What is Greenmail?

Greenmail is an acquisition tactic whereby the acquirer attempts to obtain a controlling interest in a target by buying shares at a premium from the target's shareholders.

How Does Greenmail Work?

Let's assume an entity that Company XYZ considers unsavory (we'll call it Party X) is attempting to acquire control of Company XYZ by offering to buy shares at a premium from Company XYZ's shareholders.

To avoid being purchased by Party X, Company XYZ's board of directors might offer to purchase Party X's shares for a price above the current market price. This of course makes Party X go away (and a lot richer, by the way), but the transaction can also be construed as Party X blackmailing (or greenmailing) Company XYZ by threatening to take over the company if it does not pay a particular premium to Party X.

Why Does Greenmail Matter?

To avoid this situation, in which Company XYZ might make an offer to repurchase shares at a price above what other shareholders might get, anti-greenmail provisions exist. These provisions generally state that if Company XYZ pays a premium to repurchase shares, it must offer that premium to all shareholders. An anti-greenmail provision is a clause in a corporation's charter that deters the corporation's board from conducting a stock buyback.

Company XYZ does this in exchange for Party X's agreement not to attempt to acquire the company for a period of time. Anti-greenmail provisions are attempts to thwart takeover threats from speculators, disruptive shareholders, and other 'unsavory' entities that are seeking a payoff rather than a genuine business relationship. In general, a corporation's shareholders must vote to adopt or abandon anti-greenmail provisions.