The term is a greenmail is formed by combining the terms greenback and blackmail, invented by journalists and commentators who saw the practices of corporate raiders as a form of blackmail. The target company is financially held hostage, and is legally forced to pay the greenmailer to go away. Greenmailing is a variation on the corporate raid or hostile takeover. The greenmailer commonly targets a publicly traded company that is cash rich but often undervalued, with large assets and possibly a solid customer base.
Other targets are companies that are simply inefficient. The greenmailer isn’t really interested in the business of the company. It doesn’t want to own the company, improve it, or further build it up. It will, if forced to acquire the target, sell its parts off piecemeal, which can bring a greater profit than selling the whole target. This is called asset stripping and involves replacing management and firing employees. Greenmail proved lucrative for investors such as T. Boone Pickens and Sir James Goldsmith during the 1980s.
In the latter example, Goldsmith made $90 million from the Goodyear Tire and Rubber Company in the 1980s in this manner. Occidental Petroleum paid greenmail to David Murdoch in 1984. However, if a proper greenmail occurs, the greenmailer merely secures a significant stake in the target company. The greenmailer can offer to end the threat to the target company by selling its share back at a substantial premium. The target or “mark” can also go private with the same results: a profit to the greenmailer.
The greenmailer gets away with no oversight, low overhead, and its profits. The target is left poorer and without the assets that attracted the raid in the beginning. A company which agrees to buy back the bidder’s stock position avoids being taken over. In return, the bidder agrees to abandon the takeover attempt and may sign a confidential agreement with the “greenmailer” who will agree not to resume the maneuver for a period of time. Greenmail is a corporate defense mechanism to buy back shares from shareholders attempting to control the firm.
The practice has many critics but it can result to potential windfall for the company by protecting company shares from low takeovr bids and gives the firm the opportunity to restructure management. While benefiting the “greenmailer”, the company loses capital and other assets. This hamstrings its future growth potential. This means the shareholders lose as well in addition to impacting the supplier and customers economically linked to the company. Generally the company’s existing management may remain in place but the employees usually see their ranks reduced.
Courts in states such as Calfornia have favored shareholder lawsuits, based on the contention that greenmailer constituted a breach of fiduciary responsibility. Greenmail is arguably counter productive because once such a payment becomes public others may feign a takeover attempt. Greenmail is money paid by a company (or allied company or individual) to acquire its own shares of stock from a shareholder who is threatening to take control of, or unwanted influence over, the company. In the parlance of the financial community, strategies to prevent a takeover are called a “Poison pill”.
This implies that the corporate raider will suffer if they try to swallow the target of the takeover. This involves a myriad of arcane changes in the details of corporate ownership structure, investment market rules, and may involve legal requirement in the jurisdiction where the company is incorporated. Individual states may pass “protectionist” laws that impose limits for launching formal bids, or obligations to seek shareholder approval for the buyback of its own shares, and in Federal tax treatment of greenmail gains have all made greenmail far less common since the early 1990s.
Heckmann et al. v. Ahmanson trial in July 1989. This was one of the final cases involving the payment of ”greenmail”. Greenmail is slang for targeted share repurchases – transactions in which a company repurchases shares from specific holders, rather than on the open market. In the 1980s, it was not uncommon for companies to pay greenmail to large investors who were challenging corporate management and threatening a takeover of the firm.
In this case, Disney had paid a premium price to repurchase shares accumulated by Saul Steinberg’s Reliance Group. Working with attorney Michael Hennigan, I explained to the jury how this could damage Disney’s other shareholders and to estimate the amount of the damage. Following my direct examination, as Arthur Liman was standing to begin his cross, the judge decided recess the trial early for the July 4th holiday. During the recess, the case settled. It was the only greenmail case in which plaintiffs received a cash settlement.