Updated July 21, 2023
What is Greenmail?
Greenmail can be termed as the tactics of purchasing a bulk share of a given business and threatening them with a hostile takeover which in turn makes the target business make an offer of repurchasing shares at a premium to the purchaser of the bulk shares.
The payment of this could be termed as a defensive tactic to prevent any bid of a potential takeover allowing the greenmailer to earn a big fat profit.
Greenmailer is the individual who purchases the bulk shares of the company. He may display the capacity to purchase share ownership of up to 51 percent. In mergers and acquisitions, when an individual or entity purchases bulk ownership of shares, then this is regarded as the act of hostile takeover. To prevent such an act, the target business offers to buy the ownership at a premium from the greenmailer and this is the concept. It can be compared with the concept of blackmail. The green mailer is also at times termed as a corporate raider.
How Does it Work?
The process of greenmail happens in four basic steps. In the first step, the corporate raider makes bulk purchases from the open market as well as from the secondary financial market. As the second step, the corporate raider then threatens the target company of initiating a hostile takeover. He may not pursue such an act if the target company buys the shares back at a premium or at a price that is above the fair market value.
The target business accepts the offer and utilizes the money of shareholders to pay the premium value to the greenmailer or the corporate raider. Additionally, the management also instructs the corporate raider to leave the target business and he won’t purchase the shares after the stipulated period. In the event of non-compliance, the business may undertake legal recourse. Once the premium money is repaid, the company value of the target business is reduced substantially and the greenmailer walks out with a significant profit at hand.
Examples of Greenmail
Below are the examples:
Let us take the example of renowned American investor Carl Icahn who made a substantial purchase of 9.9 percent stake at the price of $7.21 per share in the business Saxon Industry. The Saxon realized that there is a potential threat that the investor may buy more shares and raise his stake in the company. In such a case, the threat of hostile takeover by Carl Icahn was imminent.
To prevent this from happening, the business made the purchase of a 9.9 percent stake at a whopping price of $10.50 per share. This signified a premium payment of 45 percent of the overall buying price of the activist investor.
The second example deals with Sir James Goldsmith. In 1986, the investor held stake ownership of 11.5 percent at the price of $42.20 per share in the business of Goodyear company. He further threatened the business to buy the additional stake at the price of $49 per share which was then valued at $4.7 billion.
To prevent the attempts of Sir James Goldsmith, the company offered to repurchase 11.5 percent shares from the investor for $49.50 per share. The deal was valued at $620.7 million. The business also made the deal on the condition that the investor would not make any more attempts to purchase the stock for at least 5 years.
Challenges Situation in Greenmail
In greenmail, the target business is normally faced with two broad challenges. The target business has to either do nothing and let the hostile entity to take over the institution. The second challenge is that it pays the premium to the greenmailer and let him move out with a huge profit. In the first case, the target company faces the threat of management change and due to some emotional reasons, the boss and the management would not be inclined to bow down to the hostile takeover. In the second case, the business is on the verge of losing substantial market value.
Legality of Greenmail
The period of the 1980s was regarded as the period of greenmail. During this period, many corporate mergers took place as an advent from the greenmails. To prevent at large scale, there was the introduction of state and federal regulations that made it impossible for the business to repurchase shares at a premium from the short-term stakeholders or the corporate raiders.
In 1987, the internal revenue service of the US introduced a 50 percent flat tax on the profits of greenmail. The target business itself introduces poison pills that discourage the attempts of the hostile takeover. To curb greenmail, anti-greenmail provisions are incorporated in the business charter of the company.
As per the anti-greenmail provisions, the business would remove the possibility or the attempt by the board of directors to approve a greenmail payment. This, in turn, does not compromise the position of the other shareholders in the business. Some known laws are that of the New York statue and that of Ohio and Pennsylvania.
As per the New York statue, the corporation is prohibited to make a repurchase of bulk shares of more than 10 percent and such purchases should not be done at a premium price. The Ohio and Pennsylvania statue makes the investors remove all profits they earn through the mode of greenmail.
This could be regarded and can be compared to the concept of the blackmail. The word green, however, is applied because the money earned from such an activity signifies legitimate money. In the situation of greenmail, the corporate raider purchases bulk shares and threaten the target business to take over the business. If the business offers to repurchase the shares on premium, then only the entity won’t pursue a hostile takeover. In the entire situation, the greenmailer although having no intent to take over the business earns a big fat profit on the entire transaction.
This is a guide to Greenmail. Here we discuss an explanation, how does it works, examples to implement, and legality with challenges in detail. You can also go through our other related articles to learn more –