BayStar Asks SCO for Money Back – Now

The SCO Group late Friday disclosed that one of its investors is extremely unhappy — and wants its money back. But the Lindon, Utah-based Unix provider apparently isn’t going to resolve the legal controversy without a fight, at least for now.

In a letter released to other investors by SCO, BayStar Capital requested that SCO immediately redeem BayStar’s 20,000 shares of SCO’s Series A-1 Convertible Preferred Stock.

The letter — posted on SCO’s site — asserts that BayStar is entitled to the redemption of its shares under an article of the series A-1 convertible preferred stock.

Breach of Agreement?

The letter alleges that SCO has breached sections of the exchange agreement dated February 5, 2004, among SCO, BayStar and the Royal Bank of Canada. The bank also holds shares of SCO’s Series A-1 Convertible Preferred Stock.

“BayStar’s letter did not provide specific information regarding SCO’s alleged breaches of the Exchange Agreement,” said the company. “SCO is attempting to obtain specific information from BayStar and is evaluating its obligations and options with respect to the redemption notice.”

However, SCO does not believe it has breached any of the referenced provisions of the Exchange Agreement. “As a result, SCO does not believe it is obligated to redeem BayStar’s shares of Series A-1 convertible preferred stock,” the company said.

The history of the problems in the relationship between the companies appears to span only four months or so, according to a document filed with the U.S. Securities and Exchange Commission obtained by LinuxInsider.

On December 8, 2003, SCO entered into a letter agreement with BayStar Capital and Royal Bank of Canada, the investors that participated in SCO’s US$50 million private placement of shares of Series A Convertible Preferred Stock completed in October 2003.

Another Contested Issue

This letter of agreement was also “acknowledged” by Boies, Schiller & Flexner LLP, one of the law firms representing SCO in its efforts to enforce its intellectual-property rights. The firm is headed by David Boies, the activist lawyer who led former Vice President Al Gore’s unsuccessful effort to contest the election results in the state of Florida during the 2000 presidential election.

“The letter agreement provides that SCO will not complete a transaction or take any action that could result in a claim for a contingency payment by the law firms, other than contingency payments for licenses not entered into as part of any settlement of litigation or sale of SCO, without first obtaining the consent of the private placement investors holding at least two thirds of the shares of SCO’s outstanding Series A Convertible Preferred Stock,” said the statement on file with the SEC.

SCO’s Obligation to the Consent

“SCO’s obligation to obtain the consent of the investors will terminate automatically if and when the aggregate number of shares of SCO’s common stock issuable upon conversion of all outstanding shares of Series A Convertible Preferred Stock held by the Investors fails to equal or exceed five percent of SCO’s outstanding shares of common stock as of December 8, 2003,” said the statement.

Based in San Francsico, BayStar Capital is a private equity “crossover fund” that makes direct investments in late-stage privately held companies and small- to medium-cap publicly traded companies across all sectors. The company recently fended off allegations about its management and operational style, according to the London-based Financial Times newspaper.

But, to be sure, there have been major news developments between Novell and SCO that might have had a negative impact on SCO and thrown into doubt SCO’s ownership claims about its intellectual property. Novell registered Unix copyrights last year, and a host of letters were sent between the two companies. In January of this year, SCO filed suit against Novell for claiming it retained ownership of parts of Unix.

SCO’s stock closed at $8.37 Friday, down a dramatic 13.35 percent, when SCO announced the receipt of the letter from the San Francisco investor.

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  • While this is of some interest, as it’s the financial dealing of "the world’s most hated software company", anyone who has been paying attention knows that Baystar Capital is the venture company that was introduced to SCO by Microsoft. This seems to me to be an important aspect of the story and yet there is not one metion of Microsoft.
    What does this mean exactly? Does SCO have enough $$$ after redeeming these shares to continue their obviously very costly legal strategy? Is Microsoft changing their strategy in relation to the Linux threat? The public wants to know!!

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