York proposes to take over SCO's Unix/Linux lawsuits

. . . keeping an eye on the penguin

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Nov. 20, 2007

York Capital Management's proposed Asset Purchase Agreement and its associated credit agreement for SCO make it clear that if the bankruptcy court lets York buy SCO, that York will be bankrolling SCO's continued lawsuits against Novell, IBM and other Linux-using companies.

Groklaw published the APA and its associated credit agreement during the last few days. The most interesting aspects of the proposed deal are in the credit agreement.

York, a private equity firm, is offering a complex purchase agreement for SCO. While the total amount of the deal comes to $36 million, a close look reveals SCO would get $10 million in cash and what amounts to a $10 million line of credit to use to continue its legal fights with Novell and IBM.

This $10 million "Litigation Credit Facility" is specifically so that SCO can fund the "Specified Litigation." And what is that? The APA (PDF link) spells it out: "The IBM litigation and the Novell Litigation and all appellate, supplemental and/or collection proceedings related thereto." As Pamela Jones, Groklaw's editor, aptly described this proposed SCO bankruptcy bailout, "This isn't a reorganization plan. It's York funding SCO's litigation lottery."
York's proposed line of credit is called--and no we're not making this up--a Senior Secured Super-Priority Debtor-in-Possession Credit Agreement. What this amounts to is that, in the event that SCO goes back into bankruptcy. York would get its loan money out of what was left of the company ahead of any and all other debtors and without having to go through the bankruptcy courts.

As proposed, even if Novell wins the last pieces of its case in Utah over SCO using Unix licensing fees, which SCO owed Novell, to pay for its IBM and Novell lawsuits, York would still get the money. In short, York is willing to loan SCO litigation funding but only with the smallest risk possible.

This can also be seen in many of the other terms of the York agreement. York, not SCO, will be paying SCO's legal bills; SCO won't be allowed to start any new lawsuits and SCO can't sell off any assets or merge or set up subsidiaries or settle any litigation without first consulting York. In addition, York gets to restrict what SCO can do with its stock and what it can buy in the way of assets. In short, York will get from SCO what BayStar Capital was unable to get in 2004, a company that exists solely to pursue its Unix and Linux lawsuits.

While you would be hard pressed to find anyone who believes SCO's claims that Unix code is hidden within Linux after almost five years of lawsuits without any real evidence, York, if it can get the bankruptcy court to approve its bid for SCO, is willing to take a small bet that somehow profits may yet be reaped from SCO's lawsuits.

The U.S. Bankruptcy Court in Delaware will hold a hearing on the proposed sale on Dec. 5.

Steven J. Vaughan-Nichols

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