decoration decoration
Stories

GROKLAW
When you want to know more...
decoration
For layout only
Home
Archives
Site Map
Search
About Groklaw
Awards
Legal Research
Timelines
ApplevSamsung
ApplevSamsung p.2
ArchiveExplorer
Autozone
Bilski
Cases
Cast: Lawyers
Comes v. MS
Contracts/Documents
Courts
DRM
Gordon v MS
GPL
Grokdoc
HTML How To
IPI v RH
IV v. Google
Legal Docs
Lodsys
MS Litigations
MSvB&N
News Picks
Novell v. MS
Novell-MS Deal
ODF/OOXML
OOXML Appeals
OraclevGoogle
Patents
ProjectMonterey
Psystar
Quote Database
Red Hat v SCO
Salus Book
SCEA v Hotz
SCO Appeals
SCO Bankruptcy
SCO Financials
SCO Overview
SCO v IBM
SCO v Novell
SCO:Soup2Nuts
SCOsource
Sean Daly
Software Patents
Switch to Linux
Transcripts
Unix Books
Your contributions keep Groklaw going.
To donate to Groklaw 2.0:

Groklaw Gear

Click here to send an email to the editor of this weblog.


Contact PJ

Click here to email PJ. You won't find me on Facebook Donate Paypal


User Functions

Username:

Password:

Don't have an account yet? Sign up as a New User

No Legal Advice

The information on Groklaw is not intended to constitute legal advice. While Mark is a lawyer and he has asked other lawyers and law students to contribute articles, all of these articles are offered to help educate, not to provide specific legal advice. They are not your lawyers.

Here's Groklaw's comments policy.


What's New

STORIES
No new stories

COMMENTS last 48 hrs
No new comments


Sponsors

Hosting:
hosted by ibiblio

On servers donated to ibiblio by AMD.

Webmaster
If You Want to Know What's Really Going On, Ask the Lawyers
Friday, October 17 2003 @ 01:06 PM EDT

No matter what spin SCO puts on it, here's what their lawyers think, as shown in SCO 's new 8K, just filed:
Arrangement with Counsel

SCO announced that it is in the process of finalizing a modification of the engagement with the law firm representing SCO in the protection of SCO's intellectual property rights. As part of this modification, which is subject to a definitive agreement, the law firm would receive a contingent fee of 20 percent of the proceeds from certain events related to is protection of SCO's intellectual property rights, including certain licensing fees, settlements, judgments, equity financings or a sale of SCO during the pendancy of litigation or through settlement, subject to certain agreed upon credits for amounts received as discounted hourly fees or prior contingency payments. In addition, this modification may result in the payment to such law firm of up to $1,000,000 and the issuance of up to 400,000 shares of SCO's common stock.
Lawyers always make sure they get paid. So, not a ringing endorsement of SCO's future as a company. And notice that they aren't getting paid only if they win the lawsuit, so that shows me they are no longer so sure of a successful outcome or that SCO will still be there at the finish line.

The 8K also makes the claim that SCO IP is in the upcoming 2.6 Linux kernel. It says BayStar is one of two investers, but it doesn't say who the second one is [UPDATE: the full 8K with the Purchase Agreement is now up on SEC and it's the Royal Bank of Canada, which invested more than BayStar):
About the Private Investment

The SCO Group, Inc. ("SCO") has received a $50,000,000 private investment from two investors, including BayStar Capital II, LP ("BayStar"). The investment is structured as a private placement of non-voting Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock is convertible into SCO common shares at a conversion price of $16.93 per share, which was the average closing bid price for SCO's common stock for the five consecutive trading days prior to the date of closing....

SCO IP Licensing and Migration Initiative In connection with SCO's intellectual property enforcement effort, SCOsource, SCO has alleged that the Linux 2.4 and the upcoming 2.6 kernel contain SCO intellectual property. In an effort to offer marketplace solutions to these Linux-related intellectual property issues, SCO released a licensing program to offer Linux users a right-to-use binary mode only license, subject to certain limitations. In the coming months, SCO intends to expand the licensing program to include migration options for those end users who may be looking for alternatives to Linux. Over the past several months, SCO has had discussions with several major companies for the purpose of bolstering SCO's intellectual property licensing and migration initiative.

Legacy Business During SCO's upcoming fiscal year, SCO intends to roll-out major upgrades for its two UNIX operating systems.
So, that's the public plan, to forget the licensing and try to get the world to stop using Linux. According to this report, they were so cash-strapped that had BayStar not stepped in, they would have been unable to go the distance to the trial with IBM. Even with the infusion, it seems they can't afford to sue SGI:
SCO Group has suspended its demands for licensing payments from Linux users after receiving a $50 million infusion of cash from BayStar Capital.

There are also indications that the company will concentrate solely on its original $3 billion legal action against IBM, which it claims infringed its Unix operating system licence by contributing technology that SCO claims was derived however tenuously from SCO's original System V Unix.

This follows a concomitant decision to put its action against graphics workstation vendor SGI on hold. It accuses SGI of similar intellectual property infringements.
Tenuously is a good word. So, everything appears to indicate SCO's days may be numbered.

There is one paragraph in the Purchase Agreement between SCO, RBC, and BayStar that I've never seen in a contract before. That doesn't mean it's never been in any contracts before, just that it's new in my experience. It stands out because I think it'd be fair to call it the "Shut Up Clause". SCO must not issue any press releases or public statements about this deal without BayStar's prior review. It seems they know about McBride's penchant for issuing press releases and statements to the media, and they want at least prior review:

The Company shall issue a press release (the "Press Release") describing in reasonable detail the transactions contemplated hereby and such other matters as had previously been discussed by the Purchasers and the Company, as soon as practicable on or after the date hereof, but in no event later than the commencement of the first trading day following the date hereof. The Press Release shall be subject to prior review and comment from BayStar Capital II, LP ("BayStar"). Within two days after the Closing Date, the Company shall file a Form 8-K with the SEC concerning this Agreement and the transactions contemplated hereby, which Form 8-K shall attach this Agreement and its Exhibits as exhibits to such Form 8-K (the "8-K Filing"). From and after the Press Release, the Company hereby acknowledges that no Purchaser shall be in possession of any material nonpublic information received from the Company, any of its Subsidiaries or any of its respective officers, directors, employees or agents, that is not disclosed in the Press Release. The Company shall not, and shall cause each of its Subsidiaries and its and each of their respective officers, directors, employees and agents not to, provide any Purchaser with any material nonpublic information regarding the Company or any of its Subsidiaries from and after the Press Release without the express written consent of such Purchaser; provided, however, that a Purchaser that exercises its rights under Section 4(n) hereof shall be deemed to have given such express written consent. No Purchaser shall have any liability to the Company, its Subsidiaries or any of its or their respective officers, directors, employees, shareholders or agents for any such disclosure. Subject to the foregoing, neither the Company nor any Purchaser shall issue any press releases or any other public statements with respect to the transactions contemplated hereby; provided, however, that the Company shall be entitled, without the prior approval of any Purchaser, to make any press release or other public disclosure with respect to such transactions as is required by applicable law and regulations (provided that any such press release or other public disclosure shall be subject to prior review and comment by BayStar).
The funny thing is, RBC makes no similar demand. So, it indicates to me that there is some aspect to this deal BayStar would rather SCO didn't talk about in public. Our assignment, should we care to accept it, is to find out what that aspect is.

Meanwhile, Stowell says that while they aren't going to mail out invoices, at least not now, the license is still available. They'll be "approaching" companies, just not using the US mail:

He added the caveat that this was not necessarily a permanent decision. Furthermore, the licence will still be available. "We're still approaching companies [to buy the licence], we're just not invoicing them."
Of course, the beauty part of that is, no one will ever be able to prove different.

UPDATE: I have heard from a tax attorney whose opinion I value, and he says, in the nicest way possible, that I'm all wet on this Shut Up Clause. He says they are fairly standard. So here's the scoop from him:

"With respect to the 'Shut up clause', it is fairly standard in the deals that I've worked on. Whoever is the lead manager for the investors gets veto or vetting power over any communications with the press with respect to the deal, just to prevent any surprises. The lead gets the power just so that there is only one representative of the investor group as the point of contact, otherwise decisions would never get done.

  


If You Want to Know What's Really Going On, Ask the Lawyers | 63 comments | Create New Account
Comments belong to whoever posts them. Please notify us of inappropriate comments.
If You Want to Know What's Really Going On, Ask the Lawyers
Authored by: Anonymous on Friday, October 17 2003 @ 01:30 PM EDT
Is the $50 million from BayStar an equity financing to which the 20% contingency
fee might apply?

[ Reply to This | # ]

If You Want to Know What's Really Going On, Ask the Lawyers
Authored by: nabet on Friday, October 17 2003 @ 01:32 PM EDT
Well, SCO aren't going to be able to focus soley on the IBM case for the simple
reason they have to defend themselves against RedHat :-) Still, at least
they've stopped the licensing nonsense for now, although it's clear they did
so not because they've learnt their lesson, but because the $50m investment
makes it unnecessary.

Too bad they're going to squander a lot of that money on a lost cause.

[ Reply to This | # ]

Royal Bank of Canada (RBC)
Authored by: Anonymous on Friday, October 17 2003 @ 01:32 PM EDT
Thanks to heimdal31 on Yahoo! SCOX board for pointing this out. Just find
'Canada' in the 8-K. It's near the end. RBC was even the majority interest
here ... 30,000 units versus Baystar's 20,000 units

[ Reply to This | # ]

Royal Bank of Canada is majority investor
Authored by: Anonymous on Friday, October 17 2003 @ 01:33 PM EDT
At the bottom of one of the exhibits, it lists the Royal Bank of Canada as the
other investor. While BayStar is listed as the 'lead investor', they only
bought 40% of the new preferred stock, the rest of it is RBC.

thad

[ Reply to This | # ]

If You Want to Know What's Really Going On, Ask the Lawyers
Authored by: PJ on Friday, October 17 2003 @ 01:47 PM EDT
If anyone taped the conference, I'd love to get it. Or any first-hand reports.
Thanks.

[ Reply to This | # ]

If You Want to Know What's Really Going On, Ask the Lawyers
Authored by: raiford on Friday, October 17 2003 @ 02:05 PM EDT
For what its worth, it also mentioned that Microsoft is sending them an
additional $8,000,000.

[ Reply to This | # ]

If You Want to Know What's Really Going On, Ask the Lawyers
Authored by: DrStupid on Friday, October 17 2003 @ 02:21 PM EDT
"the upcoming 2.6 kernel contain[s] SCO intellectual property"

Same old same old. What intellectual property would that be exactly? Ah yes,
methods and concepts. Shame you're not entitled to any money for them, isn't
it TSG?

[ Reply to This | # ]

If You Want to Know What's Really Going On, Ask the Lawyers
Authored by: Anonymous on Friday, October 17 2003 @ 02:22 PM EDT
I live in Canada and i'm very happy not to be a customer of RBC.


Mike

[ Reply to This | # ]

If You Want to Know What's Really Going On, Ask the Lawyers
Authored by: Thomas Downing on Friday, October 17 2003 @ 02:29 PM EDT

Call me slow; I often am...

I don't understand why BayStar and RBC are investing in SCO. At least not RBC. Looking at the BayStar portfolio I see some major turkeys in the list (I was the architect at what became Concentrex.) So they may have trouble picking tech operations. But nobody that I know of called RBC stupid.

Now for what I'm really slow at. I don't see why these investments, the negotiations with their legal team, and the 8K spell the imenent demise of SCO. The only thing that seems more likely to me at this point is that they have some hopes of being acquired shortly. That's a demise of a sort, but not by bankruptcy, which is where they seemed to be headed last month. Thanks to anyone who posts a response that might clarify this for me.

---
Thomas Downing
Principal Member Technical Staff
IPC Information Systems, Inc.

[ Reply to This | # ]

Fair Market Valuation of Open Source
Authored by: Anonymous on Friday, October 17 2003 @ 02:30 PM EDT

The hope to capture "Open Source territory" and enclose it with
barbed wire excites investors to the tune of $50 Mil. I would say $50 million
is just a downpayment on the valuation of how much wealth Open Source has
created.

Of course, the proprietary guys with their "Freedom is Theft"
mindset will say this a downpayment on the cost of damages Linux has done to
their world.

=john=

[ Reply to This | # ]

If You Want to Know What's Really Going On, Ask the Lawyers
Authored by: Anonymous on Friday, October 17 2003 @ 02:37 PM EDT
This game is getting dirtier and dirtier. Any idea WHY RBC would invest in SCO?
This investment, BTW, pumped the SCO stock price up to over 20. RBC is a big
MS house of course, but I wonder if there are deeper connections. MS hired a
new "privacy strategist" back in June from RBC (look at
http://www.infoworld.com/article/03/06/23/HNmicrostrategist_1.html).

Here is the value RBC puts on privacy, so I guess they will be ordering alot of
MS products- http://www.informationweek.com/story/IWK20020816S0008.

I would wager that if someone were to check deeply, more and batter links
between MS and RBC might be found.....Looks like MS wants to continue to throw
FUD. Let's hope that SCO gets their comeuppance, and very soon.

As for Darl being told to stifle it, well, he was getting tiresome. His
entertainment value had started to slip back in late July. Guess he will have
to go back and do the important things that a CEO of SCO should be doing- like
playing the latest and best computer games on his shiny new flat screen monitor.

[ Reply to This | # ]

The clause before the "Shut Up" clause
Authored by: mec on Friday, October 17 2003 @ 02:37 PM EDT
Notice that there's a bunch of sentences before the clause that says "we
won't say anything without BayStar approval" ... sentences about
"material non-public information".

Those sentences basically say: SCO might have told some secret stuff to BayStar
during negotiations. SCO agrees to file an 8-K and hold a press conference
right quick and tell everybody all the important the things that they told
BayStar. That way, if BayStar happens to be in possession of "material
non-public information", all the information becomes "material
public information".

BayStar wants SCO to make these disclosures because "trading on material
non-public information" is a felony. Thus, the disclosure protects
BayStar against insider trading charges down the line. As soon as SCO makes
these disclosures, then BayStar doesn't have that legal issue to deal with when
they go to sell stock

So there's going be lots of juicy information in that 8-K.

I don't know if this is a boilerplate clause in a PIPE deal, or a special
clause just for this deal.

[ Reply to This | # ]

Please link to sec.gov, not biz.yahoo.com
Authored by: mec on Friday, October 17 2003 @ 02:44 PM EDT
www.sec.gov is the primary source, and has the full text of the documents. The
filings on biz.yahoo.com is just excerpts from the docs at www.sec.gov.

http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001102542&
;owner=include
http://www.sec.gov/Archives/edgar/data/1102542/000110465903023055/0001104659-03-
023055-index.htm

I would make these <a href="blah">...</a>, but when I
try that, the groklaw software sticks an extra '%20' in after a certain number
of characters. It looks like the anti-widening software is not quite smart
enough; it shouldn't do anti-widenening inside a <a
href="..."> becase that part is not rendered in the browser.

So, sigh, I'll just dump those big text strings in your lap, extra space and
all.

[ Reply to This | # ]

Not a shut up clause
Authored by: Anonymous on Friday, October 17 2003 @ 02:50 PM EDT
Actually, I don't think that is a shut-up clause. I think that is a legal
statement that once the 8-K is filed, BayStar and RBC have no insider
information and that SCO will not give them any. Thus BS and RBC are in the
clear to convert their shares and sell without fear of being accused of
executing insider trades.

[ Reply to This | # ]

Weekend at Bernie's
Authored by: DrStupid on Friday, October 17 2003 @ 02:51 PM EDT
Is it just me who is starting to be reminded of this film? With TSG as Bernie,
and ... well you can guess who the two guys are.

[ Reply to This | # ]

I Found Another Publicity Clause
Authored by: Alex on Friday, October 17 2003 @ 02:57 PM EDT
"Publicity. The Company and each Purchaser shall have the right to
approve before issuance any press releases, SEC or, to the extent applicable,
NASD filings, or any other public statements with respect to the transactions
contemplated hereby; provided, however, that the Company shall be entitled,
without the prior approval of the Purchasers, to make any press release or SEC
or, to the extent applicable, NASD filings with respect to such transactions as
is required by applicable law and regulations (although the Purchasers shall be
consulted by the Company in connection with any such press release and filing
prior to its release and shall be provided with a copy thereof and must provide
specific consent to the use of their name in connection therewith)."

So SCO can't talk about their loan without the consent of RBC or Baystar.
However, I found this bit in the paragraph PJ found interesting:

"From and after the Press Release, the Company hereby acknowledges that no
Purchaser shall be in possession of any material nonpublic information received
from the Company, any of its Subsidiaries or any of its respective officers,
directors, employees or agents, that is not disclosed in the Press
Release."

Since Purchaser's seem to be RBC and Baystar, it sounds like they're saying to
to SCO "Don't tell us, we don't want to know." It's as if
they're giving SCO a loan then stepping as far back from SCO as the law allows.
That's interesting.

Alex

[ Reply to This | # ]

BayStar linked to Microsoft
Authored by: Anonymous on Friday, October 17 2003 @ 03:20 PM EDT
http://slashdot.org/comments.pl?sid=82583&cid=7237197

Sorry if this is a dupe, but there's been so much groklaw traffic this week
that I don't have time to scan through it all.

-CSS2

[ Reply to This | # ]

"Death Spiral" Financing?
Authored by: Alex on Friday, October 17 2003 @ 03:27 PM EDT
I'm not very good at finance, but can someone who is good at finance look this
over? It seems to be the document which controls how RBC and Baystar get paid,
and I'm curious whether the agreement is a "death spiral" agreement
of the sort we were discussing last night.

http://tinyurl.com/rc06

Alex

[ Reply to This | # ]

Take 'em out.
Authored by: Anonymous on Friday, October 17 2003 @ 04:09 PM EDT
You're missing the biggest point... If they didn't have the infusion, they
wouldn't have lasted to the IBM suit.

So now it's time for pre-emptive suits. SGI should sue 'em like Red Hat is.
SUSE, too, if they want to. If two or three companies do it, they can wipe TSG
off the board before anything comes due.

On the other hand, this leaves the vultures in the Canopy safe...

[ Reply to This | # ]

  • Take 'em out. - Authored by: Anonymous on Friday, October 17 2003 @ 08:48 PM EDT
  • Take 'em out. - Authored by: Alex on Friday, October 17 2003 @ 09:27 PM EDT
SCO's Brilliant Business Maneuver?
Authored by: tcranbrook on Friday, October 17 2003 @ 04:09 PM EDT
This article in ecommerce has some relevant observations.

http://www.ecommercetimes.com/perl/story/31866.html

"But who would trust [SCO] after the IBM suit?" he said. "And
they have threatened end-user customers with litigation. In effect, they have
destroyed themselves as either a Unix or Linux supplier."

Here something I haven't heard before:

" Instead, Stowell said, SCO's long-term plans revolve around future
developments to its Unix platform and the expansion of SCOx, the company's .NET
equivalent targeted at the small and medium business market, with emphasis on
certain verticals."

[ Reply to This | # ]

Information for those curious about RBC
Authored by: beast on Friday, October 17 2003 @ 06:07 PM EDT
Primarily for non-Canadians. :^)

Royal Bank of Canada

RBC is Canada's largest bank with US$382 billion in assets and a market cap of US$36.2 billion. They have almost 60,000 employees worldwide. More at RBC fast facts page.

The division of RBC that made the investment in TSG is RBC Dominion Securities Corporation (see RBC Capital Markets).

I have not come across any press releases concerning TSG or Baystar on any of the RBC web sites. My impression from the 8-K and the press release is that RBC is trying to keep their part in the investment fairly quiet. Not secretive mind you, more like "let everyone else do the talking".

[ Reply to This | # ]

Interesting little tidbit
Authored by: beast on Friday, October 17 2003 @ 06:27 PM EDT

I was looking for press releases concerning SCO (and RBC) on www.newswire.ca and found this. It seems that TSG was a sponsor of the annual Commonwealth Business Forum that was held in London on September 25-26. This event is organized by the Commonwealth Business Councel (www.cbcnet.org) I could not verify whether or not TSG is a member.

Look at the bottom of the page:

Commonwealth Business and Government Leaders to Tackle Sensitive Globalisation Issues

[ Reply to This | # ]

Oh crap - that's my bank!
Authored by: QCumber on Friday, October 17 2003 @ 08:11 PM EDT

Well, it was my bank. I just finished applying for a credit card online (approved instantly) and am moving accounts on Monday. I will also be writing letters to various levels of managment to let them know why my business (nothing to sneeze at) suddenly moved elsewhere.

I would encourage other RBC customers to do the same.

[ Reply to This | # ]

If You Want to Know What's Really Going On, Ask the Lawyers
Authored by: Anonymous on Friday, October 17 2003 @ 08:31 PM EDT
The author of the Infoconomy report that said SCO was running out of money seems
to have some inside sources. Maybe we can contact him and get some more info
for Groklaw. Perhaps he could even become a regular here.

[ Reply to This | # ]

If You Want to Know What's Really Going On, Ask the Lawyers
Authored by: Anonymous on Friday, October 17 2003 @ 08:35 PM EDT
"CO has said it has stopped issuing commercial users of Linux invoices for
a its licence."

That implies that it was sending invoices and then stopped. I thought it hadn't
sent any. So did it send some, or is the article wrong?

[ Reply to This | # ]

If You Want to Know What's Really Going On, Ask the Lawyers
Authored by: Anonymous on Saturday, October 18 2003 @ 02:32 AM EDT
My read on this is that the Attorneys were originally hired on a contingent fee basis, but they had an out clause in their contract if the case did not look good as time went on. My read is they exercised the out clause. SCO bought them back with the following: "SCO announced that it is in the process of finalizing a modification of the engagement with the law firm representing SCO in the protection of SCO's intellectual property rights. As part of this modification, which is subject to a definitive agreement, the law firm would receive a contingent fee of 20 percent of the proceeds from certain events related to is protection of SCO's intellectual property rights, including certain licensing fees, settlements, judgments, equity financings or a sale of SCO during the pendancy of litigation or through settlement, subject to certain agreed upon credits for amounts received as discounted hourly fees or prior contingency payments. In addition, this modification may result in the payment to such law firm of up to $1,000,000 and the issuance of up to 400,000 shares of SCO's common stock." Now lets look at this -- "the law firm would receive a contingent fee of 20 percent of the proceeds from certain events related to is protection of SCO's intellectual property rights, including certain licensing fees, settlements, judgments, equity financings or a sale of SCO during the pendancy of litigation or through settlement" So instead of just getting a contingent fee if they win, the law firm gets 20% of the proceeds from events -- including equity financings, or a sale of SCO. This is BIG TIME BUCKS and does apparently not depend on winning the case (based on above). (Id sure like to see this agreement). Therefore one could conclude that SCO's own attorneys recognize that this is a weak case that they might not win, and want to clean up anyway (or not stay around). PJ any comments on this?

[ Reply to This | # ]

Groklaw © Copyright 2003-2013 Pamela Jones.
All trademarks and copyrights on this page are owned by their respective owners.
Comments are owned by the individual posters.

PJ's articles are licensed under a Creative Commons License. ( Details )