Sun shareholders sue to block Oracle acquisition

Sun Microsystems shareholders have filed three separate class action lawsuits to block a $7.4 billion acquisition by Oracle, the company revealed in a 10-Q filing with the Securities and Exchange Commission.

The lawsuits allege Sun's board didn't live up to its fiduciary responsibilities to shareholders when it accepted Oracle's acquisition offer, saying "the consideration offered in the proposed transaction is unfair and inadequate."

Personally, I don't think these issues will block the deal. If it really has to, Oracle has the cash to up its offer or settle with the shareholders before it gets nasty (if the suits actually have any merit). And in another wrinkle, Oracle probably already knows that Sun may have violated the Foreign Corrupt Practices Act.

That's right: Sun also disclosed Friday that it may have violated the act, which bars American companies from bribing or engaging in other unethical activity with foreign officials. This can often be difficult since some foreign governments, to put it charitably, don't have the same hard rules against government bribery. Potential contractors can be put in the no-win situation of either paying off local officials or losing out on a lucrative contract. That's not to say that's the situation Sun is facing. It's not clear what Sun executives believe may have happened, but they have hired outside lawyers to look into it.

But as I already said, I don't think these new revelations are deal-breakers, even if FCP violations can carry potential penalties that include fines, criminal sanctions, and a ban from doing business with the U.S. federal government.

What does this tell us about the Sun/Oracle deal itself?

Oracle execs must believe that they can work out a deal with the dissenting shareholders (or, again, maybe they think their suits have little merit). And Oracle execs probably aren't that worried about any lingering government-related issues. This isn't the first time Oracle's acquisitions have come with legal question marks. The database king successfully fought a government antitrust suit against the eventual takeover of software rival PeopleSoft several years ago. Many pundits thought fighting the suit was folly, but Oracle did it anyway.

The biggest issue for Sun: if the deal does get blocked, how much longer can it last as an independent company?

According to the same 10-Q filing, revenue was down by 20 percent for the quarter, and failing to get the Oracle deal done could cost Sun $260 million. Not only that, if it fails to go through, the Silicon Valley icon is also going to have a heck of a time convincing customers to buy from them.

There is no assurance that the Merger with Oracle or any other transaction will occur. If the proposed Merger or a similar transaction is not completed, the share price of our common stock may change to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. In addition, under circumstances defined in the Merger Agreement, we may be required to pay a termination fee of up to approximately $260 million and, in certain circumstances, reimburse reasonable out-of-pocket fees and expenses of Oracle of not more than $45 million incurred with respect to the transactions contemplated by the Merger Agreement. Further, a failed transaction may result in negative publicity and a negative impression of us in the investment community.

Sure, Sun has issues. But it's a good bet Oracle found out about the potential FCP violation while it was doing due diligence before the deal was announced. As for shareholder suits, they happen all the time. Some have merit, some don't. Let the courts decide. Either way, the merger is likely to get done.

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