Greenmail

Greenmail: Definition, How It Works, Legal Response, and an Example

What is greenmail?

Greenmail is a tactic in mergers and acquisitions where an investor (often called a corporate raider or greenmailer) acquires a substantial block of a company’s shares and threatens a hostile takeover. To avoid the takeover, the target company repurchases those shares at a premium, effectively paying the greenmailer to stop the attempt. The premium paid to the investor is called greenmail.

How it works

• An investor accumulates a large minority stake in a target company.
• The investor signals or initiates a takeover bid, creating pressure on management and the board.
• Rather than fight the takeover or restructure, the target may offer to buy back the investor’s stake at an above-market price.
• In exchange for the premium, the investor agrees to abandon the takeover bid and typically to refrain from acquiring more shares for a specified period.

The practice resembles extortion in that the investor leverages the threat of disruption to extract a profit without intending to operate the company long-term.

Legal and regulatory response

Greenmail became prominent in the 1980s and prompted legal and market responses that have made it much less common:
* Taxation: In 1987 the U.S. Internal Revenue Service imposed a 50% excise tax on greenmail profits, reducing the incentive.
* Corporate defenses: Companies adopted anti-takeover measures such as poison pills to deter hostile bids.
* Charter provisions: Many firms include anti-greenmail clauses in their corporate charters to prevent boards from approving such buybacks.
These changes, combined with greater shareholder scrutiny, have curtailed straightforward greenmail transactions, though related tactics can still occur in subtler forms.

Criticisms and defenses

Criticism:
* Viewed as predatory or akin to extortion: the greenmailer profits at the company’s expense without adding value.
* Harms remaining shareholders by draining corporate cash and often harming share price after repurchases.

Defense:
* Can be framed as a market mechanism: if a raider genuinely believes assets are misallocated, a takeover threat can force value-revealing actions (sell-offs, restructuring).
* If management can pay greenmail to retain control, that can be interpreted as a market test showing that the assets should remain under current management—though this depends on whether such payments reflect true shareholder value.

Example: James Goldsmith and Goodyear

In the 1980s corporate raider Sir James Goldsmith executed notable greenmail campaigns. In October 1986 he bought an 11.5% stake in Goodyear at roughly $42 a share and filed takeover plans with the SEC. He proposed that Goodyear sell off non-core assets, a plan resisted by management. Goldsmith then offered to sell his stake back to the company for $49.50 per share. Goodyear ultimately repurchased 40 million shares at $50 per share, costing about $2.9 billion; the stock dropped to around $42 after the buyback. Goldsmith reportedly earned tens of millions from similar campaigns, illustrating both the profit potential for raiders and the large cost imposed on target companies.

Conclusion

Greenmail is a historically significant takeover defense in which a company pays a premium to buy back shares from an aggressive investor to avert a hostile takeover. Once widespread in the 1980s, it has declined due to taxes, legal constraints, and corporate defenses. It remains controversial: critics call it extortionate and value-destructive, while some argue it can surface legitimate disagreements about asset use and corporate strategy.