BayStar Threatens to Sue SCO

By Steven Vaughan-Nichols  |  Posted 2004-07-23

BayStar Threatens to Sue SCO

Just when the Unix community thought that the fractious BayStar-SCO dispute was history, the investment house proved everyone wrong. The company now says it will sue SCO and continue the pairs troubled financial relationship.

The SCO Group Inc. had depended on BayStar Capital II LP to give it the financial fuel it needed to pursue its Linux lawsuits, however, the two earlier this year began to fight over control of SCOs direction. BayStar wanted the Unix company to focus on its litigation and discontinue software development.

But in June, the two companies came to terms on what appeared to be to a more-or-less friendly divorce. SCO said it would repurchase the $40 million Series A-1 shares held by BayStar for $13 million in cash several million shares of SCOs common stock. That was until Friday.

According to Justin Meise, BayStar spokesperson, the arranged settlement had not closed due to an "unresolved dispute between the parties," despite a prior announcement by The SCO Group to the contrary.

Further, Meese said that the Larkspur, Calif.-based private equity firm "intends to file an action requesting a declaratory judgment with respect to its rights under the Stock Repurchase Agreement. Until a final determination is made by the court, BayStar maintains its position as a Series A-1 Preferred stockholder of SCO."

In other words, SCO can say what its wants, but BayStar doesnt feel that SCO has lived up to its end of the bargain and theyll be suing SCO as a result.

SCO, had opened up the dispute between itself and its former investor when it announced in a press release earlier in the day that the company considered the repurchase transaction to be closed as of Wednesday. As far as SCO was concerned, its settlement was a done deal.

However, BayStar still has outstanding issues.

"BayStar has notified SCO that it is BayStars position that the repurchase transaction has not closed," because BayStar believed SCO had mislead it on how much money could be made from SCOs IP (intellectual property) licensing division, SCOsource, according to Blake Stowell, Lindon, Utah-based SCOs communications director.

According to SCOs public statements, the amount of revenue is currently slim. In the first quarter of 2004, SCOsource realized only $20,000 and in the last quarter the revenue from IP licensing came to a mere $11,000.

Next page: SCO vs. BayStar Heats Up Again

SCO vs

. BayStar Heats Up Again">

"SCO takes such questions very seriously," Stowell continued, adding that the company stands behind "the accuracy of its public disclosures concerning its SCOsource business."

Stowell stated that SCO hadnt lied about these potential revenues to BayStar. Indeed, SCO had specifically "cautioned in its public disclosures, [that] it has limited experience with its SCOsource licensing initiative, and projecting SCOsource revenue is difficult."

BayStar, according to Stowell, wont consider the "repurchase transaction closed until SCO provides BayStar with confidential information supporting the accuracy of SCOs recent public disclosures regarding its SCOsource business."

Despite its financial relationships with BayStar, SCO isnt willing to provide that information to BayStar, he said, "in order to protect the confidential and proprietary nature of the information." In particular, SCO doesnt want to name the developers and companies with which its having licensing discussions, "to avoid fostering speculation regarding its SCOsource business."

That said, Stowell concluded in SCOs public statement, that, "SCO believes that the stock repurchase agreement with BayStar is effective and binding." SCO has sent BayStar "a stock certificate representing 2,105,263 shares of SCO common stock" and told the firm that its ready to deliver $13 million in cash needed to complete the deal.

Since BayStar is taking SCO to court, BayStar clearly disagrees.

Microsoft introduced BayStar to SCO last year. This move has been seen widely as an effort by Microsoft to fuel SCOs Linux lawsuits.

Meanwhile, BayStar and the Royal Bank of Canada in October came up with $50 million dollars of capital for SCO. The Canadian bank grew disenchanted with its investment and, in May sold the majority of its preferred stock to BayStar.

BayStar, by that time, tried to gain control of SCO. First, BayStar threatened to pull its investment because of SCO had misrepresented its business finances and plans to BayStar. Then, it became clear that rather than simply wanting its funds back, BayStar wanted SCO to focus entirely on its Linux litigation, drop its Unix businesses, and change its management.

Read eWEEK.coms Linux & Open Source Topic Center Editor Steven J. Vaughan-Nichols take on this latest tiff between BayStar and SCO.

SCO refused to go along with this direction shift. The two companies appeared to be heading for a long, bitter battle over control and finance of SCO when on June 1, SCO and BayStar signed the stock-swap agreement that appeared to settle their differences.

Once more BayStar and SCO find themselves at loggerheads and quite possibly on their way to court.

"SCOs efforts to repurchase Baystars shares of SCO seem to be an effort to silence one of SCOs most vocal internal critics," said Allonn Levy, an attorney with Hopkins & Carley in San Jose, Calif. "Now, instead of shoring up its defenses, SCOs repurchase plan looks to have simply created a new public battle for SCO to fight."

Check out eWEEK.coms Linux & Open Source Center at for the latest open-source news, reviews and analysis.

Be sure to add our Linux news feed to your RSS newsreader or My Yahoo page

Rocket Fuel