Disney-Steinberg ‘Greenmail’ Trial Nears Opening Day

Once upon a time in 1984, the corporate guardians of Mickey Mouse and his friends were besieged by a scary raider. After he huffed and puffed at their house, they gave him $59 million to go away. But some stockholders cried “Greenmail!” and filed lawsuits.

The tale of Saul J. Steinberg and his $325-million tender offer for 49% of Walt Disney Co. is now about to be dissected in a Los Angeles civil trial. Defendants accused of breach of fiduciary duty and other violations of California law include Steinberg, Disney Co. and 11 people who were directors at the time.

Other defendants include Steinberg’s financial adviser in the deal, Drexel Burnham Lambert, and Disney’s investment banker, Morgan Stanley & Co., both New York firms. Drexel’s Beverly Hills “junk bond” office also worked for Steinberg on the deal.

A class-action suit on behalf of an estimated 60,000 Disney stockholders--who lost money selling their shares on a depressed market--seeks the money that Steinberg gained from his deal. While held by court order in a special fund the past five years, the $59 million has grown to about $100 million with interest.

Plaintiffs refer to the Disney buyout of Steinberg as greenmail, a term often used when a company buys a major block of its stock from a raider--paying him a premium price to avoid being taken over.

Among the prominent names that figure in the cast of the Disney-Steinberg events in June, 1984, are those of junk bond wizard Michael Milken and movie-and-casino magnate Kirk Kerkorian. Neither are defendants, but their roles are expected to be discussed in testimony.

Kerkorian was a Steinberg ally who had an option to buy Disney’s film production business for $447.5 million if Steinberg won control of the company with his tender offer.

Milken, who was involved in Drexel’s financing for Steinberg, is facing unrelated federal criminal charges of racketeering and securities law violations in a major Wall Street insider trading scandal.

As much as plaintiffs would like to question Milken on the witness stand, the chances appeared dim. Defense attorneys said in court Friday that they were informed that when Milken appears Tuesday in New York under subpoena by the plaintiffs for his deposition, he will exercise his Fifth Amendment right against self-incrimination by declining to answer all substantive questions in the Disney-Steinberg case.

If that occurs, Los Angeles County Superior Court Judge Abby Soven assured defense lawyers Friday, she will not allow plaintiffs to summon Milken as a witness in the trial just to exercise his constitutional right to remain silent.

She also served notice that references to the criminal cases against Milken and Drexel would not be permitted before the jury.

Nevertheless, the limelight of a public trial of the greenmail allegations were likely to increase the discomfort index for many involved.

Disney directors named defendants include Ronald W. Miller, former president and chief executive, who was a son-in-law of company founder Walt Disney. Miller resigned three months after the company bought Steinberg’s stock for $325 million, well above the market value at that time, and the company’s stock price fell sharply after Steinberg withdrew his offer.

The Disney stock has soared in value in the past several years with the film profits under the management of Michael D. Eisner, chairman and chief executive, who followed the Miller regime. Since 1986, Disney went from No. 3 to No. 1 movie company in its share of domestic box-office revenue.

Other Defendants

Steinberg’s uncompleted tender offer for Disney stock in 1984 was for $72.50 per share. Lawyers for defendant Disney directors assert that the market value of a Disney share held in 1984 “now exceeds $370 and continues to climb.”

Besides Miller, past and present Disney directors who are defendants in the civil case are former Chairman Raymond L. Watson, Richard A. Nunis, E. Cardon Walker, Robert H. B. Baldwin, Caroline Leonetti Ahmanson, Philip M. Hawley, Ignacio E. Lozano Jr., Samuel L. Williams, Donn B. Tatum and Charles E. Cobb Jr.

The name of Roy E. Disney, a nephew of Walt Disney, also has been injected into the pretrial proceedings. Plaintiffs’ attorney J. Michael Hennigan told Judge Soven on Friday that Milken’s personal relationship with Roy Disney, and subsequently with Steinberg, marked the beginning of Steinberg’s move against the Disney company.

Roy Disney, who held a major interest in the firm, resigned as a company director in March, 1984, amid rumors he was considering a takeover effort. Shortly afterward, Steinberg disclosed a 6.3% holding in Disney stock, which later was doubled. Roy Disney said at the time of the tender offer that he was not part of Steinberg’s group. Eleven days after Steinberg’s stock was purchased by the company, Roy Disney rejoined the board.

An unusual aspect of the case is that it involves a simultaneous trial of two lawsuits with conflicting goals. The suits were consolidated because they involve the same set of circumstances.

In the class action, some Disney shareholders--alleging breaches in fiduciary duty by the company’s directors, by Steinberg and by some of the New York raider’s advisers--claim the Steinberg profit fund because they lost money when they sold their stock after the price collapsed following the buyout of Steinberg’s interest.

Lengthy Maneuvering

However, in a so-called derivative suit on behalf of the Disney company, other Disney stockholders assert that the money should go to the movie company.

For five years, the case has been the subject of pretrial maneuvering. In recent weeks, under rules of the Los Angeles County Superior Court, the parties held mandatory settlement talks but failed to settle the dispute. The case has now been assigned for trial, with jury selection expected to start Wednesday. Lawyers estimate the trial may run for nine weeks.

Some 20 lawyers crowded into the courtroom late last week to start preliminary proceedings. Judge Soven noted that she had no prior knowledge that the case was being assigned and that she had “12 feet” of records piled in her office. Then she began a process of dealing with a host of pretrial motions.

After the jury is picked, the members will start hearing the parties’ opening statements about the case. Besides alleging that all defendants breached a fiduciary duty to the Disney shareholders, the plaintiffs contend that Steinberg, his Reliance Insurance Co. and related companies and Drexel illegally “aided and abetted” the defendant Disney directors in the alleged breach. The Steinberg defendants, as well as the Disney group, assert that the Disney board’s actions were fair to the company and its stockholders and that its judgments were protected by state law.

However, attorneys for the Steinberg group contend that if the court upholds the claims against them, the group is entitled to a judgment against the Disney company for its loss.