Greenmail is a legal practice where a company pays a large sum of money to someone who owns a significant share of the company’s stock to prevent a hostile takeover. The term originated in the 1980s during the hostile takeover boom in the US and requires a lot of affordable funds. Companies may try to negotiate an agreement with the greenmailer to prevent future attempts, and some people believe it is a slimy business practice.
Greenmail is a sum of money paid by a company to someone who owns a large share of the company’s stock, with the aim of preventing a hostile takeover. The term is a portmanteau of “dollar”, a slang term for US currency, and “blackmail”. Some companies also refer to greenmail as a goodbye kiss or bon voyage bonus, referring to the fact that the company basically says goodbye to a substantial sum of money when you pay greenmail.
This term originated in 1983, during the height of the hostile takeover boom in the United States. In the 1980s, countless companies gobbled themselves up, taking advantage of increased liquidity to acquire a variety of new assets. Some companies were naturally unhappy with this state of affairs and tried to fight these takeovers. The greenmailers saw the potential to earn substantial amounts and took advantage of it.
A greenmail attempt requires a lot of affordable funds, because the greenmailer must be able to buy enough shares in a company to legitimately threaten a takeover. After the shares are purchased, the greenmailer can alert the company to the situation, if the company has not already noticed, and the company is invited to make an offer to buy the shares back. The company typically pays a premium above the true value of the shares to regain control of the shares, allowing the greenmailer to profit, sometimes substantially.
When a company pays greenmail, it may also try to negotiate an agreement with the greenmailer, usually to the effect that the attempt will not be repeated. Many companies also try to keep blackmail attempts secret, to discourage further attempts, and because to capitulate with what is really just blackmail can be a bad PR move. However, greenmailers may go public in hopes of forcing a high deal, an attempt that sometimes backfires.
This practice is perfectly legal: there is nothing to stop someone from buying a controlling share in a company, and nothing to stop a company from buying that share back. However, some people believe that it is a rather slimy business practice, and these individuals would rather see regulations that can stop greenmail. At the very least, blackmail attempts could potentially be prosecuted by experienced lawyers if the blackmailer slips up and crosses the line into blackmail, because blackmail is certainly illegal.
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