What Is Greenmail?
Greenmail is the method of buying enough shares in a company to attempt a hostile takeover to repurchase the target company's shares at a premium instead. In the case of fusions and acquisitions, the greenmail payment is made as a protective measure to stop the bid for the purchase.
The target company is forced to repurchase the stock at a large premium to foil the takeover, which gives the greenmailer a lucrative profit.
Understanding Greenmail
Like extortion, greenmail is money paid to an individual to stop aggressive behaviour or to discourage it. It's an anti-takeover mechanism in mergers and acquisitions in which the target company charges a premium, known as greenmail, to buy back its own stock shares from a corporate raider at inflated prices.
The raider generally agrees to discontinue the takeover after receiving the greenmail payment and does not buy any more shares for a given time.
The word "greenmail" is a mixture of extortion and greenbacks ($). The large number of corporate mergers that took place during the 1980s led to a greenmailing surge. At that time, some corporate raiders were accused of launching takeover bids, aiming only to profit, with no plan to follow through on the takeover.
Greenmail has largely been outlawed by most regulatory bodies.
Anti-Greenmail Provisions
An anti-greenmail rule is a special clause in the corporate charter of a company that prohibits greenmail payments from being accepted by the board of directors. An anti-greenmail clause would remove the possibility that the board will take the expedient way out and pass off the company's shares to an unexpected acquirer, leaving shareholders worse off.
