The two companies have fallen out over the terms of an agreement to convert BayStar’s 40,000 shares of Lindon, Utah-based SCO’s Series A-1 convertible preferred stock into $13m in cash and just over two million shares of common stock.

SCO announced on Friday that it had received approval for the conversion from the Securities and Exchange Commission and that it considered the transaction closed. BayStar responded that it still had questions it wanted answered regarding SCO’s SCOsource intellectual property business, that it did not consider the matter closed, and that it was prepared to file an action requesting a declaratory judgment to protect its rights.

According to SCO, BayStar is unhappy that SCO’s recent public statements about SCOsource licensing opportunities do not match with statements previously made by SCO to BayStar. This is contrary to a statement made by BayStar in early June that it was satisfied with SCO’s management team, operating plan, and litigation management, following earlier calls from the investor for SCO to change its management and business plan.

SCO has denied that its public disclosures are in any way inconsistent with those made to BayStar and declined to provide BayStar with any more information in order to protect the confidential and proprietary nature of the information.

The SCOsource business was set up in January 2003 to protect SCO’s intellectual property through licensing programs, but following initial success with $8.3m revenue in the second quarter of 2003, the business brought in just $20,000 and $11,000 in the first and second quarters of 2004 respectively.

SCO added that it has sent BayStar a stock certificate for 2,105,263 shares of common stock and is ready to send the investment firm $13m in return for the Series A-1 stock, while BayStar maintained that it remains a Series A-1 stockholder until a determination is made by the court.

The potential litigation will bring a messy end to a relationship that previously appeared to be set to finance SCO’s legal claims that Linux contains SCO copyrighted Unix code.

BayStar invested $20m in SCO in October 2003, alongside Royal Bank of Canada’s $30m, as SCO looked for financial backing for its breach of contract battle against IBM Corp, its slander of title case against Novell Inc, its breach of copyright case against AutoZone Inc, its declaratory judgment case against Red Hat Inc, and its now defunct breach of contract case against DaimlerChrysler Corp.

Relations between SCO and BayStar had soured by April 2004, however, when the investment firm stated that it wanted a refund from SCO or a change of management to better focus the company on its intellectual property claims, rather than growing its Unix operating system business.

SCO refused to change its ways, and looked set for a major battle with the investment firm after Royal Bank of Canada washed its hands of SCO in May, converting 10,000 Series A-1 shares into common stock and selling the remaining 20,000 to BayStar. However, instead of launching a battle for control of SCO, BayStar agreed in June to sever its ties with the Unix vendor in return for cash and stock.