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Term in finance

Greenmail or greenmailing is a financial maneuver where investors buy enough shares in a target company to threaten a hostile takeover, prompting the target company to buy back the shares at a premium to prevent the takeover.

Corporate raids involve hostile takeovers of undervalued companies, sometimes through asset stripping or pressuring the sale of valuable assets like real estate. Greenmailers may offer to sell back their shares to the target company at a premium, resulting in losses for the company and its shareholders.

The tactic was used by investors such as T. Boone Pickens and Sir James Goldsmith in the 1980s, who made profits by pressuring companies into repurchasing shares at a premium. For instance, Goldsmith's group acquired stakes in companies like St. Regis, prompting buybacks at a higher price and yielding substantial profits.

Greenmail is a complex corporate strategy, but legal restrictions and counter-tactics, like imposing limits on formal bids and a 50% excise tax on gains in the United States, have made it less common since the early 1990s.

Term

The term is a financial neologism, coined in the 1980s, from blackmail and greenback as commentators and journalists saw the practice of corporate raiders as attempts by well-financed individuals, or their operating companies, to blackmail a company into handing over money by using the threat of a takeover.

Tactic

Corporate raids occasionally aim to generate large amounts of money by hostile takeovers of large, often undervalued or inefficient (i.e. non-profit-maximizing) companies, by either asset stripping and/or replacing management and employees. In other circumstances, the greenmailer seeks out assets the target company has built up as equity, such as real estate, and attempts to have the target company dispose of those assets and lease them back via a recurring lease payment, while returning the sold-off real estate to shareholders as a special dividend.

The greenmail strategy has evolved since its first practices with ways to counter greenmail, other variations of greenmail, as well as ways to reinforce a greenmail tactic. In the area of mergers and acquisitions, the greenmail payment is made in an attempt to stop the hostile takeover.

One example of this practice was the attempted takeover by William Ackman's Pershing Square Capital Management of American retailer Target, which had a large inventory of mature or nearly mature real estate properties in its corporate portfolio. Ackman attempted to have these assets spun off as an IPO, along with a partial sale of Target's credit card unit and the execution of share buybacks, which reduce the number of shares outstanding by using corporate equity and earnings to repurchase existing shareholders' positions.

Once having secured a large share of a target company, instead of completing the hostile takeover, the greenmailer offers to end the threat to the victim company by selling his share back to it, but at a substantial premium to the fair market stock price.

From the viewpoint of the target, the ransom payment may be referred to as a goodbye kiss. The origin of the term goodbye kiss as a business metaphor is unclear. In reference to a President, Chairman, or CEO in charge of a target company being taken over, there are many situations in which a golden parachute is provided. A company which agrees to buy back the bidder's stockholding in the target avoids being taken over. In return, the bidder agrees to momentarily abandon the takeover attempt and may sign a confidential agreement with the greenmailee, guaranteeing not to resume the maneuver for a period of time.

While benefiting the corporate raider, the company and the company's shareholders lose money. Greenmail also momentarily protects the company's existing management and employees from termination, demotion, or reduction in wages, which would have most certainly seen their ranks reduced or eliminated had the hostile takeover successfully gone through.

Examples

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. In 1984, Occidental Petroleum paid $194 million greenmail to David Murdock.

The St. Regis Paper Company provides an example of greenmail. When an investor group led by Sir James Goldsmith acquired 8.6% stake in St. Regis and expressed interest in taking over the paper concern, the company agreed to repurchase the shares at a premium. Goldsmith's group acquired the shares for an average price of $35.50 per share, a total of $109 million. It sold its stake at $52 per share, netting a profit of $51 million. Shortly after the payoff in March 1984, St. Regis became the target of publisher Rupert Murdoch. St Regis turned to Champion International and agreed to a $1.84 billion takeover. Murdoch tendered his 5.6% stake in St. Regis to the Champion offer for a profit.

In a fictional context, greenmail tactics are prominently used in the 1987 film Wall Street. At one point, fellow corporate raider Sir Larry Wildman refers to Gordon Gekko as "a two-bit pirate and a greenmailer."

2024 Ohio case

In 2021, a plaintiff's law firm tried to sue two so-called "activist" investors in a Franklin County, Ohio court, alleging that the investors violated Ohio's law against greenmailing. Law firm Robbins Geller Rudman & Dowd LLP represented the Corpus Christi Firefighters’ Retirement System and filed the suit against two investment firms. In the suit, the plaintiff alleged that Macellum and Ancora attempted to engage in a greenmail campaign against Big Lots, a publicly traded discount retailer. Ohio's statute would force the investors to give up any profits it earned from ownership of Big Lots stock if they had engaged in greenmailing. However, the investors did not make any such attempt, according to RealClearMarkets. In March 2024, Ohio Judge Daniel Hawkins - who is running for the Ohio Supreme Court - dismissed the case.

Other cases

A Harvard Business School case study in 1990 pointed to the repeated use of greenmail attempts by the Walt Disney Company - "a much criticized defensive tactic which Disney uses trying to buy enough time to fix its investment and financial strategies."

In 2003, Michael Ashcroft was criticised by the High Court judge, Mr Justice Peter Smith in Rock (Nominees) Ltd v RCO (Holdings) Plc. Smith condemned Ashcroft's tactics in relation to the takeover of cleaning company RCO by the Danish firm ISS. Smith said,

Euphemistically this practice – which I understand is a not unheard-of practice in the City – is described as "greenmail". The proper word to my mind is blackmail. It is the kind of thing which brings the City into disrepute ...

— Justice Peter Smith

History

Greenmail's use, as a strategy, is one of many corporate finance tactics. The most cited 20th century legal precedents of stock manipulation, which set the foundation for tactics like Greenmail, were:

Cases

Significant pre-20th century precedents of stock manipulation, which set the foundation for tactics like Greenmail, were:

Historic Examples

Prevention tactics

Greenmail is a financially sophisticated corporate business tactic, and many counter-tactics have been applied to defend against and to financially engineer the reception of a greenmail. There is a legal requirement in some jurisdictions for companies to impose limits for launching formal bids. United States Federal tax treatment of greenmail gains (a 50% excise tax), legal restrictions, as well as counter-tactics have all made greenmail far less common since the early 1990s (see 26 U.S.C. § 5881, and 26 C.F.R. Part 156, notably § 156.5881-1 ff.).

Some U.S. states have enacted laws prohibiting greenmailing. In Ohio, for example, a state statute makes it illegal for someone who has made the intention of trying to acquire control of a company from disposing of their shares in that company within 18 months after making the intention. New York's anti-greenmail law prohibits a corporation from buying back more than 10 percent of its stock from a shareholder for more than market value. It is only allowed if it is approved by both the board of directors and a majority of shareholders (excluding the shareholder in question attempting to sell back the stock).

See also

Notes

  1. ^ ""Greenmail" Makes a Comeback". Harvard Law School Forum on Corporate Governance and Financial Regulation. 2014-01-22. Archived from the original on 2019-01-07. Retrieved 17 November 2017.
  2. "greenmail" Cornell Law School. Retrieved October 25 2022.
  3. "Greenmail: Definition, How It Works, Example, Legality". Investopedia. Retrieved 2024-07-11.
  4. "The Pioneers". Investopedia. Archived from the original on 1 November 2017. Retrieved 17 November 2017.
  5. Ackman Says Target REIT IPO Would Raise $5.1 Billion (Update2), Bloomberg news, By Lauren Coleman-Lochner - November 19, 2008 20:00 EST
  6. Parrish, Michael (1992-03-21). "Occidental Ends Lawsuits Over Cost of Buyout: Settlement: Oxy will pay $3.65 million to shareholders who objected to the price David Murdock got for his shares in 1984". Los Angeles Times. Archived from the original on 2013-10-29. Retrieved 25 October 2013.
  7. J. Fred Weston, Mark L.Mitchell J. Harold Mulherin—Takeovers, Restructuring, and Corporate Governance: page 529
  8. Riley, Kim (2024-02-16). "How one Ohio lawsuit could quell legitimate shareholder activism in the state". Financial Regulation News. Retrieved 2024-05-14.
  9. Lubrano, Mike (2021-08-03). "Another Threat to Shareholders Emerges In Ohio | RealClearMarkets". www.realclearmarkets.com. Retrieved 2024-05-14.
  10. Laura Hancock, cleveland com (2023-05-15). "3rd Republican judge announces campaign for Ohio Supreme Court". cleveland. Retrieved 2024-05-14.
  11. Riley, Kim (2024-03-21). "Activist investors win greenmail case in Ohio". Financial Regulation News. Retrieved 2024-05-14.
  12. "Walt Disney Productions: Greenmail - Case - Faculty & Research - Harvard Business School". www.hbs.edu. Retrieved 2024-05-14.
  13. EWHC 936 (Ch), upheld in the Court of Appeal EWCA Civ 118, however Jonathan Parker LJ said, "That being so, it was in my judgment unnecessary and inappropriate for the judge to have expressed himself in such extreme language. However, the fact that he chose to express himself as he did has no impact on the conclusion which he reached on the issue of undervalue: a conclusion which, for the reasons I have given, was in my judgment plainly correct."
  14. Walsh, Conal; Antony Barnett (11 May 2003). "Ghost of Gekko in Ashcroft's greenmail". The Observer. London. Archived from the original on 11 September 2014. Retrieved 12 July 2009.
  15. "Management, Hostile Takeovers: Russian Style". Knowledge@Wharton. 2009-04-20. Archived from the original on 2019-07-03. Retrieved 17 November 2017.
  16. Ronald D. Orol (2007). Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World. John Wiley & Sons. pp. 14, 22, 23, 329. ISBN 978-0-470-45024-6. Archived from the original on 2020-10-27. Retrieved 2020-10-02.
  17. Connie Bruck (1988). Predator's Ball. Penguin. pp. 233, 234. ISBN 978-0-949338-85-3. Archived from the original on 2020-10-27. Retrieved 2020-10-02.
  18. "GILLETTE DEAL ENDS REVLON BID". New York Times. 1986-11-25. Archived from the original on 2019-06-16. Retrieved 17 November 2017.
  19. "Hushmail: Are Activist Hedge Funds Breaking Bad?". Harvard Law School Forum on Corporate Governance and Financial Regulation. 2014-07-07. Archived from the original on 2015-05-16. Retrieved 17 November 2017.
  20. "Hostile Takeover Defenses". Slideshare. 5 November 2010. Archived from the original on 2016-12-05. Retrieved 2017-08-15.
  21. "The Rise of Investor-Centric Activism Defense Strategy". Harvard Law School. Archived from the original on 2017-07-05. Retrieved 2017-08-15.
  22. "IRS Form 8725: Excise Tax on Greenmail" (PDF). Archived (PDF) from the original on 2017-05-04. Retrieved 2017-08-10.
  23. Elman, David (2021-09-01). "Big Lots Lawsuit Puts Greenmail Under Microscope in Ohio". The Deal. Retrieved 2024-05-14.
  24. Granata, Enrico; Klein, Spencer (2014-01-22). ""Greenmail" Makes a Comeback". The Harvard Law School Forum on Corporate Governance. Retrieved 2024-05-14.

References

  • David Manry & David Stangeland, 'Greenmail: A Brief History' (2001) 6 Stanford Journal of Law, Business and Finance 217 (not free)

External links

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