Greenmail

Greenmail is the practice of buying enough shares in a company to threaten a hostile takeover so that the target company will instead repurchase its shares at a premium. Regarding mergers and acquisitions, the greenmail payment is made as a defensive measure to stop the takeover bid. The target company is forced to repurchase the stock at a substantial premium to thwart the takeover, which results in a lucrative profit to the greenmailer.

Like blackmail, greenmail is money paid to an entity to stop or prevent aggressive behavior. In mergers and acquisitions, it is an anti-takeover measure in which the target company pays a premium, known as greenmail, to purchase its own stock shares back at inflated prices from a corporate raider. After accepting the greenmail payment, the raider generally agrees to discontinue the takeover and not purchase any more shares for a specific time.

The term "greenmail" stems from a combination of blackmail and greenbacks (dollars). The great number of corporate mergers that occurred during the 1980s led to a wave of greenmailing. During that time, it was suspected that some corporate raiders, seeking only to profit, initiated takeover bids with no intention of following through on the takeover.

Anti-Greenmail Provisions

An anti-greenmail provision is a special clause in a firm's corporate charter that prevents the Board of Directors from approving greenmail payments. An anti-greenmail provision will remove the possibility that a board takes the expedient way out and pays off an unwelcome acquirer of the company's shares, leaving shareholders worse off.

Sir James Goldsmith was a notorious corporate raider of the 1980s. He orchestrated two high-profile greenmail campaigns against St. Regis Paper Company and Goodyear Tire and Rubber Company. Goldsmith earned $51 million from his St. Regis venture and $93 million from his Goodyear raid, which took only 2 months.

In October 1986, Goldsmith purchased an 11.5% stake in Goodyear at an average cost of $42 a share. He also filed plans to finance a takeover of the company with the Securities & Exchange Commission (SEC). Part of his plan was to have the company sell off all of its assets except its tire business, which was not received well by Goodyear executives. In response to Goodyear's resistance, he proposed to sell his stake back to the company for $49.50 a share; this strong-arm proposal is often referred to as the ransom or the goodbye kiss. Eventually, Goodyear accepted and subsequently repurchased 40 million shares from shareholders at $50 per share, which cost the company $2.9 billion. Immediately following the repurchase, Goodyear’s share price fell to $42. 

Although greenmailing still occurs tacitly in various forms, several federal and state regulations have made it much more difficult for companies to repurchase shares from short-term investors above market price. In 1987, the Internal Revenue Service (IRS) introduced an excise tax of 50% on greenmail profits. In addition, companies have introduced various defense mechanisms, referred to as poison pills, to deter activist investors from making hostile takeover bids.

Despite the efforts to deter and prevent greenmailing, it is still being practiced implicitly in various ways. Greenmail does not always present the threat of a hostile takeover; sometimes, it presents the threat of a proxy contest that can substantially affect management and operations. For example, from 2011 to 2013, Icahn Associates, run by activist investor Carl Icahn, held a majority stake in WebMD. To restrict his ability to alter their leadership structure, WebMD repurchased its shares for approximately $177.3 million in 2013.