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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.

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