what is greenmail 
greenmail is the practice of buying enough shares in a company to threaten a hostile takeover so that the target company will instead repurchase its shares at a premium regarding mergers and acquisitions the company makes a greenmail payment as a defensive measure to stop the takeover bid the target company must repurchase the stock at a substantial premium to thwart the takeover which results in a considerable profit for the greenmailer understanding greenmaillike blackmail greenmail is money paid to an entity to stop or prevent aggressive behavior in mergers and acquisitions it is an anti takeover measure in which the target company pays a premium known as greenmail to purchase its own shares back at inflated prices from a corporate raider after accepting the greenmail payment the raider generally agrees to discontinue the takeover and not buy any more shares for a specific time the term greenmail stems from a combination of blackmail and greenbacks u s dollars the high number of corporate mergers that occurred during the 1980s led to a wave of greenmail during that time it was suspected that some corporate raiders seeking only to profit initiated takeover bids with no intention of following through on the takeover greenmail is much less common today because of laws regulations taxes and anti greenmail provisions although greenmail still occurs tacitly in various forms several federal and state regulations made it much more difficult in 1987 the internal revenue service irs introduced an excise tax of 50 on greenmail profits 1 furthermore companies have introduced various defense mechanisms referred to as poison pills to deter activist investors from making hostile takeover bids an anti greenmail provision is a special clause in a firm s corporate charter that prevents the board of directors from approving greenmail payments an anti greenmail rule will remove the possibility that a board takes the expedient way out and pays off an unwelcome acquirer of the company s shares leaving shareholders worse off criticism of greenmailgreenmail is often seen as a predatory practice bordering on extortion in this view the greenmailer who buys up shares does not intend to participate in the company s operations as a shareholder instead the greenmailer buys the shares intending only to threaten management with a hostile takeover or other actions if successful critics believe that the greenmailer profits at the company s expense while providing nothing in return greenmail is conceptually similar to blackmail but green denotes legitimate money benefits of greenmaildespite its sinister reputation some forms of greenmail can be seen as free market solutions to real disputes between shareholders a corporate raider may genuinely believe that resources within the company are not used effectively one solution may be to sell off assets at a profit to other firms which can presumably put them to better use this arrangement could be beneficial to the corporate raider other shareholders and society as a whole however the firm s management may not share the corporate raider s view that their assets would be put to better use by others suppose that management can come up with the funds to pay greenmail instead that provides a sort of free market proof that the assets should remain under the firm s control the corporate raider forgoes the profits that could be made selling off assets by selling shares instead if the raider can make more money selling the assets greenmail does not occur because it would be unprofitable and economically inefficient hence greenmail only takes place when it is beneficial in this view real world examplesir james goldsmith was a notorious corporate raider in the 1980s he orchestrated two high profile greenmail campaigns against st regis paper company and goodyear tire and rubber company gt goldsmith earned 51 million from his st regis venture and 93 million from his goodyear raid which took only two months in october 1986 goldsmith purchased an 11 5 stake in goodyear at an average cost of 42 per share he also filed plans to finance a takeover of the company with the securities and exchange commission sec part of his plan was to have the company sell off all its assets except its tire business this plan was not well received among goodyear executives in response to goodyear s resistance goldsmith proposed to sell his stake back to the company for 49 50 a share this type of strong arm proposal is often referred to as the ransom or the goodbye kiss eventually goodyear accepted and subsequently repurchased 40 million shares from shareholders at 50 per share which cost the company 2 9 billion goodyear s share price fell to 42 immediately following the repurchase 