May 7, 2004 12:09 PM PDT

Canadian bank backs away from SCO

The Royal Bank of Canada has sold two-thirds of its investment in the SCO Group to co-investor BayStar Capital, giving the hedge fund more power in its search for major changes at the Unix company.

In October, RBC invested $30 million, and BayStar invested $20 million in SCO. The funding was a major shot in the arm for SCO's expensive legal campaign, which argues that companies using Linux are violating its Unix intellectual property rights. Now, the Canadian bank has sold 20,000 of its 30,000 preferred shares to BayStar and converted the remaining 10,000 into common stock that can be sold, SCO spokesman Blake Stowell said Friday.


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The conversion price was $13.50 per share, which gives RBC 740,740 shares of SCO's common stock, SCO said. The move doesn't affect SCO's cash position, according to Stowell.

"The timing and price of our purchase of RBC's holdings in SCO presented a strategic and financial opportunity for BayStar and its investors," a BayStar representative said, declining to discuss the motivation or terms of the sale.

RBC spokesman Paul Wilson confirmed the transactions but declined to detail the bank's motives other than saying, "It's a business decision."

After the conversion, SCO has 15.2 million shares outstanding, of which RBC holds 4.8 percent, SCO said. Because SCO's common stock is more liquid than the preferred shares, RBC's conversion is an essential step toward selling its complete stake in SCO, if it chooses.

The move consolidates more power at BayStar, which is seeking major changes at SCO. The move gives the Larkspur, Calif., investment firm 40,000 of the 50,000 preferred shares originally issued in the October investment.

In April, BayStar said it wants new management at SCO and a focus on its intellectual-property claims rather than its Unix products business. It reinforced its demands with a request to retrieve its investment in SCO.

SCO's stock price was largely unchanged Friday, dropping 2 cents to close at $5.99.

In SCO's most recent quarter, it spent $3.4 million on legal bills and other expenses from the SCOsource effort to profit from its Unix intellectual property. The company has sued Linux user AutoZone, Unix licensee DaimlerChrysler and Linux advocate IBM, in connection with the case, and is fighting Novell's claim that it never sold the Unix copyrights to SCO.

SCO is also demanding that Linux users buy intellectual-property licenses, but open-source software advocates have adamantly denied SCO's claims that Linux infringes on Unix copyrights.

Because of RBC's move, BayStar now holds new power over settlements or other major outcomes of SCO's controversial intellectual-property case.

SCO hired the law firm of Boies, Schiller & Flexner to pursue the case, and a December agreement gives the firm a contingency fee of 20 percent of payments from licenses, settlements, legal judgments or an acquisition of SCO.

However, that agreement required SCO to give BayStar and RBC power over several such deals that could involve a contingency payment. According the agreement, SCO is prohibited from completing any settlement, acquisition of SCO or investment in SCO, unless the holders of two-thirds of the preferred shares give written approval.

Previously, when RBC held 60 percent of the preferred shares, and BayStar had 40 percent, neither party had more than two-thirds. Now, BayStar holds all the preferred shares.

 

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