Back to scofacts Yarro case files.

Disclaimer: Al Petrofsky is not your attorney at law. In fact, he's not licensed to practice law in any state of the Union. He has a B.S. in Electrical Engineering and Computer Science from U.C. Berkeley and an expired stock broker's license from the NASD, but he is not your electrician nor your financial advisor. He's just an award-losing free-lance journalist with a notary public background who has been retained by scofacts.org to write something here occasionally, so as to counter complaints that "all you have is a bunch of records". Further disclosure (including the size of his short position in SCO's common stock) can be found at http://scofacts.org.

2005-03-07

Case Settled?

Late this afternoon, the following entry was added to the docket listing of the Yarro case:

  03-07-05 04 DAY PRELIMINARY INJUNCTION Cancelled.                               
           Reason: Case Settled.                                          

I didn't notice this until just after 5:00 P.M. Mountain Time, and thus I wasn't able to get any confirmation from the court, nor was I able to reach anyone at Canopy.

There could be some mistake, but it seems likely that the entry means just what it appears to say: that the four-day hearing scheduled for tomorrow through Friday has been canceled, and the case has been settled.

2005-02-16

Some background

The SCO Group's largest investor is The Canopy Group, Inc., the venture capital firm founded by Ray Noorda when he left Novell. Canopy owns about 30% of SCO's outstanding common stock. Since 2000, SCO's chairman, Ralph Yarro, has been one of Canopy's three directors, along with Ray Noorda and his wife Lewena Noorda. Until late last year, Yarro was also the undisputed president of Canopy.

Since December 17, however, two men have been claiming to be the real president of Canopy: Mr. Yarro and William Mustard. Their competing legitimacy claims arise from a contested vote count at the board meeting that day: Mustard says that the Noordas outvoted Yarro two-to-one to enact resolutions that dismissed Yarro from the presidency and installed Mustard as his replacement. Yarro says that Ray Noorda (who has Alzheimer's disease) was incompetent to vote, and thus the vote count was one-to-one, falling shy of the majority required to enact the resolutions.

Apparently with the advantages of surprise and a private security force, Mustard won the initial ground war on December 17 and has been recognized ever since as the de facto president, at least within the borders of the Canopy homeland at 333 S 520 W Ste 300, Lindon UT 84042. However, at upcoming stockholders' meetings of the corporations in which Canopy has invested (such as SCO), it's possible that some of those corporations will continue to recognize President Yarro rather than President Mustard as the person with the authority to vote Canopy's shares.

Yarro (and two other allegedly dismissed Canopy officers) filed a suit on January 20 seeking, among other things, a judgment declaring that all actions purportedly taken at the December 17 meeting are of no effect.

On January 25, a suit was filed by Canopy seeking, among other things, the return to Canopy of more than $20 million of allegedly improper compensation that was received by Yarro and his associates. The complaint was not actually submitted to the court by Canopy, but by lawyers from the Ballard Spahr law firm claiming to be attorneys for Canopy. This is the same firm that is representing Mustard as a defendant in the first case, and I'm guessing that the engagement agreement between Canopy and Ballard Spahr was signed on behalf of Canopy by purported President Mustard rather than by purported President Yarro.

The Denial of a Temporary Restraining Order

On Friday January 28, Yarro scheduled a temporary restraining order hearing for the following Monday at 09:15. On Sunday, Yarro served on Mustard and the other defendants a motion for a temporary restraining order "restoring the parties to the status quo that existed prior to the void actions taken on December 17, 2004", along with a 38-page supporting brief and over 100 pages of affidavits and assorted exhibits. On Monday morning, despite having only 0.25 normal business hours in which to prepare a response, the defendants came to court with a 47-page memorandum and over 150 pages of supporting filings.

Judge Anthony Schofield heard arguments for an hour and a half and then told the attorneys to return in the afternoon after he had reviewed the lengthy submissions. In the afternoon, he announced that he would not issue a temporary restraining order, and a four-day hearing was scheduled for March 8 through March 11 (Tuesday through Friday) on the question of a preliminary injunction. Here is the transcript.

I don't have a transcript or recording of the morning session, and I'm told that it will not be released until Judge Schofield has had a chance to consider a request that the record of some or all of that session be sealed. In the afternoon session, reference is made to discussion in the morning of a motion to disqualify the defendants' counsel. Anthony Kaye, for the defendants, then tells the judge "I THINK THIS DISQUALIFICATION ISSUE COULD BE SOMEWHAT MORE OF A BATTLE THAN YOU ARE PROBABLY HOPING FOR" and indicates that his side will, in turn, be looking into disqualifying the other side's counsel.

Subsequent docket entries

The docket listing of the Yarro case shows that a motion to consolidate was filed yesterday (February 15). The docket listing of the Canopy case shows that a motion "to Remove Ralph J. Yarro III as Director" was also filed yesterday. I don't yet have copies of either of these.

The dockets also state that Snell & Wilmer, IBM's local Utah counsel in the SCO v. IBM case, has ordered complete copies of both case files.

Selections from the transcript

Here are some selections from the transcript of the afternoon session on Monday January 31.

Some background, and the principal ruling:

I'M PREPARED TO ISSUE A RULING ON THE PLAINTIFFS' REQUEST FOR A TEMPORARY RESTRAINING ORDER IN THIS MATTER. I NOTE THAT AT ISSUE IN THIS TRO PROCEEDING IS WHO IS GOING TO SERVE AS THE OFFICERS OF THE CANOPY GROUP, WHICH IS A CLOSELY HELD CORPORATION.

...

I DON'T THINK THAT AT THIS JUNCTURE I HAVE TO AND I DO DECLINE TO MAKE A DETERMINATION ON THE RIGHTS OF ANY OF THE THREE DIRECTORS TO HAVE VOTED ON ANY OF THE SIX RESOLUTIONS, BUT I NOTE THAT THE DISINTEREST OF EACH IS IN QUESTION. NOW, YARRO AND THE OTHER PLAINTIFFS ASSERT THAT MR. NOORDA IS SUFFERING FROM ALZHEIMERS, A CLAIM THAT THE DEFENDANTS HAVE CONCEITED HERE THIS MORNING. PLAINTIFFS ASSERT THAT HE, MR. NOORDA, APPEARED TO HAVE BEEN COACHED AT THE TIME THAT HE SECONDED THE MOTION AT THE DIRECTOR'S MEETING, AND THEY BELIEVE HIS ACTION MAY NOT HAVE BEEN WITH CAPACITY. THEY SUPPORT THIS CLAIM WITH THE AFFIDAVITS OF A NUMBER OF PRESENT OR FORMER CANOPY EMPLOYEES AND OTHERS DESCRIBING THEIR OBSERVATIONS OF AND APPARENT MARKED DECREASE IN MR. NOORDA'S MENTAL FUNCTIONING.

...

THAT BRINGS ME SQUARELY TO WHAT I THINK IS THE ISSUE HERE TODAY: DOES YARRO, MR. YARRO, HAVE A POTENTIAL INJURY IF CANOPY IS MISMANAGED BY MR. MUSTARD? THERE IS CLEAR ALLEGATIONS THAT MR. MUSTARD HAS OPERATED WITH A HEAVY HAND AND OTHERWISE HAS CAUSED A GREAT DEAL OF FRUSTRATION WITH PRIOR EMPLOYEES, A NUMBER OF WHOM HAVE TERMINATED EMPLOYMENT. I'VE READ THEIR AFFIDAVITS. I THINK THERE HAS CERTAINLY EVIDENCE BEEN ESTABLISHED BY THE PLAINTIFFS THAT THEY WILL SUFFER AN INJURY, OR THAT MR. YARRO MAY SUFFER AN INJURY IF HE IS -- AS A SHAREHOLDER -- IF HE IS NOT ALLOWED TO REMAIN IN CONTROL BECAUSE IT APPEARS THAT CANOPY WAS MAKING A LOT OF MONEY WHEN HE WAS RUNNING IT, AND THERE IS AT LEAST SOME REASON TO QUESTION WHETHER IT WILL DO AS WELL UNDER MR. MUSTARD'S MANAGEMENT.

BUT THE QUESTION IS, IS THAT AN IRREPARABLE INJURY? I DON'T REALLY THINK SO. I DON'T THINK SO BECAUSE, FIRST, I THINK IT CAN BE RESOLVED OR COMPENSATED BY A MONEY JUDGMENT AFTER THE FACT. AND, SECOND, I DON'T THINK I HAVE THE ABILITY, ON THE EVIDENCE THAT I HAVE TODAY, TO DETERMINE THE EXTENT OF ANY POTENTIAL INJURY TO MR. YARRO AS A SHAREHOLDER. I THINK THAT'S THE ONLY POTENTIAL INJURY THAT THIS COURT CAN LOOK AT BECAUSE I DON'T THINK THAT HE CAN ASSERT CLAIMS ON BEHALF OF THE PORTFOLIO COMPANIES, AND I DON'T THINK HE CAN ASSERT CLAIMS ON BEHALF OF OTHER EMPLOYEES. HE CAN ONLY ASSERT CLAIMS ON HIS OWN BEHALF, AND THOSE ARE HIS EMPLOYMENT, WHICH WAS EMPLOYMENT AT WILL, AND HIS SHAREHOLDER STATUS UNDER THE SHAREHOLDER AGREEMENT.

PARAGRAPH (E)(4) REQUIRES THE PLAINTIFFS TO ESTABLISH A SUBSTANTIAL LIKELIHOOD OF PREVAILING ON THE MERITS. THAT REALLY GETS TO THE QUESTION OF WHAT WAS MR. NOORDA'S CAPACITY OR PHYSICAL OR MENTAL CONDITION ON 12/17. I'M CERTAIN SOMEBODY KNOWS WHAT IT WAS, BUT I DON'T KNOW WHO KNOWS, AND I DON'T KNOW WHO CAN PROVE WHAT HIS CAPACITY WAS AT THAT TIME. IT CERTAINLY SEEMS TO ME IT'S A PRETTY TOUGH HILL THAT THE PLAINTIFFS HAVE TO SLED UP TO PROVE THAT AT THAT DATE HE HAD SUCH SIGNIFICANT INCAPACITY THAT HE WAS UNABLE TO VOTE OR ACT IN THAT SHAREHOLDERS' -- OR DIRECTOR'S MEETING.

FURTHER, I THINK THAT FOR PURPOSE OF TODAY'S HEARING, I'M PERSUADED THAT THE STANDARD OF PROOF ON THE ISSUE OF HIS CAPACITY IS CLEAR AND CONVINCING EVIDENCE. I DON'T THINK THE PLAINTIFFS HAVE ESTABLISH BY CLEAR AND CONVINCING EVIDENCE THAT THERE'S A LIKELIHOOD HE WAS INCAPACITATED ON THAT DAY. I DON'T SEE HOW IT CAN BE EASILY ESTABLISHED. I'M NOT SURE IT CAN BE ESTABLISHED BY AFTER-THE-FACT MEDICAL EVIDENCE. IT'S CLEAR THE VARIOUS AFFIDAVITS RAISE THE ISSUE, BUT NON ALONE, NEITHER ALTOGETHER, DO I BELIEVE THEY ARE DISPOSITIVE OR PROVIDE ADEQUATE EVIDENCE.

WITHOUT EVIDENCE OF HIS STATUS ON THE 17th OF DECEMBER, THERE ARE THREE DIRECTORS. IF HE HAS CAPACITY, IF HE HAD CAPACITY ON THAT DATE, THE ACTIONS OF THE BOARD REMOVING THE THREE OFFICERS MUST STAND BECAUSE IT WOULD BE THE VOTE OF TWO-TO-ONE. IF HE DOES NOT -- DID NOT HAVE CAPACITY, THE ACTIONS OF THE BOARD MUST FAIL, AS THERE WOULD BE AT BEST A ONE-TO-ONE TIE. AND THAT MEANS THAT UNDER THE SHAREHOLDER AGREEMENT, WHICH REQUIRED A SIMPLE MAJORITY VOTE, TIES -- A TIE IS A LOSS. A TIE IS NOT A VICTORY.

IT SEEM THAT WHAT IS THE CRITICAL ISSUE IS WHAT WAS THE CAPACITY OF MR. NOORDA ON THE 17th OF DECEMBER. I CERTAINLY DON'T BELIEVE THAT I HAVE ADEQUATE EVIDENCE TO ESTABLISH OR DETERMINE THAT AT THIS JUNCTURE. THIS BRINGS ME TO THE SECOND LEG OF SUBSECTION (4)(E) THAT THE CASE PRESENTS SERIOUS ISSUES. WELL, IT DOES. SEEMS TO ME IT'S A VERY SERIOUS ISSUE WHEN PEOPLE COME TO COURT TODAY AND SAY, ONE SIDE SAYS "JUDGE, WE WANT OUR MAN IN RUNNING THE COMPANY."

THE OTHER MAN SAYS, "JUDGE, WE WANT OUR MAN IN RUNNING THE COMPANY."

WHAT WE HAVE IS COMPETING CLAIMS TO MANAGE THE CORPORATION. THE QUESTION IS: SHOULD I PUT MR. MUSTARD OUT AND MR. YARRO BACK IN, ONLY TO HAVE A HEARING IN THE NEXT 10 TO 30 DAYS ON A PRELIMINARY INJUNCTION, THEN PUT, POTENTIALLY, MUSTARD BACK IN AND YARRO BACK OUT? THAT SEEMS ILL ADVISED TO ME. I'VE GIVEN CAREFUL CONSIDERATION, MR. PRESTON, OTHERS, I SIMPLY DON'T BELIEVE ON THE EVIDENCE THAT I HAVE HERE THAT I'M PREPARED TO COMPEL A CHANGE IN MANAGEMENT. I DON'T BELIEVE THAT THE PLAINTIFFS HAVE ESTABLISHED IRREPARABLE INJURY, OR THE SUBSTANTIAL LIKELIHOOD OF PREVAILING ON THE MERITS SUFFICIENT FOR ME TO GRANT A TEMPORARY RESTRAINING ORDER.

I RECOGNIZE THIS RAISES SERIOUS ISSUES. I RECOGNIZE THAT THERE IS A CLAIM, AND IT APPEARS IT MAY BE MORE THAN A CLAIM, THAT A NUMBER OF FOLKS ARE SERIOUSLY CONCERNED ABOUT THE CURRENT DIRECTION OF CANOPY, MEANING, THE CURRENT DIRECTION MANAGEMENT IS TAKING IT. BUT I DON'T BELIEVE UNDER THESE CIRCUMSTANCES THAT I'VE REVIEWED WITH A WHOLE DAY'S WORTH OF REVIEW, A BETTER PART OF A DAY'S WORTH OF REVIEW, THAT I -- THAT THE STANDARD HAS BEEN MET TO A POINT THAT I'M PREPARED TO CHANGE MANAGEMENT.

Scheduling the preliminary injunction hearing:

I AM PREPARED TO GIVE YOU A HEARING DATE IN A REASONABLY SHORT TIME, AND UNDER THE RULES TO MOVE OTHER CASES TO FIND YOU A HEARING DATE ON AN APPLICATION FOR A PRELIMINARY INJUNCTION, AND I'M HAPPY TO TALK ABOUT SCHEDULING, ABOUT DISCOVERY, AND ANY OTHER ISSUES YOU WANT TO TALK ABOUT ...

...

I'M PREPARED TO GIVE YOU ALL DAY THOSE FOUR DAYS, THE 8TH, 9TH, 10TH, 11TH. WE CAN BEGIN AT 8:30 EVERYDAY. I WILL MOVE WHAT I ALREADY HAVE SCHEDULED THOSE FOUR DAYS.

On the actions Mustard has been taking in accordance with the disputed Canopy board resolution (see last item of resolution number 2), that "the Company shall take all available action to remove Mr. Yarro from all positions he holds as an employee, officer, director or consultant of any of the entities in which the Company holds an interest":

MR. PRESTON [for Yarro et al.]: WE ARE CONCERNED ABOUT THE CONTINUED REMOVAL OF MY CLIENT ON THESE PORTFOLIO COMPANIES. THERE'S -- THAT IS SERIOUS DAMAGE THAT THEY ARE FACING. IS THAT -- I'D LIKE TO KNOW WHETHER THE COURT IS -- WOULD BE WILLING TO CONSIDER THAT THAT BE HELD IN ABEYANCE UNTIL WE HAVE THIS PRELIMINARY INJUNCTION HEARING?

MR. KAYE [for Mustard et al.]: DO I NEED TO RESPOND TO THAT?

THE COURT: YES. GO AHEAD.

MR. KAYE: THEN THAT WOULD AFFECTIVELY BE DEPRIVING CURRENT MANAGEMENT OF CONTROL OF CANOPY. THE BOARD MEMBERS OF CANOPY CAN EXERCISE ITS INTEREST IN COMPANIES TO REMOVE BOARD MEMBERS. IT OUGHT TO BE ABLE TO DO THAT. AND THERE'S -- THIS GETS BACK TO THE ISSUE OF WHETHER OR NOT THE PORTFOLIOS ARE SUFFERING IRREPARABLE INJURY BY HAVING A CHANGE IN THE STATUS OF THEIR CONTROL.

IF MR. PRESTON AND HIS CLIENTS PREVAIL IN SIX WEEKS, THEY CAN GO BACK AND RE-ESTABLISH THEMSELVES ON THE BOARDS OF THOSE COMPANIES. IN THE MEANTIME, IF YOU ARE NOT ISSUING A TRO, IT SEEMS TO ME IMPLICIT IN THAT DENIAL THAT YOU ARE NOT PLACING RESTRAINTS ON THE ABILITY OF CANOPY TO BE MANAGED BY ITS CURRENT MANAGERS IN THE MANNER BEST DEEMED FIT BY ITS CURRENT MANAGER.

THE COURT: WELL, IT'S MY VIEW, MR. PRESTON, THAT I DON'T THINK I'M -- IN HAVING DENIED YOUR REQUEST FOR TRO, I DON'T THINK I'M IN A POSITION TO NOW SAY, "WELL, MR. MUSTARD DO THIS OR DON'T DO THAT." AND I REALLY AM DISINCLINED TO DO SO. IF THERE'S A LEGITIMATE REASON TO REMOVE HIM, I SUPPOSE HE MAY MAKE THAT DECISION. IT CERTAINLY SEEMS TO MAKE SENSE THAT IF THERE'S NOT A LEGITIMATE REASON TO REMOVE HIM, WE OUGHT TO LEAVE AS MUCH AS THE STATUS QUO SIMPLY BECAUSE IT MAY PRESERVE MORE AMICABLE WORKING RELATIONSHIPS, BUT I AM NOT GOING TO SIMPLY ENTER AN ORDER THAT MANAGEMENT MUST DO THIS, THAT, OR THE OTHER. I THINK THAT MANAGEMENT IS WHO MANAGEMENT IS.

IN THAT SENSE, I'VE RULED AGAINST YOU, AND I'M NOT -- REALLY NOT CHANGING MY MIND.

On examining Noorda:

MR. PRESTON [for Mustard et al.]: WE ARE INTERESTED ABOUT WHETHER OR NOT MR. NOORDA WILL BE REQUIRED TO ATTEND THIS HEARING. WITH THE ISSUES THAT HAVE BEEN RAISED, WHETHER WE NEED TO DO AN IME OR A COMPETENCY EXAMINATION, THOSE ARE ISSUES WHICH I'M NOT SURE WE'LL BE ABLE TO REACH AN AGREEMENT AT. I WOULD LIKE THE COURT'S INPUT ON THAT.

THE COURT: UNLESS YOU WANT TO SAY SOMETHING, I WILL SIMPLY SAY, IT'S MY VIEW THAT THIS STARTED OUT ON DECEMBER THE 17th AS A SQUABBLE, OR A FIGHT, OR A DISAGREEMENT BETWEEN MR. AND MRS. NOORDA OSTENSIVELY ON ONE SIDE, AND MR. YARRO ON THE OTHER. I AM GOING TO REQUIRE THAT MR. NOORDA, IF REQUESTED, SUBMIT TO ANY -- TO A REASONABLE EXAMINATION BY THE PLAINTIFFS. THERE'S CLEARLY ENOUGH IN THE AFFIDAVITS TO MAKE ONE WONDER ABOUT HIS COMPETENCE. I THINK THAT'S A CRITICAL ISSUE. I THINK THEY ARE ENTITLED TO DISCOVERY ON THAT ISSUE, INCLUDING APPROPRIATE MEDICAL EXAMINATION.

On disqualifying counsel:

MR. KAYE [for Mustard et al.]: BASED ON THE DISCUSSIONS THIS MORNING, ONE CONCERN I HAVE IS A MOTION TO DISQUALIFY COUNSEL.

THE COURT: I EXPECT THAT'S LIKELY COMING.

MR. KAYE: AND THAT WOULD -- ASSUMING THAT GETS GRANTED, WHILE WE'RE IN THE MIDDLE OF DISCOVERY PREPARING FOR HEARING ON THE 9TH, THAT WOULD OBVIOUSLY PREJUDICE OUR CLIENTS' RIGHTS TO PUT ON THEIR CASE.

THE COURT: I UNDERSTAND. WE'LL DEAL WITH WHATEVER COMES WHEN IT COMES. I DON'T KNOW HOW I CAN FORECAST EITHER HOW I'M GOING TO RULE BECAUSE I DON'T HAVE ANY IDEA ON HOW I WOULD RULE ON SUCH A MOTION, BUT I DO UNDERSTAND THAT IT MAY HAVE A POTENTIAL IMPACT. WE'LL JUST DEAL WITH IT.

...

MR. KAYE: ONE DISCOVERY ISSUE THAT MAY COME UP BECAUSE I THINK THIS DISQUALIFICATION ISSUE COULD BE SOMEWHAT MORE OF A BATTLE THAN YOU ARE PROBABLY HOPING FOR.

THE COURT: NO. I --

MR. KAYE: ONE OF THE THINGS WE'RE GOING TO ASK FOR DISCLOSURE FROM SNOW, CHRISTENSEN IS THEIR PRIOR REPRESENTATION OF CANOPY AND ANY PORTFOLIO COMPANIES BECAUSE WE ARE AWARE OF THEIR HAVING REPRESENTED BOTH IN PREVIOUS ACTIONS, AND THEIR KNOWLEDGE THAT THEY GAINED OF CANOPY MANAGEMENT, AND THEIR, YOU KNOW, MENTAL FACULTIES, WHICH ARE ISSUES IN THIS CASE, WOULD ALL BE CLEARLY RELEVANT.

SO THAT'S SOMETHING, IF WE'RE GOING TO GO DOWN THIS DISQUALIFICATION ROUTE, I WOULD LIKE TO ASK FOR A QUICK TURN AROUND, IF WE PUT A REQUEST TO SNOW, CHRISTENSEN OF THAT INFORMATION.

THE COURT: I SIMPLY AM NOT -- ALL I'M ASKING AND DIRECTING IS THAT COUNSEL BE PROFESSIONAL AND COOPERATIVE. AND PAST THAT, I THINK WE'VE GOT TO SEE WHERE EACH SIDES DECIDES IT WANTS TO GO IN THE NEXT WHILE.

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