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It’s not unusual for companies to issue convertible notes to institutional investors, Sun Microsystems Inc. in-house lawyer Craig Norris said � but when it’s a large deal with one investor, and you’re getting a new director out of it, new questions arise. “There were not a lot of precedent deals that we could look to,” Norris said. The Santa Clara company announced Jan. 23 that private equity firm Kohlberg Kravis Roberts & Co. had made a $700 million investment in the company in the form of convertible senior notes. Norris said the single-investor deal, and adding a new director from Kohlberg to Sun’s board, raised a whole host of relatively novel legal issues for Sun, and for convertible note offerings. “One consideration was that there might be a perception that KKR was investing so they could buy the whole company,” Norris said. “Which is not necessarily bad, but there can be a perception that they could use that as an avenue toward launching a hostile or an unwelcome takeover of a company.” Therefore Sun’s in-house lawyers negotiated a standstill agreement, under which KKR agreed not to purchase more than a certain percentage of stock, to allay any takeover fears. “We certainly don’t think that that’s their intention, but prudence dictated that measures be taken,” Norris said. The financial details were also a challenge. Wilson Sonsini Goodrich & Rosati, led by partner John Fore, represented Sun. “The deal was really three interdependent transactions,” Fore said. “A convertible note investment by KKR; a series of hedge and warrant transactions by Sun used to swap the effective conversion premiums on the notes up to the 60 to 70 percent range; and a creative swap arrangement used by KKR to finance half of its investment.” The creative financing involved Citibank, which nominally bought $350 million of the bonds to immediately enter into the swap to provide the financing. The swap, Fore said, was a vehicle for KKR to obtain financing for half of the total purchase price. The Wilson Sonsini team also included Palo Alto partners Robert Claassen and Todd Cleary, San Francisco partner David Gerson and Palo Alto of counsel Alex Kolar and associate Cynthia Ferebee. A New York team of Simpson Thacher & Bartlett attorneys represented KKR.

Petra Pasternak

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