Sun Faces Suit Over Oracle Deal, Bribery Probe

Sun and Oracle shareholder lawsuits

UPDATED: Sun Microsystems must be glad the weekend is here. The company disclosed today that it has been slapped with three class-action suits from shareholders looking to block its acquisition by Oracle, which is also named in the lawsuits.

Making matters worse, Sun (NASDAQ: JAVA) also admitted that it’s investigating possible incidents involving employees bribing foreign officials — a violation of U.S. law.

The lawsuits were disclosed in the company’s quarterly earnings filing with the Securities and Exchange Commission (SEC).

“Three putative shareholder class actions were filed by individual shareholders … naming Sun and certain of our officers and directors, as well as Oracle Corporation, as defendants,” the company said in its most recent 10-Q filing. “The complaints … seek to enjoin the proposed acquisition of Sun by Oracle Corporation and allege claims for breach of fiduciary duty against the individual defendants and for aiding and abetting a breach of fiduciary duty against the corporate defendants.”

The complaints generally allege that the consideration offered in the proposed transaction is unfair and inadequate,” Sun said. “Sun and the other defendants have not yet responded to the complaints.”

Sun, which had been working for some time to effect a turnaround in its struggling business, entered into merger talks with IBM — but the deal fell apart at the last minute. Oracle (NASDAQ: ORCL) then jumped in and struck a deal that was negotiated in just a few days.

John Webster, principle IT advisor for Illuminata, was flummoxed at the suit. “You gotta wonder what these people have in mind,” he told “Why would you want to do this? If you’re saying Sun didn’t live up to its fiduciary responsibilities and it’s unfair and inadequate, it seems to me you should be able to say there’s a better deal out there somewhere, or [Sun] can stand on its own and do just fine. I don’t think either one of those statements would be easy to demonstrate.”

Separately, a research note from Stifel Nicolaus sent out a research note saying the deal should not face significant regulatory resistance. “We believe an Oracle-Sun deal faces significantly fewer obstacles in the antitrust review than an IBM-Sun deal would have, particularly as it does not raise the issues regarding consolidation in the server and storage markets that would have been problematic for a deal with IBM,” wrote analyst Blair Levin.

Paying bribes?

In addition to the lawsuit disclosure, Sun also said in its filing that it is investigating possible violations of the Foreign Corrupt Practices Act in its overseas operations. The law prohibits U.S. companies from bribing foreign officials.

The company discovered the problem in its 2009 fiscal year, which began July 2008.

Sun said it initiated an independent investigation with the assistance of outside counsel, took remedial action and made a voluntary disclosure to the Department of Justice (DoJ), SEC and applicable foreign governmental agencies.

“The outcome of these, or any future matters, cannot be predicted,” Sun said in the regulatory filing.

Potential penalties could include fines, criminal sanctions and a ban from doing business with the U.S. federal government, the company said in its filing. That would be particularly bad for Sun, as the federal government is one of Sun’s biggest customers.

Requests for comment from Sun and Oracle were not returned as of press time.

Update adds comments from Illuminata and Stifel Nicolaus.

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