AGREEMENT AND PLAN OF MERGER

        AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of February 9, 2007, among KKR Financial Corp., a Maryland corporation (the "Corporation"), KKR Financial Holdings LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Corporation (the "LLC"), and KKR Financial Merger Corp., a Maryland corporation and wholly-owned subsidiary of the LLC (the "Merger Corp.").

RECITALS

        WHEREAS, the Corporation has adopted an overall restructuring plan (the "Conversion Transaction") to cause the Corporation to become a subsidiary of the LLC and to undertake certain related transactions; and

        WHEREAS, the Conversion Transaction contemplates, among other things, the merger of the Merger Corp. with and into the Corporation (the "Merger"), with the stockholders of the Corporation having their shares of common stock converted into the right to receive shares representing limited liability company interests in the LLC, all pursuant to this Agreement; and

        WHEREAS, for federal income tax purposes it is intended that the Merger (as hereinafter defined) qualify as a tax-deferred contribution of the common stock of the Corporation to the LLC within the meaning of Section 721 of the Internal Revenue Code of 1986, as amended (the "Code"); and

        WHEREAS, the Board of Directors of the Corporation, the Board of Directors of the LLC and the Board of Directors of the Merger Corp. each has determined that the Merger is advisable and in the best interests of each such corporation or limited liability company, as the case may be, and its stockholders or members, as the case may be, and have approved the Merger on the terms and subject to the conditions set forth in this Agreement.

        NOW, THEREFORE, in consideration of the foregoing, the parties hereto hereby agree as follows:

ARTICLE I
THE MERGER; CLOSING; EFFECTIVE TIME; EFFECTS OF MERGER

        1.1    The Merger.    Subject to the terms and conditions of this Agreement, at the Effective Time (as defined in Section 1.3) and in accordance with the Maryland General Corporation Law (the "MGCL"), the Merger Corp. shall be merged with and into the Corporation and the separate corporate existence of the Merger Corp. shall thereupon cease and the Corporation shall be the surviving entity of the Merger (sometimes hereinafter referred to as the "Surviving Corporation") and the separate existence of the Corporation will continue unaffected by the Merger.

        1.2    The Closing.    Subject to the terms and conditions of this Agreement, the closing of the Merger (the "Closing") shall take place at such time, date and place as the parties may agree but in no event prior to the satisfaction or waiver, where permitted, of the conditions set forth in Section 3.1 hereof. The date on which the Closing occurs is hereinafter referred to as the "Closing Date."

        1.3    Effective Time.    Subject to the terms and conditions of this Agreement, following the Closing, the parties hereto shall, at such time as they deem advisable, cause (i) articles of merger (the "Articles of Merger") to be executed and filed with the State Department of Assessments and Taxation of

1

Maryland and make all other filings or recordings required by Maryland law in connection with the Merger. The Merger shall become effective upon the acceptance of the Articles of Merger for record by the State Department of Assessments and Taxation of Maryland or at such other time as the Corporation and the Merger Corp. shall agree and specify in the Articles of Merger in accordance with the MGCL (the "Effective Time").

        1.4    Effects of Merger.    The Merger shall have the effects specified in the MGCL and this Agreement.

ARTICLE II
EFFECT ON CAPITAL STOCK

        2.1    Effect on Capital Stock.    At the Effective Time, by virtue of the Merger and without any further action on the part of the Corporation, the LLC or the Merger Corp. or their respective stockholders or holders of shares, as the case may be, the following shall occur:

        (a)   Each share of common stock, par value $0.01 per share, of the Corporation ("Corporation Common Stock") issued and outstanding immediately prior to the Effective Time shall be converted into the right to receive one validly issued and fully paid share representing a limited liability company interest in the LLC ("LLC Share").

        (b)   Except as provided in Section 2.1(d), all shares of Corporation Common Stock shall no longer be outstanding and shall be canceled and retired and shall cease to exist. At the Effective Time, each certificate ("Certificate") representing shares of Corporation Common Stock immediately prior to the Effective Time shall thereafter only represent the right to receive (i) the consideration payable in respect of such shares under Section 2.1(a), and (ii) an amount equal to any dividend or other distribution pursuant to Section 2.3(c).


 

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