UPDATED: SCO's investors grab the helm off legals

By Matt Whipp

Posted on 9 Dec 2003 at 16:37

SCO has announced a new agreement which gives its investors effective control of the company's legal efforts.

The agreement, issued today in an SEC filing, also means that SCO must seek prior approval from the investors before embarking on any action that would result in SCO's legal firms receiving its 20 per cent contingency fee.

This agreement will remain for as long as BayStar Capital and RBC remain with two thirds of outstanding Series A Convertible common stock and that that stock continues to be vaued at five per cent or more of common stock (on conversion). BayStar Capital and RBC bought $50mn of such shares worth 17.5 percent of outstanding shares, according to Gartner.

SCO's PR Director Blake Stowell indicated that SCO might have to dig into its own pockets to pay the law teams if the investors veto legal proceedings. 'Lawyers have to be paid one way or another. You can pay them in stock, with a fee... but they'll have to be paid.'

The delay in finalising the agreement between SCO, its legal firms, led by Boies, Schiller and Flexner, and investors BayStar Capital and the Royal Bank of Canada (RBC), and accounting for the latters' investment, has caused the rescheduling of the company's full year results to 22 December.

SCO's PR Director Blake Stowell told us that now 'everything was in order, apart from finalising that investment,' which will be completed before 22 December.

Speculation about SCO taking in external auditors to finalise its accounts suggested that the investors were concerned with the relationship between SCO and its legal firms. In particular the stockholders were worried when it was revealed that the law firm was to receive $1mn in cash and 400,000 shares, worth some $8mn.

In addition to this, SCO's legal teams also earned $1.6mn 'in connection with certain licensing arrangements', according to other documents associated with the SEC filing. Stowell was unable to expand on nature of these arrangements for us.

The new deal will, it is hoped, allay speculation about the relationship. When SCO announced it was deploying its legal teams to pursue SCO's IP claims against end users of the Linux operating system, Gartner's George Weiss wrote that 'mounting financial pressures have forced SCO to find alternatives to pay Boies, Schiller & Flexner' and predicted 'the legal and financial aspects of the intellectual property infringement cases will absorb the company's attention, and [the] law firm will be in an increasingly powerful position to set the overall agenda for its compensation.'

However, BayStar Capital and RBC taking the power of veto over SCO's IP claims doesn't return power to the SCO boardroom. Rather it could leave the company in a tight spot if its legal firms pitch for more contingency actions and investors simply don't want to play ball.

The SEC filing, also revealed that SCO is serious about pursuing 'potential claims' arising out of a 1994 USL/BSDI settlement - it has hired Boise, Schiller & Flexner to do just this.

Furthermore, Kevin McBride, brother of SCO CEO Darl McBride, is an attorney at Angelo, Barry & Boldt - one of two other legal teams hired by SCO to represent the company on its litigation. However, Boies, Schiller & Flexner have 'sole discretion' to handle further financial arrangments between SCO and its Utah counsel - presumably to build a glass wall between Darl McBride and his brother so that these relationships are seen as above board. However, Stowell said that the arrangement was more about simplifying the way SCO dealt with its legal firms.