Chapter 21, Problem 4Q

In the spring of 1984, Disney Productions' stock was selling for about $3.125 per share. (All prices have been adjusted for 4-for-l splits in 1986 and 1992.) Then Saul Steinberg, a New York financier, began acquiring it; after he had 12%, he announced a tender offer for another 37% of the stock—which would bring his holdings up to 49%—at a price of $4.22 per share. Disney's management then announced plans to buy Gibson Greeting Cards and Arvida Corporation, paying for them with stock. It also lined up bank credit and (according to Steinberg) was prepared to borrow up to $2 billion and use the funds to repurchase shares at a higher price than Steinberg was offering. All of these efforts were designed to keep Steinberg from taking control. In June, Disney's management agreed to pay Steinberg $4.84 per share, which gave him a gain of about $60 million on a 2-month investment of about $26.5 million.

When Disney's buyback of Steinberg's shares was announced, the stock price fell almost instantly from $4.25 to $2.875. Many Disney stockholders were irate, and they sued to block the buyout. Also, the Disney affair added fuel to the fire in a congressional committee that was holding hearings on proposed legislation that would (1) prohibit someone from acquiring more than 10% of a firm's stock without making a tender offer for all the remaining shares; (2) prohibit poison pill tactics such as those Disney's management had used to fight off Steinberg; (3) prohibit buybacks, such as the deal eventually offered to Steinberg, (greenmail) unless there was an approving vote by stockholders; and (4) prohibit (or substantially curtail) the use of golden parachutes (the one thing Disney's management did not try).

Set forth the arguments for and against this type of legislation. What provisions, if any, should it contain? Also, look up Disney's current stock price to see how its stockholders have fared. Note that Disney's stock was split 3-for-l in July 1998.