BayStar seeks to retrieve investment in SCO

BayStar Capital is seeking to get back the $20 million it invested in the SCO Group, raising issues for SCO's expensive and controversial legal campaign that argues Linux infringes its Unix copyrights.

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Stephen Shankland

April 16, 2004 5:57 p.m. PT

3 min read

BayStar sent SCO a letter Thursday "requesting that SCO immediately redeem BayStar's 20,000 shares of SCO's Series A-1 Convertible Preferred Stock," SCO said in a statement Friday. SCO disputes the basis of BayStar's request, that SCO breached terms of a Feb. 5, 2004, exchange agreement by which SCO exchanged one type of preferred stock BayStar owned for another.

News.context

What's new:
BayStar Capital is seeking the return of $20 million it invested in the SCO Group.

Bottom line:
The Royal Bank of Canada, which also chipped in $30 million, could follow suit. The funding was considered crucial to SCO's expensive legal attack on Linux.

For more info:
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The move represents a serious threat to a $50 million investment that SCO described as a "war chest" it would use against Linux. The Royal Bank of Canada, which chipped in $30 million, could follow suit.

RBC is keeping its options open. "We haven't requested a redemption. We're reviewing the situation and will arrive at a decision shortly," said spokesman Paul Wilson.

The new dispute adds another front to SCO's battles with the open-source community and the companies it has sued, said RedMonk analyst Stephen O'Grady. "I don't think this is going to make SCO investors feel real good," he said.

Indeed, the news sent SCO's stock down $1.29, or 13 percent, to a closing price of $8.37.

BayStar said SCO breached four sections of an agreement that exchanged BayStar's shares from one type of preferred stock to another--specifically, 2(b)(v), 2(b)(vii), 2(b)(viii) and 3(g). The sections govern: the truth of SCO's "representations and warranties" of the original investment agreement; the disclosure of adverse changes such as the seeking of bankruptcy protection; the disclosure of materially significant events that legally must be published; and requirements around press releases and a regulatory filing describing the exchange agreement.



		Download the exchange agreement This is the Feb. 5, 2004, agreement that BayStar alleges the SCO Group breached. BayStar accused SCO of violating Sections 2(b)(v), 2(b)(vii), 2(b)(viii), and 3(g).

However, "SCO does not believe it has breached any of the referenced provisions," SCO said, and therefore, "SCO does not believe it is obligated to redeem BayStar's shares."

Stowell said BayStar didn't detail how it believes SCO violated the agreement.

BayStar invested $20 million and the Royal Bank of Canada $30 million in an October transaction that has been instrumental to SCO's legal fight against Linux.

BayStar spokesman Bob McGrath declined to comment further on BayStar's request.



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SCO has sued AutoZone, DaimlerChrysler and IBM in connection with its allegations that Linux, a widely used operating system, violates its Unix copyrights. Novell, an earlier owner of Unix, argues it still owns the copyrights, a matter that's the subject of another SCO lawsuit.

In its most recent quarter, SCO spent $3.4 million on the legal case.

The investment has been crucial to raise cash for SCO's operations. "A year ago we had (about) $6 million, and now we have $60 million--$50 million of that coming in through the investment. We have a war chest to defend our rights and to fight our claims in the courtroom," Chief Executive Darl McBride said in a March interview.