Chapter 63: ‘Plan A’ or ‘Plan B’?

June 6, 1995, Chicago, Illinois

“He did what?!” I demanded.

“Served legal notice he intends to buy the shares held by Dallas Capital Partners,” Manny said.

“But we have a signed deal!” I protested.

“I understand. His letter states, correctly, that the terms of his agreement with Dallas Capital permit him to buy those shares at any time prior to a completed sale.”

“Son of a bitch!” I swore. “So now what?”

“Under the terms of the agreement, he has fifteen business days to deliver the funds. If he doesn’t, our agreement would stay in force.”

“Would you fax me a copy of what he sent you, please? To the same fax machine you sent all the other documents.”

“I will.”

“And remember, you can’t disclose the sale of the software. If you do, without our permission, we have the unilateral right to cancel the purchase AND retain the rights to the software. I’ll fax you a notice we aren’t giving permission.”

“That creates a significant issue because we’d be withholding material information from him.”

“Have your attorney call Jamie Ferguson, please. Right away. And please keep everything quiet until that happens.”

“I will. Sorry, Steve.”

I snapped the phone shut without saying anything more. I opened it, and pressed the buttons to speed dial Jamie. When I was put through to his assistant, I stated it was an emergency and she put me on hold until she could find him. In the meantime, I walked into the office and up to Elyse’s office. Jamie came on the line just as I shut the door.

“Steve? What’s up?”

“Manny Nuñez just called me and said that Nathan Edwards is exercising his right to buy the shares in Lone Star held by Dallas Capital Partners. According to Manny, the agreement gives Nathan the right to buy those shares at any point before the sale is completed. And he has fifteen business days to deliver the funds.”

Elyse’s eyes went wide and she mouthed, ‘What the fuck?’

“That’s a surprising development!”

“Jamie, Manny said he has to reveal the software purchase to Nathan. His lawyer is going to call you before he does that, but Dallas Capital would be in violation of our agreement.”

“They are on the horns of a real dilemma,” Jamie said. “They can’t withhold any business information material to the sale, but revealing it would be a material breach, which would let you revoke your offer and keep the software and copyrights. And per the deal, the royalty-free license expires on June 9th, unless Dallas Capital Partners retains ownership of their shares. And it terminates as soon as they sell them.”

“So what happens?”

“Given they can’t refuse his purchase of their shares if he can come up with the funds, they don’t have a choice but to tell him. That said, it’s a matter of timing. So long as he’s informed before the purchase is completed, they’ve fulfilled their fiduciary duty. BUT, the longer they wait, the more risk they incur for a claim of fraud. And once they tell him, he’s likely to challenge everything in court.”

“Wonderful. What are our chances?”

“He’d sue in Texas, in State court. We could, in theory, remove it to Federal Court, but as you know, Texas law would still apply.”

“We chose Illinois law.”

“NIKA and Dallas Capital did. Nathan Edwards will sue Dallas Capital over the sale under Texas law. The copyright angle is different, and that has to be Federal, based on preemption and the fact that the Constitution reserves patent and copyright law to the Congress.”

“I’m missing something,” I said.

“I’m no intellectual property expert, but transfer of copyright is federal. That’s why we signed the assignment of copyright as a separate set of transactions. Even if he wins in Texas, the Texas court ruling would only entitle him to challenge the copyright assignment in federal court, not get it back automatically.”

“So why not just move the whole thing to federal court and be done with it?”

“That might be our best strategy, but I’m going to have to talk to Thad Baker and Jacob Goldberg, your intellectual property attorney. Steve, my assistant is signaling me that I have another call.”

“That’s probably their attorney. Call me back when you know more.”

“I will.”

I snapped the phone shut.

“I think we’ve just found out what ‘Plan A’ really is,” I sighed. “‘Plan B’ is hiring the development staff.”

“What do you mean? You said it was Nathan Edwards.”

I nodded, “Sure. And we were told he couldn’t raise the funds. Now, it appears, he can.”

“Dante?”

I nodded, “Dante.”

“But it doesn’t make sense. Why not just buy them outright?”

“A very good question. Had he done that, Lone Star would have been in good shape and there would have been no major issues with losing customers. They could spin it as Dallas Capital cashing in their winnings, so to speak. There would be a bit of turmoil, but if Dante said he was infusing capital, that would turn it positive.”

“Are you sure it’s Dante?”

“I have to believe it is.”

“So what’s his game?”

“If we go back to the assumption he wants to wreck Lone Star and buy it for a song, it makes no sense. Would you dial Samantha’s number, please?”

Elyse nodded, opened her Rolodex, and found Samantha’s direct line. Ernie answered and when I identified myself, he put us right through.

“Steve? What’s up?”

“I think we’ve been had, but I’m not sure how we’ve been had. Or how badly we’ve been had.”

“Lone Star?”

“Yes. Let me explain.”

I told her what I knew so far and my belief Dante was behind it.

“I can think of two possibilities off the top of my head,” Samantha said. “They found out about the software sale and this is Dante’s way of trying to get control of it. Or, alternatively, it’s a move to get you to cancel the deal, and then have Nathan Edwards’ financing fall through, leaving a stinking pile of crap which Dante can then scoop up for a song.”

“Which means it’s possibly ‘Plan A’ or ‘Plan B’, depending. Dante will now have complete information. If we cancel, his plan, whatever it is, moves forward. And if we do make the purchase, the whole thing will likely be tied up in court for years.”

Elyse’s phone emitted a soft buzz which told her she had another call. We put Samantha on hold and Lucas announced he had Jamie on the line. He put the call through and we conferenced the two calls together.

“Jamie, we have Samantha on the line. I need to bring you in on one additional point. We believe Dante is backing Nathan. Samantha has suggested that Dante and Nathan might know about the software deal.”

“Dante again?” Jamie sighed. “That guy is a menace!”

“No kidding, Jamie!” I laughed. “So?”

“It’s possible. I did get their attorney to give us until 9:00am Central Time on Thursday before they reveal the existence of the sale and copyright transfer.”

“Jamie,” I asked, “what happens if we simply wait and see if Nathan comes up with the money?”

“That’s more of a PR question for Cindi than anything, really. There’s no risk legally that I can see.”

“What happens after? I mean if Dante does acquire the shares?”

“An ugly court fight. Remember, I’m no expert here, but I am sure Dante and Nathan would go to court to get an injunction allowing them to continue selling the software until the case is resolved. The harm that would be done to them if you withheld the licenses would be too great.”

“I wouldn’t. I’d just enforce the royalty rate.”

“They might be able to get an injunction against that, though I’m not sure. Our response would be to demand that all royalty fees that might be due be placed in escrow. I’m not sure if that would succeed, as it would make it very difficult for them to do business, and the courts are reticent to hand victory to one side or the other in that way.”

“They’d never pay,” I said. “Dante would drag this out forever, especially if he got an injunction that let them keep selling without paying or even putting the funds in escrow.”

“That’s entirely possible,” Jamie said. “It’ll cost you a fortune, and tie you up in court. The PR could be nightmarishly bad, but that’s a question for your expert on the matter.”

“Jamie,” Samantha said, “I think it’s possible this is all just a charade to devalue Lone Star. In other words, this was Dante’s plan all along. To tie Steve up, cost him money, and then pull the rug out at the last minute. Actually, two rugs. Steve walks away, then Dante fails to make the funds available to Nathan. Lone Star is now a sunken ship and he can buy it for a song. It’s simply a variation on the original idea we had.”

“Making the idea of hiring the developers his ‘Plan B’,” I said. “That’s why we missed this possibility. We saw ‘Plan B’ and thought it was ‘Plan A’. Or perhaps it was a ruse to distract us from ‘Plan A’.”

“I’m not up on the latest financial shenanigans,” Jamie laughed. “So I’ll take Samantha’s word for this. Basically, you’re playing chicken or poker, depending on how you want to look at it. What do you want to do?”

“Give me until tomorrow,” I said. “Obviously we have to decide before Thursday morning. Don’t talk to anyone just yet, please. Let Samantha, Elyse, and I discuss our options.”

“OK. I’ll hold off. Call me as soon as you have an idea of how you want to proceed. Don’t forget you’ll need to inform your Board.”

“Oh, I know. But I want to go to them with a strategy in hand.”

“Sounds good. I’m going to hang up. Talk to you tomorrow.”

“Bye, Jamie,” I said.

I heard the clicks as he hung up.

“Steve, why don’t you and Elyse come over? I’ll get your sister, Bo, and Bernie to sit down with us and figure out a strategy.”

“We’ll be there in thirty minutes,” I promised. “Thanks.”

Elyse pressed the button to disconnect the call.

“Maybe we should just walk away and let them buy back the software.”

“And hire away their best developers?” I grinned. “Jiu-jitsu?”

“That would be a nice countermove.”

“Well, we’d have to let them breach first, or rather, not stop them from breaching. If they do, then we can rescind everything, including the agreement not to go after their customers and developers. And if we hire Skye and the other female programmer who was pretty good, we can build an interface that looks like Lone Star’s and take them out.”

“How long?”

“A crash effort? Not long, really. Kajri already did a full analysis and design of what we’d need. A couple of dozen screens. Those are relatively simple to do and QA is straightforward. Call it sixty days from start to release. That’s a conservative number. And we can announce right away with a promise not to let the turmoil in Dallas impact their firm, etc.”

“That sounds like a safe course of action.”

“Let’s go talk to the experts and make sure we’re not missing anything. First I need to fax a notice to Manny telling him I do not give permission to disclose.”

We went to my office and I quickly typed up a letter which I handed Kimmy to fax to Manny Nuñez, and got the copy of Nathan’s notice which was a simple two paragraph declaration. I had Kimmy lock it in her secure file, and let her know Elyse and I were heading to Spurgeon Capital, and then we left.

Twenty-five minutes later Elyse and I were in Samantha’s office with Bo, Bernie, Stephanie, and Samantha.

“So they pulled a fast one?” Bernie said once Ernie had brought everyone coffee or tea.

“So it would seem,” I said. “My first inclination is to allow them to breach the contract, then simply wash my hands of the deal and return the software and copyrights in exchange for our money back. Then hire two developers from them and recreate their interface, easily allowing us to convert their customers.

“On the way over, I realized we could probably grab most of their sales force as well, because it’ll be three weeks before ANYTHING happens, meaning they’ll all have missed their commissions for about six weeks. We had offered them a special bonus to compensate, once the deal was done, which is why most of them are still there. One guy in Dallas quit already.”

“Can you safely replicate their user interface?” Bo asked.

I nodded, “Apple sued Microsoft on exactly that issue and lost. All we have to do is make some cosmetic tweaks. The court basically said you could recreate the Apple ‘Trash’ and call it a ‘Recycle Bin’, and change the icon a bit, and that was good enough to defeat Apple’s claim.”

“He’s correct,” Bernie said. “Apple lost their advantage in user interface because of that.”

“Remember, they ‘borrowed’ it from someone else,” I chuckled. “But that’s not relevant here except in the sense that neither Lone Star nor Peach nor Dante nor Nathan could prevent us from creating a very similar interface. And, it would use our code, so there’s no issue of reusing their code, though we own it at the moment, and when we sell it back, it’s with a perpetual royalty-free license to the current version so we don’t get screwed by claims we saw their code. Jacob Goldberg made sure we’re protected.”

“It sounds as if you think we should walk away from the deal,” Samantha said.

“Think about it - Dante is left with the stinking pile of crap he wants, and he gets Lone Star for a song. Their reputation is in the tank. I think his best case is to rebrand Lone Star as Peach, claiming to be the ‘White Knight’. He reaches out to all the customers and maybe even makes some concession on maintenance to hold them. He has the support staff and most of the development staff.

“BUT, how quickly can this happen? And what will Dallas Capital Partners do? My plan would be to bring two or three of their developers on board, hire most of their sales reps and maybe even one or two of their support reps. By the time Dante sorts it all out, we’ll have stolen a march on him.”

“You know, he only has to put up half the capital,” Bo said. “He’s ONLY buying the 51% which Dallas Capital owns. He could leave the other 49% in the hands of the founders and key employees.”

“In other words, go through with the purchase,” I said. “Which wouldn’t wreck the company and Nathan could come out and say he saved the firm, taking it back under his control, and so on.”

“That would be entirely possible,” Bernie said. “The founder of the company steps up to save it. And if he has good personal relationships with his major clients, that might work well.”

“Steve has that,” Stephanie said. “In a similar situation, if he were to step up, they’d stick with him.”

“You need to hold onto the code,” Samantha said. “It’s a dick move, but it puts you in the driver’s seat. Nathan Edwards, or maybe Dante, has to sue Dallas Capital Partners to void the sale, or come hat in hand to you. Even if you eventually give it back, it creates a perfect opportunity for FUD.”

“We do have to be careful about that,” Elyse said. “We don’t want to LOOK like dicks even if we’re fucking over Dante.”

“I think it’s just a matter of making them go through the motions of filing the suit or approaching you,” Bo added.

Samantha smirked, “Let him sue Dallas Capital Partners. Then approach them to sell the software back at a premium. We get all our funds back, earn a bit of profit, and you cover what you’ve spent on the failed merger. And you play it up as Lone Star reneging on the deal when you had signed agreements. You take the high road and come out smelling like roses.”

“I think we have a plan,” I said. “I’ve already had Kimmy fax a refusal to waive the secrecy clause, so in less than thirty-six hours, Dallas Capital will breach, allowing us complete freedom to act. Then all hell breaks loose down in Dallas. Which means I need to get Terry back, fill him in, then send him back with offer letters for the developers in Dallas, and Cindi needs to figure out which sales reps she wants to keep, which means I have to bring her into this.”

“And the Board?” Elyse asked.

“Not until Dallas Capital is in material breach,” I said. “Now it’s just speculative.”

“If you need bridge financing to make this happen, you have it,” Samantha said. “At whatever minimum interest rate Bernie thinks will pass IRS muster.”

“Thanks, Samantha. I need the Gulfstream, if it’s available. I can’t wait on commercial flights for Terry.”

“I’ll call and get them moving. Love Field, right?”

“Yes. I’ll call Terry in a few minutes and let him know. I have one more question. What are we missing?”

Everyone shook their head or shrugged.

“That bothers me,” I continued. “We missed something big already. What ELSE are we missing?”

“That’s not the right way to think about something like this,” Bernie said. “Think about what they could do to counter YOUR strategy. If your strategy is sound, and there is no reasonable counter, don’t worry about what they’re doing.”

“Never interrupt your enemy when he is making a mistake,” I grinned. “That’s Napoleon, by the way, not Sun Tzu.”

“Yes, and that’s why Dante let everything go the way it has. He believed he had you making the mistakes. The fly in HIS ointment is that you prepared for this eventuality by buying the source code and acquiring the copyrights. That’s how you handle this. Execute YOUR plan, take the proper precautions, and let them flounder or run into the trap YOU’VE laid.”

“You’ve seen this before?” I asked.

“I’ve seen far worse. Bo and I could tell you stories...”