An often used tactic by hostile bidders in mergers & acquisitions is the practice of Greenmail. The bidder buys a sufficient amount of stock in the target company and convinces the target a hostile takeover is imminent. This may be a real strategy or a bluff. In order to make the unwanted bidder go away and prevent the hostile takeover, the target firm offers to repurchase the bidder’s stock holding in the target at a significant premium to the current market price. This anti-takeover defense tactic results in a handsome profit for the hostile attacker.
This practice gives the corporate raider an additional opportunity at producing a profit from the deal. If the bid is deemed friendly, all proceeds as expected. If management and the board of directors determine the bid is a hostile takeover approach, the attacker runs the risk of a drawn out and expensive takeover. Proxy fights, legal fees, marketing could all erode the attractiveness of the deal. By negotiating a greenmail settlement, this situation is avoided.
In return for accepting payment, the attacker usually agrees to sell their entire holding back to the target firm and agrees to a moratorium of action. This prevents the attacker from engaging in any corporate activity against the target firm for a specified period of time.
The practice of greenmail, or greenmailing is a neologism concocted in the 1980’s. It is derived from blackmail and greenback. Commentators and journalists saw the actions of the corporate raiders as similar to blackmail, where threats are made to establish a benefit. In this case, handing over money by using the threat of a takeover.
The Legaility of Greenmailing
Greenmail was significantly prominent during the 1980s, in particular between 1983 and 1984. Due to the explosion in the practice, many states in the U.S. adopted statutes to curtail or prohibit companies from attempting or paying greenmail.
These (amongst others) include
- A New York statute prohibits New York corporations from purchasing more than 10% of its own stock from a shareholder at a higher price than market value (unless approved in a majority vote by shareholders)
- Statutes in Ohio and Pennsylvania require investors who use greenmail to remove all profits they earn
- Under Section 5881 of the Internal Revenue Code, a 50% excise tax is payable on profits generated from greenmail. Although since the practice is not clearly defined, the excise tax is easily avoided
- Some jurisdictions impose a legal requirement on limits for launching a formal bid
Despite these restrictions coupled with other shark repellent defensive tactics, greenmailing has evolved and still exists in various guises in the modern era. For instance, WebMD repurchased its shares from activist Carl Icahn as recent as 2013.
Greenmail Example
One of the most famous and often repeated examples of greenmail involved Goodyear Company and Sir James Goldsmith. In 1986, Sir James Goldsmith had acquired an 11.5% stake in Goodyear. The purchase price was made at an average of $42.20 per share. Sir James had threatened a buyout of the firm at $49 per share totaling $4.7 billion.
The defensive response by Goodyear was to agree to a share repurchase of Sir James stake for $49.50 per share totaling $620.7 million. In return, Sir James would refrain from purchasing any Goodyear stock for the next 5 years. This earned Sir James a $93 million profit.
Greenmail tactics feature prominently in fictional contexts, especially finance movies. In the 1987 film Wall Street, fellow corporate raider Sir Larry Wildman, a character who was modelled on Sir James Goldsmith, refers to Gordon Gekko as “a two-bit pirate and a greenmailer“
