MGM/UA Shareholders Made Money; Should They Get More? : Entertainment: A lawsuit claims that Kirk Kerkorian profited by a 1986 deal at the expense of other stockholders.

In the tradition of Hollywood court battles, stars will serve as star witnesses when a class-action suit challenging the sale of MGM/UA Entertainment Co. goes to trial next month.

Dinah Shore, Art Linkletter and Gen. Alexander Haig Jr. are among the board members who will testify in the $200-million case, which revolves around the 1986 studio acquisition.

The suit alleges that MGM/UA majority shareholder Kirk Kerkorian undervalued United Artists when he sold parent MGM/UA to media mogul Ted Turner. A group of shareholders, including former congresswoman Bella Abzug, claims that Kerkorian, with the complicity of his board, cut a special deal to buy back UA for himself at a sweetheart price.

Lawyers for MGM/UA vehemently deny the allegations. But the case promises new insights into the business dealings of Kerkorian, a shrewd deal maker renowned for his secrecy. It also sheds light on the dark corridors of the MGM/UA boardroom, where the fate of the once-proud studio was ultimately sealed, and on the board members themselves, whose experience exemplifies the pitfalls facing celebrities serving as directors in today’s litigious business climate.

Shore, Linkletter, Haig and the other directors are named as defendants in the Los Angeles Superior Court case. A plaintiffs’ brief contends that they “made no effort to understand the basis on which the price of the (company) was established . . . made no effort to seek other buyers . . . and made no effort to obtain the highest and best price.”

Celebrity directors composed only a fraction of the 15-member board; the only other one was the late actor Cary Grant. Their experience varied widely; Linkletter made his name as a TV host who heard the darndest things, Shore as a singer and Haig as a military-political figure. But lawyers for the shareholders will try to show that each acted irresponsibly in approving the Turner deal.

In pretrial depositions, Shore told attorneys James W. Mercer and J. Michael Hennigan that she was appointed to the board after meeting Kerkorian on a tennis court. Haig and Linkletter, who were more experienced as directors, testified that they largely followed management’s lead.

At one point, Linkletter was asked if he relied on outside counsel before voting on the proposed MGM/UA sale. Linkletter replied that he did not.

Haig even professed ignorance about a key aspect of the deal. Asked if he understood that, under a prearranged plan, Turner agreed to buy certain MGM/UA assets rather than the entire company, Haig answered: “I am not aware of that.”

Mercer and Hennigan, who made these depositions available, say such testimony will prove that the board failed to perform due diligence.

“The board was the guardian of the rights of the shareholders. They stood between the economic interests of Kerkorian and the minority shareholders,” Hennigan said. “But they were passive. . . . They failed to ask insightful questions. They failed to meet with the investment banker. They failed to even inquire as to the basic nature of the transaction they were asked to approve.”

Daniel E. Lazaroff, a Loyola University Law School professor specializing in corporate law, said MGM/UA’s board members are legally bound to defend their actions. Board members can even be held personally liable for damages awarded in cases that arise from shareholder suits, Lazaroff said, although that is not expected in this case.

“One cannot simply be what’s called a ‘dummy director,’ ” Lazaroff said. “There are responsibilities described by statutes and case law . . . that say you must engage in monitoring and oversight functions.”

MGM/UA attorney Terry Christensen accused Mercer and Hennigan of trying to “contaminate” potential jurors by releasing the depositions. Christensen said the directors obviously acted responsibly, since the deal made it possible for shareholders to double their money.

Attorneys for MGM/UA note that, under the “generous” terms of the deal, shareholders got $27 to $30 per share for stock that previously traded in the $11 to $16 range.

“The plaintiffs contend that if you are a celebrity you don’t know what you are doing,” Christensen said. “But these people are all business people in their own right. . . . They knew perfectly well what they were doing: approving the best deal that could be attained for the shareholders.”

Shore, Linkletter and Haig also defended their votes.

“I thought it was a wonderful value that was being put on the company,” Linkletter said in his testimony. “And, I might add, most everybody in Hollywood did.”

“I think we did our homework pretty well,” testified Shore, who nonetheless called herself a “novice at boards.”

The stakes are high--the case took four years to come to trial--but the depositions offer occasional comic relief. When Haig was asked to recount when he first learned of a possible MGM/UA sale, he traced it back to “May or June of ’56.” When the error was noted, Haig corrected himself: It was 1955, he said.

Negotiations over the sale of MGM/UA actually started in 1985, when the venerable film studio was reeling from a string of box-office flops. Kerkorian found a willing buyer in the Atlanta-based Turner, who was fresh from a disastrous attempt to take over CBS Inc.

Details of the MGM/UA deal, such as who suggested returning certain assets to Kerkorian, remain in dispute. But by 1986, Turner had agreed to purchase MGM/UA for $1.5 billion, or $29 a share. MGM/UA management immediately bought back the United Artists film library and other assets for about $470 million, or $9 a share, and eventually even took back the MGM/UA name.

Turner essentially ended up with the MGM and RKO Warner film libraries for use on his cable channels, after selling off other major assets such as the MGM/UA studio lot. Kerkorian remained in the movie business as majority shareholder in a trimmed-down version of MGM/UA.

The plaintiffs claim that MGM/UA management knew it was using an appraisal that undervalued the United Artists film library by half and also that management failed to account for expected revenue from two big films: “Rocky IV” and “A View to a Kill.” The plaintiffs also contend that the company discouraged shareholders from buying into what became the new MGM/UA--formed from the old United Artists--by setting unrealistic deadlines and qualification rules.

Roughly half of MGM/UA was publicly held at the time of the sale. Kerkorian increased his stake to about 80% afterward, when about 20% of the shareholders bought into the new company.

(MGM/UA is on the block again. A group headed by Italian financier Giancarlo Parretti is attempting to purchase the company from Kerkorian for $1.3 billion. The shareholder suit will not affect that proposed sale.)

The plaintiffs say the sale resulted in a financial bonanza not just for Kerkorian, but for several former MGM/UA executives, such as ex-Chairman Frank Rothman, who allegedly purchased huge blocks of the new MGM/UA stock with borrowed funds personally guaranteed by Kerkorian.

Kerkorian and his former executives defended their actions in their depositions. In his, Kerkorian said he relied on expert opinions of United Artists’ worth. “I left it up to the lawyers and the investment bankers, and I felt that was my responsibility,” he said. “We assumed it was all right.”

On the buyback price paid for United Artists, Rothman said: “There was no way in the world--I want to be as emphatic as I can be--that the UA package was worth any more than the $9 we ultimately got.”

MGM/UA attorneys note that Turner’s price was considered high at the time. They argue that shareholders had more than enough time--24 days--to respond to the new company offering. And they say shareholders were offered the stock at the same $9-per-share price as Kerkorian.

“The notion that Tracinda (Kerkorian’s private holding company) wished to capture more (stock) at a bargain price to make a market killing is ludicrous, since Tracinda was a long-term investor, not a trader,” the lawyers argued in their brief. “Tracinda continued holding the new (stock) when it increased in value and when it decreased in value.”

The depositions of high-profile directors Shore, Linkletter and Haig may or may not legally resolve that issue, but they do offer insight into the events leading up to the sale of the studio.

Shore and Linkletter are scheduled to take the stand in the case, which comes to trial Sept. 20, while Haig’s videotaped testimony is expected to be shown to the jury.

Of the three, Haig was the most defensive of his role as a director. The former Army general and high-ranking aide to Presidents Nixon, Ford and Reagan testified that MGM/UA was sagging under the weight of financial losses at the time of the sale.

Board members considered Turner’s offer “rather extravagant” under the circumstances, according to Haig, who said the $9-per-share United Artists buyback price was suggested by Kerkorian’s representatives. The former general had only limited memory of details but said “the simple facts were that the shareholders received a very, very generous offer.”

When Haig was asked if the board tried to negotiate a higher price for United Artists than $9 a share, he said, “I don’t recall that.”

Haig also said he did not consider “Rocky IV,” which grossed $125 million for United Artists in the first six months of its release, to have any bearing on the company’s worth.

“No, I wouldn’t describe ‘Rocky IV’ as a blockbuster,” Haig said. “It was reasonably successful.”

Separately, when Linkletter was asked if he queried MGM/UA management on how the price for United Artists was determined, he answered “no.” Linkletter said he also did not know that a range of fair prices was established and that $9-a-share was at the low end. Linkletter said he was not shown a 10-year cash flow summary prepared by the investment banking firm of Bear, Stearns & Co.

“Did you rely on others with respect to the review of the documentation and transaction between MGM/UA and (Turner)?” Linkletter was asked. “Yes,” he replied.

Shore said she also relied on “advisers, Bear Stearns . . . and fellow board members . . . who I felt were more knowledgeable in this particular area than I might be” for her decision.

Shore later testified that she didn’t have “the faintest notion” about a film library’s sources of revenue. “Did the board of directors undertake to re-evaluate the $9 price being paid for (United Artists)?” Shore was asked. “Not to my recollection,” she answered.

Toward the end of Shore’s testimony, comedy struck again. Shareholder attorney Mercer complained that Andrew M. White, an MGM/UA lawyer acting as Shore’s representative, objected so often he was like a “halibut flopping around on the deck of a ship.”

White was irate.

“To compare an opposing counsel to a fish flopping on a deck is the most personally offensive thing that has ever been said to me in a deposition,” he fumed.

“I’m insulted for you,” added Shore. “What kind of fish was it?”