co-opt the work done on Fund II for themselves”, court papers say.
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The legal filings shows the clear distance between the former friends and business partners.
In the absence of mediation between the parties or any move to agree a buyout by Cosgrave of Hickey and Kelly’s stakeholder interest at an acceptable price, “expensive and complicated” remains the most likely forecast for this internecine corporate fight.
With additional coverage by Thomas Hubert
Further reading:
The big read: Inside the multimillion-dollar battle between two Web Summit founders
