We've already read IBM's objections to SCO's proposed assets sale, and here are Novell's [PDF], as text, thanks to Groklaw's brooker. Novell opposes on many grounds, that there is only a vague preliminary term sheet, not an actual agreement, that there is no demonstration of marketing or efforts to get the best deal, that there is no evidence of any actual emergency, that there is no justification offered for a sale of virtually all the assets outside of a plan of reorganization, etc.
Of course, from Novell's perspective the most serious issue is that SCO proposes to sell assets that Novell claims are its own. Here are the three most serious issues:
- a largely illusory, nominal $36 million sale price (e.g., representations and warranties, possible cure amounts for assigned executory agreements);
- purports to sell assets whose ownership by the Debtors is, to put it mildly, in serious question; and
- grants the stalking horse buyer very generous breakup fee and cost reimbursement benefits without any justification whatsoever.
Illusory is another word for sham, which rhymes with scam, and next thing ya know, ya got trouble in River City, I say, trouble, right here in River City. Just kidding around, folks. I can't imagine this deal being approved as currently proposed. Even if it were, it'd be appealed so fast your head would spin. I seriously doubt SCO even thinks it has a prayer. So we might as well joke.
Who is York, Novell asks? Do they have a connection to SCO, meaning insider? Is this a sweetheart deal? The terms seem to Novell exceedingly generous. Any other bidders have to provide information about any such ties, and Novell says that the court should require no less from York.
Novell suggests that perhaps York and SCO have set the terms of bidding so high that it guarantees that only York will bid. At a minimum, Novell asks for at least enough information for creditors to know if there is any benefit to the estate. It would also like to know how SCO can sell Novell's stuff. How will Novell's rights be protected?
On its face, it's a mighty funny looking deal, to my eyes. SCO, ruled by a Utah court to be liable for conversion and found guilty of unjust enrichment, breach of fiduciary duty, and breach of contract, proposes to sell what the court just told them they don't own, on the purported basis that an appeal someday might alter the ownership rights, without making clear who will pay Novell if the appeal fails.
Talk about nice work if you can get it. If they get this approved, I recommend we all convert other people's property, if we are sued for it file an appeal when we lose, sell it off fast after declaring bankruptcy, and then we'll be rich! Then we can spend it all really fast, paying relatives and friends and stuff, and when they come to collect, we'll tell them, hey, we spent *that* money already. Any dollars we have in the bank now are not the dollars that you are talking about. These are *different* dollars. Unjust enrichment, you say? That is what the Utah court called it. Hey, so what? If I can find a mystery buyer, like my cousin maybe, what, me worry?
So what? Because, as SCO used to remind us with holy music playing in the background, intellectual property rights must be respected. It's the basis of the economy. Courts need to be shown respect too. You don't get to grab other people's stuff. And if a court says it's not yours, you can't grab it and make a quick run for the border, so to speak. By gum, that's it. That's what is wrong with the deal. SCO wants not to have to face the music. But it still wants to keep suing, just minus everybody else's counterclaims.
A little Mexican music please, maestro. Really, let's dance to trumpets and mariachis. Maybe a nice cumbia. I can't possibly take this seriously.
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
The SCO Group, Inc., et
Case No. 07-11337 (KG)
NOVELL'S OBJECTION TO EMERGENCY MOTION OF THE DEBTORS
FOR AN ORDER (A) APPROVING ASSET PURCHASE AGREEMENT,
(B) ESTABLISHING SALE AND BIDDING PROCEDURES,
AND (C) APPROVING THE FORM AND MANNER OF NOTICE OF SALE
Novell, Inc. ("Novell") hereby submits this objection (the "Objection") to the Emergency
Motion of the Debtors for an Order (A) Approving Asset Purchase Agreement, (B) Establishing
Sale and Bidding Procedures, and (C) Approving the Form and Manner of Notice of Sale (the
"Sale Motion"). In support of its Objection, Novell respectfully states as follows:
The Sale Motion, which is based upon a mere term sheet rather than an asset purchase agreement, is ill-advised at every level, starting with the very timing of the Sale Motion. The Debtors have not established an adequate justification for emergency consideration of the proposed sale on shortened notice, relying instead on unsubstantiated claims of urgent circumstances allegedly dictated by the stalking horse buyer.
Next, at a general level, the Sale Motion is deficient because it:
Debtors and their management, on the one hand, and the stalking horse buyer, on the other);
fails to establish grounds for a sale of substantially all the Debtors' assets outside a plan
in terms of both why there should be such a sale at all outside a plan and whether this sale
is reasonable (e.g., the Debtors offer no description or evidence of prior marketing or
other alternative dispositions efforts, nor any disclosure about the relationship between
fails to adequately describe what is being sold to the Court, creditors and potential overbidders, as it offers only a preliminary term sheet;
- fails to provide adequate information on the factors that may affect what already is a largely illusory, nominal $36 million sale price (e.g., representations and warranties, possible cure amounts for assigned executory agreements);
- purports to sell assets whose ownership by the Debtors is, to put it mildly, in serious question; and
- grants the stalking horse buyer very generous breakup fee and cost reimbursement
benefits without any justification whatsoever.
Finally, there are issues specific to Novell's unique interests. The Sale Motion, in
addition to purporting to sell assets that the District Court already has determined belong to
Novell, evidently seeks to sell other assets as to which Novell has at least partial ownership. The
Sale Motion also fails to provide sufficient assurance that defaults can and will be cured on any
Novell agreements that the Debtors want to assume and assign. This is of particular importance
given the likely size of Novell's claims and the shortened sale period that the Debtors request.
The best that the Debtors do in the Sale Motion is pay mere lip service to one or two of these
issues, but they provide no evidence even on those they acknowledge, and completely ignore the
1. Over four years ago, The SCO Group, Inc. (The "Debtors" or "SCO") sued Novell
based on Novell's public statements claiming that it retained certain software copyrights in a sale
of other property by Novell to SCO, SCO asserted that it purchased those copyrights as part of
the overall sale. What SCO could and could not do with those copyrights depended largely on
the ownership question (and certain related issues). The resolution of these questions, in turn,
has broad implications for SCO's business model and its ability to generate revenues from the
licensing of the copyrighted material. At issue with respect to revenues were the parties'
respective rights to certain past and future revenues.
2. Pursuant to an Asset Purchase Agreement dated as of September 19, 1995 (as
amended, the "Novell APA"), Novell transferred legal title to certain UNIX SVRX software
licenses (the "SVRX Licenses") to SCO's predecessor, The Santa Cruz Operation, Inc., but
retained all UNIX copyrights. The SVRX Licenses generate a royalty payment stream paid by
end users (the "SVRX Royalties") to which Novell retained equitable title and over which Novell
retained considerable rights of control.
3. In an attempt to generate additional revenue, SCO improperly entered into
additional SVRX Licenses based on Novell's retained SVRX copyrights ("SCO Source").
4. In 2004, SCO sued Novell involving a dispute over the Novell APA (the Utah Action").
5. On August 10, 2007, the District Court ruled substantially in Novell's favor on
cross summary judgement motions. The District Court dismissed many of SCO's claims
against Novell, including the original underlying allegation of slander of title, and granted most
of Novell's claims (the "Utah Decision"). Most importantly, the District Court ruled that Novell
is the owner of the UNIX and UnixWare copyrights and that SCO owes Novell the SVRX
Royalties it had collected, due to SCO's breach of fiduciary duty, conversion, unjust enrichment
and breach of contract.
6. Following entry of the Utah Decision, the parties were scheduled to try Novell's
certain limited aspects of remaining counterclaims. These issues are derivative of and will build
upon Novell's victory in the Utah Decision. Whatever their result, they will not undo the District Court's essential
rulings in Novell's favor.
7. Presently pending before this Court are two motions filed by Novell, set for hearing
November 6, 2007. The first is a motion pursuant to 11 U.S.C. § 362(d)(1) (the "Bankruptcy
Code") for relief from the automatic stay to allow the District Court to (i) apportion revenue
from certain SCOsource licenses that the District Court has determined or determines that SCO
wrongfully retained and (ii) determine SCO's authority to enter into SCOsource licenses
generally (the "Stay Relief Motion").
8. The second is a motion pursuant to Section 541(d) of the Bankruptcy Code seeking
confirmation that the SVRX Royalties are not property of the Debtors' estate and turnover of
property to Novell (the "541 Motion"). In the 541 Motion, Novell establishes that (i) SCO has
only legal title and not an equitable interest in the SVRX Royalties within the meaning of
Section 541(d) of the Bankruptcy Code; (ii) pursuant to the Novell APA, all right, title and
interest to the SVRX Royalties were excluded from the transfer by Novell; and (iii) SCO has a
continuing obligation to remit 100% of the SVRX Royalties to Novell, subject to the 5%
9. In the Sale Motion, the Debtors purport to sell the so-called "Unix Business."
Although the Debtors do not reveal the true nature of what is included in the "Unix Business," it
is presumed that they are purporting to assume and assign the Novell APA.
10. The Debtors also purport to convey an interest in litigation described as the "Linux Litigation" in the Sale Motion.
The Debtors' transfer of the Linux Litigation is based on a false
assumption that the Debtors own the property upon which the "Linux Litigation" is based, which
they do not.
11. Sales of assets, especially sales of substantially all of a debtor's assets outside a
plan on an expedited basis, are subject to rigorous and extensive standards for approval.
Measured by these standards, the Sale Motion is wholly inadequate.
12. Sales of substantially all of a debtor's assets under Section 363(b) of the
Bankruptcy Code must be "closely scrutinized" because of the risk that a sale outside of a plan of
reorganization may deprive parties of substantial rights inherent in the plan confirmation process.
Accordingly, the Debtors bear a "heightened burden of proving the elements necessary for
authorization." In re Channel One Comm., Inc., 117 B.R. 493, 496 (Bankr. E.D. Mo. 1990)
(citing Indus. Valley Refrigeration & Air Conditioning Supplies, Inc., 77 B.R. 15, 17 (Bankr.
E.D. Pa. 1987); In re Woods, 215 B.R. 623, 626 (quoting Collier on Bankruptcy ¶ 363.02, at
363-19 (Lawrence P. King ed., 15th ed. rev. 1997)).
13. Furthermore, in order for a sale under Section 363 of the Bankruptcy Code to be
expedited, the Debtors must establish a compelling justification for expedited sale. See, e.g., In
re Beker Indus. Corp., 89 B.R. 336, 339 (S.D.N.Y. 1988) (denying sale where, although
reorganization plan was not imminent, there was an "absence of any compelling circumstances
permitting a sale").
14. In proposing a 363 asset sale, the debtor must establish, and the Court must
determine, that there is a "sound business justification" for the sale. See In re Del. & Hudson Ry.
Co., 124 B.R. 169, 176 (D. Del. 1991) ("Once a Court is satisfied that there is a sound business
reason or an emergency justifying the pre-confirmation sale, the Court must also determine that
the trustee has provided the interested parties with adequate and reasonable notice, that the sale
price is fair and reasonable and that the purchaser is proceeding in good faith"); see also In re
Lionel Corp., 722 F.2d 1063, 1068-69 (2d Cir. 1983) (finding no sound business reason for
proposed 363 sale). The test has four requirements: i) a sound business reason; ii) accurate and
reasonable notice; iii) fair and reasonable price; and iv) good faith. See In re Titusville Country
Club, 128 B.R. 396, 399 (Bankr. W.D. Pa. 1991); In re Abbotts Dairies of Penn., Inc., 788 F.2d
143, 149-50 (3d Cir. 1986) (good faith of the purchaser challenged).
15. When determining whether the procedures underlying the Sale Motion are
adequate, one of the factors the Court should consider is whether there has been proper exposure
to the market. See In re Castre, 312B.R. 426, 428 (Bankr. D. Colo. 2004) ( explaining the
importance of marketing a 363 sale). Disclosures regarding such matters as the following might
reflect on whether the purchase price is fair and reasonable; whether any other potential
purchasers were contacted; how long marketing went on; whether the Debtors used any brokers;
what alternative deals may have been considered, proposed or discussed internally or with
prospective buyers; whether any parties entered into confidentiality agreements in contemplation
of the sale; and whether there was competing interest for the position of stalking horse bidder.
Without further information of this sort, the Court will not be able to determine whether the
purchase price is fair and reasonable. In re Abbotts Dairies, 788 F.2d at 149 (analyzing whether
purchase price is fair and reasonable under both auction and appraisal values).
16. It is well-settled that when a bankruptcy court considers a 363 sale it is required to
make a finding of the purchaser's good faith. Id. at 150 (the Court is "required to make finding
with respect to the 'good faith' of the purchaser"). One component of the good faith analysis is
the determination that there is no evidence of unlawful insider influence, fraud, collusion or any
other improper conduct between the debtors and the prospective purchaser. See In re Trans
World Airlines, Inc., 2001 WL 1820326 (Bankr. D. Del. 2001) (explaining its analysis in
applying the good faith test).
17. In addition to the all the foregoing considerations, there is the common-sense
threshold question of whether the property that the Debtors intend to sell is actually property of
their bankruptcy estates in the first instance. It is axiomatic that a debtor is not authorized to sell
property that it does not own. See Cincola v. Sharffenberger, 248 F. 3d 110, 121 (3d Cir. 2001)
(bankruptcy authorized the sale of property of the estate, as defined in section 541 of the
Bankruptcy Code). A bankruptcy court may not allow the sale of property as "property of the
estate" without first determining whether the debtor in fact owns the property. See In re Rodeo
Canon Dev. Corp, 362 F.3d 603, 608 (9th Cir. 2004), withdrawn per settlement, 2005 U.S. App.
LEXIS 3802 (9th Cir. 2005) (property could not be sold free and clear of liens, claims and
encumberances when debtor's title was in dispute). This underlying question must be decided
before the property can be sold free and clear under Section 363(f). See In re Clark, 266 B.R.
163, 172 (9th Cir. B.A.P. 2001) (sale free and clear of claims denied because not property of the
estate); Gorka v. Joseph (In re Atl. Gulf Cmtys. Corp.), 326 B.R. 294 (D. Del. 2005) (sale of real
property under section 363 not free and clear of claims because title in dispute; In re Claywell,
341 B.R. 396 (Bankr. D. Conn. 2006) (sale disallowed pending resolution of debtor's ownership
18. Finally, the Court must also carefully consider the propriety of any "bid
protections." In the Third Circuit "the allowability of breakup fees, like that of other
administrative expenses, depends on the prospective purchaser's ability to show that the fees
were actually necessary to preserve the value of the estate," Calpine Corp. v. O'Brien Envtl.
Energy Inc., 181 F.3d 527, 535 (3d Cir. 1999); see also In re Beth Israel Hosp. Ass'n of Passaic,
207 WL 2049881 at 12 (Bankr. D. N.J. 2007) (citing In re O'Brien Envtl. Energy Inc., 181 F.3d
at 535). In the Beth Isreal case, the Bankruptcy Court examined the record before it to determine
whether the stalking horse expended any efforts to preserve the value of the debtor's estate. The
Court found that the facts did not show that the stalking horse's bid for the debtor's assets was a
catalyst for a higher bid. Id. at 12-13. One particular factor the Court should consider in
deciding the necessity of break-up fees is whether they are reasonable in light of the purchase
price. See Integrated Resources, Inc., 147 B.R. 650 (S.D.N.Y. 1992) (enunciating factors to
consider in approval of bid protections).
The Request for Expedited Sale Should be Denied
19. In the Sale Motion, the Debtors seek to have the Bankruptcy Court approve the
Sale Approval Order (as defined in the Sale Motion) by December 7, 2007 and close the 363 sale
by December 31, 2007 (the "Shortened Sale Period"). The Debtors state only vaguely that their
business is declining and that its customers are "skittish." They supply no evidence to support
these bald statements.
20. In reality, it seems that the sole public reason the Debtor's expose for seeking to
close the 363 sale by the end of the year is a vague reference that purchaser, JDG Management
Corp., d/b/a York Capital Management ("York" or the "Prospective Purchaser"), may walk away
from the deal if the Shortened Sale Period is not approved. Again, the Debtors provide no
evidentiary support for this claim, let alone any evidence that anyone has had an opportunity to
test. Will York really "walk" if it knows that it will not close by the end of the year? Such
threats in Bancruptcy Court, as in other business contexts, often melt away when they are
challenged. And since the Debtors have provided no evidence on other alternatives or on what
they may have done to market their business or assets, let alone any evidence that has been
vetted by interested parties, there is no reason to believe that creditors would be worse off if
York does bow out. Indeed, it is possible the creditors might be better off -- the Debtors
certainly have provided no evidence to the contrary.
21. By the same token, and for largely the same reasons, it is unclear that there is any
real reason, let alone a good reason, for a sale to York on an expedited basis. Here, there are
many reasons why the proposed sale should be subjected to a more deliberate and thoughtful
process than what amounts to two weeks' notice.
22. First, the Debtors purport to transfer assets in the term sheet (the "Term Sheet")
which they do not own. As will be discussed below, the Debtors cannot transfer assets which
do not constitute property of the estate. The Court must determine exactly what property the
Debtors are planning to sell and, where there is an issue as to who owns the property, the
Court must determine those rights before it approves any portion of the Sale Motion. In that
respect, the Court should not approve an expedited sale, particularly when a proposed asset
purchase agreement has not been disclosed (or perhaps not even yet exist).
23. Second, amongst the Transferred Assets are executory contracts that may be
burdened with enormous cure amounts. The Debtors are purporting to assume and assign
these contracts without providing a solution for curing the defaults, or indicating how the Purchaser
would cure the defaults. In countenancing the Shortened Sale Period, the Court would present
itself with a 363 sale that may be unable to close because of the excessive amounts owed on the
contracts. In any case, creditors would not have a true notion of the impact of the sale on what
funds will be left for them until some of the Novell/SCO issues are resolved.
24. Lastly, expedited sale may have a negative impact on realization of maximum
recovery to the estate and creditors.
The Sale Procedures Set Forth by the Debtors are Inadequate
25. The sales procedures that the Debtors propose do not provide for adequate
marketing of the Transferred Assets. Here, the Debtors neither explain how the Transferred
Assets have been marketed up to this point (if at all), nor how they will be marketed to potential
Overbidders during the Shortened Sale Period. Indeed, they do not disclose anything about how
the sale to York was achieved, a subject that might throw some light on these crucial issues. the
Court should deny the request for expedited sale. If the Debtors then want to proceed with the
sale to York, they should provide evidence that supports the sale as the best alternative and in the
best interests of creditors. Otherwise, neither creditors nor the Court can be certain that the
Debtors will receive the highest competitive bid possible under the circumstances.
The Debtors Provide Inadequate Information for the Court to Make a Finding as to Whether
There is a Sound Business Justification for the Sale
26. As discussed above, in order for the Court to approve a sale outside of a plan under
Section 363 of the Bankruptcy Code, there must be a "sound business justification" for the sale,
with many Courts analyzing four requirements: i) a sound business reason; ii) accurate and
reasonable notice; iii) fair and reasonable price and iv) good faith. See In re Titusville Country
Club, 128 B.R. at 399 (recognizing a non-exhaustive list of factors that indicate presence or lack
of a sound business justification for a sale). If ever there were a transaction to which these rules
should apply, it is the Sale Motion. It is clear that if this deal is approved and closes, there will
be little left to discuss about what a plan could look like since the estates' course will be all but
set in stone.
27. The Sale Motion falls short of these standards for at least the following reasons:
i) the Debtors have not disclosed enough information for the Court to determine whether there is
a sound business reason for the 363 sale; ii) the lack of information about the Prospective
Purchaser leaves the good faith of the parties unresolved, and iii) it is unclear whether the
Purchase Price (defined below) is fair and reasonable. Without the benefit of an asset purchase
agreement and further disclosures by the Debtors and the Prospective Purchaser about a whole
litany of subjects, it will be difficult for the Court to determine these issues and ultimately
whether there is a sound business justification for the sale.
28. First and foremost, the lack of disclosures in this sale process is staggering,
beginning with the absence of an asset purchase agreement. In particular, there are serious
questions as to what Debtors intend to sell and the buyer(s) think they are buying. The Debtors
state in the Sale Motion that they intend to sell "all right, title and interest to the assets, properties
and rights of [Debtors] useful in connection with the operation of the Unix business of the
[Debtors] (the "Unix Business")." However, it is unclear just what comprises the "Unix
Business." As a threshold matter in this regard, the Debtors make no disclosures regarding the
questionable ownership rights of the Transferred Assets, and as will be discussed in more detail
below, these issues are critical to the Court's consideration of the Sale Motion.
29. Second, without additional disclosures the Court will not be able to make the
required determination of the good faith of the Prospective Purchaser. Here, the Debtors give no
insight into the actual or prospective relationship(s) between York and the Debtors or their
management although the Sale Motion requires other bidders to make disclosures about their
connections with the Debtors and other parties of interest. The lack of intelligence in this regard
impairs the Court's ability to make the key determination of whether York and the Debtors are
presenting the Sale Motion in good faith. It also casts a shadow on the price and terms the
Debtors present. Was there arm's length bargaining, are there (or might there be) sweetheart
arrangements and understandings that might have affected what the personnel involved tried to
extract from York? York should be held to the same standard as any other Qualified Bidder and
must be directed to disclose its relationship to the Debtors. Otherwise, the Court will not have
enough evidence to make the necessary findings of good faith.
30. Third, in Sale Motion's current form, it is at best questionable whether the Purchase
Price is fair and reasonable for several reasons. First, upon close examination, the Purchase
Price appears to be artificially inflated. While Debtors state that the purchase price is "$36
million," in actuality, it could prove to be $10 million or less. The Term Sheet provides for (i) a
cash payment of $10 million, (ii) up to $10 million in the form of a litigation credit facility (with
a 20% interest in any litigation proceeds up to $100 million), (iii) up to $10 million in the form
of a 20% interest in any favorable judgement in certain litigation, and (iv) up to $6 million in the
form of a revenue sharing agreement (collectively the "Purchase Price"). As it stands however,
over two-thirds of the Purchase Price is contingent upon the success of (and as explained below,
underlying ownership of) certain lawsuits to be pursued by York and the Debtors.
31. In particular, a $10 million non-cash component of the Purchase Price is
conditional on the Prospective Purchaser collecting a favorable judgment in litigation or
enforcement of the Linux Litigation (as defined in the Sale Motion). What the Debtors do not
disclose is that this litigation seeks to enforce the very SVRX copyrights the Utah Court has held
belong to Novell. It is Novell's view that this portion of the Purchase Price is worthless. The
other non-cash component of the Purchase Price, the $10 million drawdown credit facility that is
earmarked for litigation expenses, is also unlikely to benefit the estates, as meaningful cash
component to the Purchase price. Classifying it otherwise is disingenuous. The remaining $6
million of the Purchase Price is also questionable as the Court is given little indication as to what
type of arrangement underlies this so-called "revenue sharing agreement."
32. Moreover, the Debtors' failure to disclose what marketing efforts they have made
(or have not made) and what their relationships with York and others may be makes it
impossible for this Court and the creditors generally to assess the Purchase Price, whatever it is,
in any realistic way. This problem is exacerbated by the limited period the Debtors propose for
attracting overbids since a proper overbidding process that gives overbidders a reasonable
opportunity to assess the assets at issue might otherwise give parties in interest some comfort
about the Purchase Price.
33. Therefore, in its current form and without the benefit of a clear asset purchase
agreement, the Sale Motion does not provide adequate information for the Court to determine
whether the Debtors have a sound business justification for selling its assets outside of a plan of
Bid Protections are Not Justified
34. A related but similarly important issue is the fact that the Debtors have failed to
establish how the break-up fee and expense reimbursement protections (the "Bid Protections")
are necessary to the 363 sale. In order for a propective purchaser to be awarded fees and other
consideration as protection for providing the opening bid in a 363 sale, the record must reflect
that the bid protections offered to the prospective purchaser are "necessary to preserve estate
assets." Calpine Corp. v. O'Brien Envtl. Energy Inc., 181 F. 3d 527, 535 (3d Cir. 1999). Thus
the Debtors made no effort at all to demonstrate that the Bid Protections are necessary.
35. In exchange for agreeing to become the stalking horse for this auction process,
York requested a break-up fee of $780,000, along with reimbursement of all expenses in an
amount up to $300,000. The Debtors baldly state in the Sale Motion that the Bid Protections are
reasonable and appropriate under the circumstances and they are comparable to protections that
have been granted in other cases. Sale Motion at 17.
36. However, neither the Debtors nor York has indicated how York has brought
tangible benefit to the estate in exchange for these generous terms. There is no evidence that it is
necessary for the Debtor to offer these terms, or, indeed, any terms to attract a buyer in the first
instance. Indeed, as we have seen, the Debtors have provided no evidence on what they have
done to market the assets or how they found and corralled York. It also remains to be seen if
York's offer will encourage bids from other potential purchasers.
37. Furthermore, even if otherwise needed in some degree, the Bid Protections are
excessive and disproportionate to the potential actual Purchase Price. As discussed above, the
Purchase Price could prove to be as low as $10 million (if the Debtors are found to not own the
property underlying the lawsuits that form the basis of two-thirds of the Purchase Price). In that
case, the Bid Protections would represent in excess of 10% of the actual Purchase Price. This is
rich even by the Debtors' own citations. They have cited numerous cases in which break up fees
and other protections were granted where they represented an average of 3% of the purchase
price. (Sale Motion at 17-18.) But that is far below the massive 10% the Bid Protections may
well represent in this case.
38. In any case, the expense reimbursement protections agreed to by York would make
it whole in the event of a breakup. There is no reason to allow a break-up fee on top of the
reimbursement of expenses.
39. Novell similarly objects to the initial incremental overbid of $1,630,000 and
subsequent bid increases of $100,000 as being unreasonable and disproportionate. Plainly, they
are designed to chill rather than to encourage bidding, and make the disclosure of the Debtors'
connections with York even more important.
Novell's Rights Will Be Prejudiced if the Sale Motion is Approved in its Current Form
40. Implicit within the Debtor's ability to sell property under Section 363 of the
Bankruptcy Code is the requirement that the estate must actually have an interest in the property
to be sold. See Cincola v. Sharffenberger, 248 F. 3d 110, 121 (3d Cir. 2001). In the Sale
Motion, the Debtors attempt improperly to convey that which is not property of the estate.
41. Presently pending before this Court are Novell's Stay Relief Motion and 541
Motion, which are scheduled to be heard on November 6, 2007. Novell's Stay Relief Motion
describes how the UNIX and UnixWare copyrights on which the Linux Litigation is based are
actually Novell's property, as confirmed by the Utah Decision. This clearly limits the Debtor's
rights, as a court of competent jurisdiction has determined as a matter of law that Novell owns
the underlying property. The Linux Litigation cannot be assigned as part of the sale process.
42. In the 541 Motion, Novell addresses that it has certain rights to royalties under the
Novell APA and that those funds are Novell's property and, thus, not property of SCO's estate.
It is not clear from the Sale Motion how SCO intends to address these license and royalty issues
under the sale. Objections regarding the propriety of assumption and assignment of this
component of the Novell APA will very likely arise.
43. There are similar problems with other potentially transferred assets. For example,
in the Utah Litigation Novell also seeks a declaration that SCO was without authority to enter
into two major "SCOsource" licenses, with Sun Microsystems and Microsoft. As these licenses
provided SCO with its only profitable quarter in recent memory, determination of their status
would seem paramount before a sale can complete.
44. Because they did not submit an asset purchase agreement with the Sale Motion, it
remains unclear what assets the Debtors purport to assign. What is clear is that Novell's rights
are directly impacted. Both Novell and the Court need to establish whether the Debtors intend to
assign the Novell APA pursuant to the Sale Motion. At present, the Court and creditors cannot
tell what representations or warranties the Debtors will be making regarding what they are
actually selling or what York or another buyer is buying. Once that is known, it may well be that
the York deal is off and that other buyers will not be interested until they know what they are
45. In addition, if the Debtors intend to assume and assign the Novell APA as part of
the Transferred Assets, they would have to cure any outstanding defaults before doing so. See 11
U.S.C. & 365(f)(2). It is Novell's position that SCO is in default on the Novell APA in the
amount of its liability stemming from the Utah Decision; potentially up to $40 million. It is
questionable whether a sale with such a large outstanding liability is even possible.
46. It is clear that there are a number of outstanding issues affecting Novell's rights
under the Novell APA that need to be resolved before the Court can approve the Sale Motion.
Reservation of Rights
47. The requested expedited timing of the Sale Motion, and the fact the Debtors have
not provided adequate information regarding the proposed sale, has put Novell in a difficult
position. The Debtors have requested approval of an asset purchase agreement that has not even
been submitted to the Court. While much of the Sale Motion deals with procedures and notice,
there are inherent substantive issues that must be addressed prior to entry of any order approving
48. Although Novell recognizes that there may be further opportunity to object to a
proposed sale (as opposed to bid procedures), Novell has, in the interest of caution, indicated in
this Objection many of its reservations about the proposed sale. Novell expressly reserves all of
its rights to file an objection to both the asset purchase agreement (when the Debtors finally
reveal it) and to file an objection to the sale at the appropriate time.
Dated: November 1, 2007
YOUNG CONAWAY STARGATT & TAYLOR, LLP
/s/Sean T. Greecher
James L. Patton (No. 2202)
Michael R. Nestor (No. 3526)
Sean T. Greecher (No. 4484)
-- and --
MORRISON & FOERSTER LLP
Adam A. Lewis
-- and --
MORRISON & FOERSTER LLP
Larren M. Nashelsky
Counsel for Novell, Inc.
1 A prime example is the Novell APA. The implications of the Novell APA and Novell's 541 Motion on the Sale Motion are discussed in detail infra.
2 For instance, as described in more detail below, Novell believes it is owed up to $40 million on the Novell APA.
3 The bid procedures corresponding to the Sale Motion require any Qualified Bidder to "[d]isclose any
connections or agreements with the Debtors, the Prospective Purchaser, any other potential, prospective bidder or Qualified Bidder, and/or any officer, director or equity security holder of the Debtors or Proposed Purchaser." Sale Motion at 11.
4 If Novell's claims in the District Court Action are sustained at anywhere near their present level, the cure amounts due it if the Prospective Buyer wants its agreements as executionary contracts would consume even
more of the purchase price, if the Prospective Buyer even wants to go through with the deal at that point.
5 Even assuming arguendo, that the Novell APA is intended to be part of the Transferred
Assets, the Debtors may not be able to assume and assign the Novell APA because there are
issues relating to the executory nature of the Novell APA and the outstanding cure amounts,
which are fundamental to the Court's consideration of the Sale Motion as it affects Novell's
rights. Other creditors, too, will want to know the same information in order to assess
whether they support the proposed sale.