Greenmail
Greenmail or greenmailing is the practice of purchasing enough shares in a firm to challenge a firm's management or leadership and even threaten a corporate takeover, thereby forcing the target firm to buy those shares back at a premium in order to suspend the potential takeover or to take other actions that remove equity from the target firm and return it to the greenmailer.
The term is a neologism derived from blackmail and greenback as commentators and journalists saw the practice of said 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 paid real estate assets and lease back the real estate as a recurring lease payment, while returning the sold off real estate as a special dividend. One vivid example of this practice, was the attempted takeover of the retailer Target Corporation by William Ackman's Pershing Square Capital Management, which had a large inventory of mature or nearly mature real estate properties in its corporate portfolio that Ackman attempted to have spun off as an IPO, along with Target's partial sale of its credit-card unit and the execution of share buybacks which reduce the number of shareholders and shares outstanding by using corporate equity and earnings to repurchase existing shareholders positions. [1] However, 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 as a business metaphor is unclear. A company which agrees to buy back the bidder's stockholding in the target avoids being taken over. In return, the bidder agrees to 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 predator, the company and its shareholders lose money. Greenmail also perpetuates the company's existing management and employees, 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.[2]
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. (Source: J. Fred Weston, Mark L.Mitchell J. Harold Mulherin—Takeovers, Restructuring, and Corporate Governance: page 529)
- Cases
- Viacom Int'l, Inc. v. Icahn, 747 F. Supp. 205 (S.D.N.Y. 1990)
- Polk v. Good, 507 A.2d 531 (Del. 1986).
Prevention
Changes in the details of corporate ownership structure, in the investment markets generally, and the legal requirement in some jurisdictions for companies to impose limits for launching formal bids, or obligations to seek shareholder approval for the buyback of its own shares, and in Federal tax treatment of greenmail gains (a 50% excise tax)[3] 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.).
See also
Notes
- ↑ Ackman Says Target REIT IPO Would Raise $5.1 Billion (Update2), Bloomberg news, By Lauren Coleman-Lochner - November 19, 2008 20:00 EST
- ↑ Lua error in package.lua at line 80: module 'strict' not found.
- ↑ IRS Form 8725 : Excise Tax on Greenmail
References
- David Manry & David Stangeland, 'Greenmail: A Brief History' (2001) 6 Stanford Journal of Law, Business and Finance 217 [1] (not free)
