Expert Witness in Disney Case Says ‘G’ Word : Repurchase of Steinberg Shares Called ‘Greenmail’

A UCLA finance professor testified Friday that he believed that Walt Disney Co. directors paid “greenmail” to corporate raider Saul P. Steinberg in 1984 and that the transaction was not in the best interests of the company and its stockholders.

Prof. Bradford Cornell was an expert witness for former Disney stockholders in a 2-week-old jury trial in Los Angeles Superior Court. Plaintiffs claim that tens of millions of dollars in damages resulted from the company’s repurchase of Steinberg’s 11% stock holding for $325 million, which was above the market price.

Cornell’s strong conclusions provoked consternation among lawyers for Disney and the 11 persons who voted for the June, 1984, transaction while serving as directors. These directors are accused of violating their fiduciary duty.

During a recess when the jury was not present, defense attorney Michael Diamond told Judge Abby Soven that Cornell had caused “surprise and dismay on this side of the table.” The judge rejected the defense complaint that the conclusions of the witness went beyond what he said in a lengthy pretrial deposition.

Big Price Drop

Cornell introduced the greenmail term into the trial. The court had not allowed plaintiffs’ attorneys to use the word but said that witnesses could. After its first use, J. Michael Hennigan drew smiles from the jury in referring to it as “the G word.”

As explained by the witness, greenmail is a common term used when a company threatened by an unwelcome suitor pays him “to go away” by giving a premium price for his shares.

Cornell said the foremost reason that the Steinberg transaction was not in the stockholders’ interest was a swift drop in the market price of Disney stock to about $45 a share from about $65.

This, he contended, was unnecessary because the Disney board had alternatives to buying out Steinberg for $77.50 a share, which gave him $31 million in profit and $28 million for his expenses.

Cornell observed that Steinberg would have had to get approval by holders of 80% of Disney’s stock to acquire the company. The witness added that more than 20% of the stock was already controlled by the company’s presumed allies, including Roy E. Disney and the billionaire Bass family of Texas, so it could have let the shareholders vote on Steinberg’s offer.

Both Sides Score

Cornell said another option was Roy Disney’s 11th-hour proposal of a leveraged buyout of the company by the heirs of founder Walt Disney.

Cornell rejected the explanation by Disney management and directors that the $77.50 per share paid to Steinberg was a bargain, noting that the company could have bought its shares on the market for $65.

On the other hand, Cornell also emphatically said he did not think the Disney board had to “cave in” and accept Steinberg’s proposed price of $67.50 a share for 49% of Disney’s stock or $72.50 a share for 100%.

Earlier, both sides appeared to score points in the testimony of Ignacio E. Lozano, editor-in-chief of La Opinion newspaper, who has been an outside director of Disney since 1981 and is a defendant. Although he said he was unaware of management’s defense strategies before voting on key transactions, including the Steinberg buyout, he strongly defended the board’s actions as in the best interest of the company and its shareholders.