Sun investors querying lawyers about merger lawsuit

*Large Sun investors ask attorneys about legal remedies

*Lawsuit could be filed as shareholder derivative action

*Law professor says Sun board on "firm legal ground"

By Gina Keating

LOS ANGELES, April 8 (Reuters) - Two top securities litigators said they have been approached by several large investors of Sun Microsystems Inc JAVA.O about suing directors to force them to reconsider their rejection of a takeover bid by International Business Machines Corp (IBM.N).

But UCLA Law School Professor Iman Anabtawi says the Sun board is still on "firm legal ground" with respect to its decision to terminate its exclusivity agreement with IBM, and that lawsuits may be premature.

"If shareholders differ with management over the strategic course that the company should pursue, it would be more appropriate for them to pressure the company ... by contesting the existing directors," Anabtawi said.

Sun spokeswoman Karen Kahn declined comment on potential litigation related to the takeover bid.

The plaintiffs attorneys, Darren Robbins of Coughlin Stoia Geller Rudman & Robbins in San Diego and Marc Molumphy of Cotchett Pitre & McCarthy in Burlingame, California, declined to identify Sun investors who have contacted them, but both represent large pension funds and institutional investors.

Robbins, who would not comment on whether a suit is in the works, said such cases are generally brought as shareholder derivative actions, in which investors sue a company's management on behalf of the company itself.

A case against Sun could be filed in Delaware, where the company was incorporated, and could be brought at any time, despite the lack of a formal statement from either company about the offer, Robbins said.

"There is no requirement to wait if management does not respond (to a buyout offer) in good faith and in compliance with fiduciary duties," Robbins said.

Investors can seek an injunction from the court, ordering Sun management to "respond to an overture in good faith ... and to refrain from taking any action in furtherance of their own personal interests over the company's welfare," Robbins said.

Molumphy, who said he has "received a lot of interest from large institutional investors" since Sun rejected the $9.40 per share offer from IBM, said causes of action stem from "not just the stock plunge but also in the failure to negotiate the acquisition."

"We are taking a particularly close look today at reports that Sun and IBM clashed over executive pay to Sun's executives," Malomphy said. "To the extent that these people were going to benefit personally, depending on which way the acquisition went, and insisted on their executive compensation as part of the deal, that raises serious conflict of interest issues."

He said, however, that any action should be filed in state court in Northern California where Sun is headquartered.

Molumphy also said the Sun board's rejection of the IBM offer could amount to "a scarlet letter on Sun's head that would scare away other potential suitors."

Anabtawi said, however, that the Sun board has "broad discretion" in fulfilling its fiduciary duty "to act in the long-run best interests of the company and its shareholders."

"It may choose to remain independent and execute its business plan over being acquired, so long as it has reasonably informed itself of the alternatives and has a rational basis for believing that its shareholders are best served by its decision," she said.

While Molumphy would not comment on whether and when his firm would file a lawsuit, he expects legal action to come shortly after Sun makes a public statement about the offer. (Reporting by Gina Keating; Editing Bernard Orr)