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To read comments to this article, go here
SCO's Shareholder Rights Plan, et al
Friday, September 03 2004 @ 06:51 AM EDT

Here is SCO's Shareholder Rights Plan. As you can see, the worrisome figure to SCO is 15%. While they say this plan has nothing to do with any takeover attempt, one can't help but notice that BayStar now appears to own 12.7%. (Exhibit 1.)As you know, I'm no financial maven, but even I can add 1 and 1. UPDATE: I have heard from a corporate lawyer who points out that, in fairness, it should be said that 15% is a normal figure for such poison pill plans.

Here is the setup on the new Series A Junior Participating Preferred Stock, whereby each share gives you 1,000 votes, according to Section 3(a): "Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation." That is in addition to their normal votes resuting from their shares of common stock. And the poison pill section seems to say that in the event SCO gets bought, dissolved or whatever, these dudes holding Series A Junior Preferred Stock get 1,000 times the loot they otherwise would have:

Section 6.               Liquidation, Dissolution or Winding Up.

  (a)           Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (i) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received the greater of (x) $1,000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon to the date of such payment (the “Series A Liquidation Preference”) and (y) an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to the product of 1,000 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (ii) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up.  In the event the Corporation shall, at any time after the Rights Dividend Declaration Date declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock (and an equivalent dividend is not declared on the Series A Preferred Stock or the Series A Preferred Stock is not similarly subdivided or combined), then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (i) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

  (b)           In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, which rank on a parity with the Series A Preferred Stock, then such remaining assets shall be distributed ratably to the holders of Series A Preferred Stock and such parity shares in proportion to their respective liquidation preferences.

  Section 7.               Consolidation, Merger, etc. 

In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or converted or changed into other stock or securities, cash and/or any other property (or into the right to receive any of the foregoing), then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged, converted or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is converted, changed or exchanged.  In the event the Corporation shall, at any time after the Rights Dividend Declaration Date declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock (and an equivalent dividend is not declared on the Series A Preferred Stock or the Series A Preferred Stock is not similarly subdivided or combined), then in each such case the amount set forth in the preceding sentence with respect to the conversion, exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

So when they say they intend to take care of the shareholders, they left out which shareholders they mean to take care of. As usual, the little people get... well, how to put it? Overlooked? More eye-glazing details in this document, the Rights Agreement between SCO and ComputerShare Trust Company, the rights agent. It's probably fascinating stuff, if you are Canopy Group or an executive at SCO, but I confess I find it slow going. I'll finish slogging through it later, having no personal stake in the fine points. I'm sure, though, that if I ever wanted to be slick and was a public company, I'd hide my slime in a document just like this. Obfuscated. Not saying anyone has, of course, in this particular document. Just saying in general, that's what I'd do, because no one can bear to read this stuff.

Speaking of SEC filings, here is Microsoft's. It seems Linux is a serious competitor after all:

We continue to watch the evolution of open source software development and distribution, and continue to differentiate our products from competitive products including those based on open source software. We believe that Microsoft's share of server units grew modestly in fiscal 2004, while Linux distributions rose slightly faster on an absolute basis. The increase in Linux distributions reflects some significant public announcements of support and adoption of open source software in both the server and desktop markets in the last year. To the extent open source software products gain increasing market acceptance, sales of our products may decline, which could result in a reduction in our revenue and operating margins. . . .

For fiscal 2004, the operating income decline of $511 million was primarily caused by the $2.53 billion of charges related to the Sun Microsystems settlement and a fine imposed by the European Commission in the third quarter of fiscal 2004 and $2.21 billion of stock-based compensation expense related to our employee stock option transfer program in the second quarter of fiscal 2004. . . .

In fiscal 2005, we do not expect revenue to grow at similarly high rates as fiscal 2004, even if information technology spending continues to improve. While we expect general economic conditions to remain stable with the improvements seen in the second half of fiscal 2004, we expect PC and server unit shipment growth rates to decline in fiscal 2005 from the high growth rates in fiscal 2004.

Here[PDF] is a handy chart from the Center for Strategic and International Studies, showing what all the countries in the world are doing or not doing with respect to FOSS. Heise, according to my computer translation, finds lots of reasons for MS to worry:

"The US-American center for Strategic and internationally Studies (CSIS) gathered world-wide 90 initiatives and projects current in authorities and other national places for the application of open SOURCE (pdf). The researchers are encountered thereby 24 urgent recommendations for the application of open SOURCE. None of these decisions was transferred however so far in the long run, is called it in the study. It gives so far also no official decision, which forbids the application of proprietaerer software.

[German] "Das US-amerikanische Center for Strategic and International Studies (CSIS) hat weltweit 90 in Behörden und anderen staatlichen Stellen laufende Initiativen und Projekte zum Einsatz von Open Source zusammengetragen (PDF). Die Forscher sind dabei auf 24 dringende Empfehlungen für den Einsatz von Open Source gestoßen. Keine dieser Entscheidungen sei aber bisher letzlich umgesetzt worden, heißt es in der Studie. Es gebe bisher auch keine behördliche Entscheidung, die den Einsatz proprietärer Software verbietet."

And now for the text of the SCO shareholder rights plan:

************************

Material Modifications, Change in FYE or Articles, Financial Statements and Exhibit

Item 3.03. Material Modification to Rights of Security Holders.

On August 10, 2004, the Board of Directors of the The SCO Group, Inc. (the "Company") adopted a stockholder rights plan (the "Rights Plan"). The plan is similar to plans adopted by many other companies and was not adopted in response to any current hostile takeover attempt. In connection with adopting the Rights Plan, the Company created a new Series A Junior Participating Preferred Stock (the "Series A Preferred Stock") on August 27, 2004 having the rights and preferences set forth in Exhibit 4.1 hereto.

Under the Rights Plan, Series A Preferred Stock purchase rights (the "Rights") will be distributed as a dividend at the rate of one Right for each share of common stock of the Company held by stockholders of record as of the close of business on August 30, 2004. The Rights Plan is designed to deter coercive takeover tactics, including the accumulation of shares in the open market or through private transactions and to prevent an acquiror from gaining control of the Company without offering a fair price to all of the Company's stockholders. The Rights will expire on August 10, 2014.

Each Right will entitle stockholders to buy one unit of a share of Series A Preferred Stock at a price of $60. The Rights generally will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company's common stock or commences, or publicly announces an intention to commence, a tender or exchange offer upon consummation of which such person or group would beneficially own 15% or more of the Company's common stock, and thus becomes an "Acquiring Person."

If any person becomes the beneficial owner of 15% or more of the Company's common stock, other than pursuant to a board-approved tender or exchange offer for all the outstanding shares of the Company, then each Right not owned by an Acquiring Person will entitle its holder to purchase, at the Right's then current exercise price, shares of Series A Preferred Stock (or, in certain circumstances as determined by the board, cash, property, or other securities) having a value of twice the Right's then current exercise price. In addition, if the Company, after any person has become an Acquiring Person, becomes involved in a merger or other business combination transaction with another company, in which the Company does not survive or in which its common stock is changed or exchanged, or sells 50% or more of its assets or earning power to another person, each Right will entitle each holder, other than an Acquiring Person, to purchase shares of common stock at the Right's then current exercise price of such other company.

The Company will be entitled to redeem the Rights at $0.001 per Right at any time until 10 days (subject to extension) after a public announcement that any person or group of affiliated persons intends to acquire, or has acquired or obtained the right to acquire, beneficial ownership of 15% or more of the shares of the Company's common stock.

The Rights are intended to enable all stockholders to realize the long-term value of their investment in the Company. The Rights will not prevent a takeover attempt, but should encourage anyone seeking to acquire the Company to negotiate directly with the board of directors.

Item 5.03. Amendments to Certificate of Incorporation or Bylaws; Change in Fiscal Year.

On August 10, 2004, the Board of Directors of the Company adopted the Rights Plan as described more fully above under "Item 3.03 Material Modification to Rights of Security Holders." In connection with the Rights Plan, the Company filed with the Delaware Secretary of State the Certificate of Designation of Series A Junior Participating Preferred Stock, attached hereto as Exhibit 4.1, on August 27, 2004. The Company subsequently filed with the Delaware Secretary of State a Certificate of Correction correcting the Certificate of Designation of Series A Junior Participating Preferred Stock, attached hereto as Exhibit 4.2, on August 31, 2004.

Item 9.01. Financial Statements and Exhibits.

(c) Exhibits. The following items are filed as exhibits to this report:

4.1 Certificate of Designation of Series A Junior Participating Preferred Stock.

4.2 Certificate of Correction correcting the Certificate of Designation of Series A Junior Participating Preferred Stock.

4.3 Rights Agreement dated as of August 10, 2004 by and between the Company and Computershare Trust Company, Inc.


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