Greenmail

GREENMAIL

A corporation's attempt to stop a takeover bid by paying a price above market value for stock held by the aggressor.

Greenmail is a practice in corporate mergers and acquisitions. Like blackmail, the concept after which it is named, greenmail is money paid to an aggressor to stop an act of aggression. In the case of greenmail, the aggressor is an investor attempting to take over a corporation by buying up a majority of its stock, and the money is paid to stop the takeover. The corporation under attack pays an inflated price to buy stock from the aggressor, known popularly as a corporate raider. After the greenmail payment, the takeover attempt is halted. The raider is richer; the corporation is poorer but retains control. During a great wave of corporate mergers in the 1980s, the practice of paying greenmail became controversial. Critics viewed it as harmful to U.S. business interests. Portraying the transaction as little more than a bribe, they argued that some corporate raiders began takeover bids simply to earn profits through greenmail. Corporate shareholders also protested the practice. By the mid-1990s, state legislatures had taken the lead in opposing greenmail through legislation.

The increase in corporate mergers in the 1980s made the hostile corporate takeover a familiar event. Before the decade's multi-billion-dollar takeovers, corporate mergers usually involved a mutual agreement. In contrast, hostile takeovers ignore the target corporation's management. One form of hostile takeover involves stock. Whoever owns the most stock controls the corporation. Instead of entering negotiations with management, corporate raiders go to the corporation's stockholders with offers to buy their stock. Not only the means but also the goals of these acquisitions differ from those of earlier acquisitions. Prior to the 1980s, mergers generally occurred when larger interests bought up smaller competitors in similar industries, with an eye toward dominating a particular market. In hostile takeovers, corporate raiders often intend to break up and sell a corporation after the takeover is complete. Their interest commonly lies in earning enormous short-term profits from selling a company's assets, motivating corporations to try to protect themselves against takeovers.

Greenmail is one of an array of strategies, ranging from changing corporate bylaws to acquiring debt that makes the corporation a less attractive target, used to deter raiders. It is an expensive alternative, as was illustrated when investor Saul P. Steinberg attempted to take over the Disney Corporation in 1984. Steinberg was known for his concerted efforts in the takeover field, having previously targeted Chemical Bank and Quaker State. In March 1984, his purchase of 6.3 percent of Disney's stock triggered concern at the corporation that a takeover was in progress. Disney management quickly announced an approximately $390 million acquisition of its own that would make the company less attractive. After this maneuver failed, Disney's directors ultimately bought Steinberg's stock to stop the takeover. Steinberg earned a profit of about $60 million.

The Disney case illustrates a major criticism of greenmail: other stockholders blame corporate directors for showing undue favoritism to corporate raiders, who are paid exorbitant sums for stock whereas the stockholders are not. This criticism formed the basis of a lawsuit that produced one of the few court decisions condemning greenmail outright. In 1984, Disney stockholders sued the corporation's directors as well as Steinberg and his fellow investors, seeking to recover the amount paid as greenmail. They won an injunction from the Superior Court of Los Angeles County, which placed Steinberg's profits from the sale in a trust. The verdict was upheld on appeal (Heckmann v. Ahmanson, 168 Cal. App. 3d 119, 214 Cal. Rptr. 177 [Cal. Ct. App. 1985]). In ordering the profits put in a trust, the court sought "to prevent unjust enrichment" that would otherwise "reward [Steinberg] for his wrongdoing." In 1989, Steinberg settled with the plaintiffs for approximately $21.1 million.

Although greenmail's heyday was in the 1980s, it continued to be controversial in the 1990s. Criticism of greenmail grew out of a larger condemnation of the way in which corporate raiders had rewritten the rules of mergers and acquisitions in an avaricious, shortsighted manner. Some critics viewed this trend harshly. In his 1995 work on the subject, Professor David C. Bayne portrayed greenmail as a pact involving embezzlement by corporate directors and blackmail by corporate raiders. Bayne said greenmail is "nothing other than a recondite species of the broader genus Corporate Bribery, and as such is intrinsically illegitimate." States increasingly viewed greenmail in the same light. Most states had enacted antitakeover laws, and several had anti-greenmail provisions. The Ohio and Pennsylvania laws were among the toughest, requiring raiders to return greenmail profits to the target corporation (Ohio Rev. Code Ann. § 1707.043 [Anderson Supp. 1990]; 15 Pa. Cons. Stat. Ann. §§ 2571–2576 [Purdon Supp. 1991]). Some people doubt the constitutionality of these laws, and the issue of greenmail remains far from settled.

further readings

Bayne, David Cowan. 2001. "Traffic in Corporate Control—Greenmail: Damages and the Disposition of the Bribe." University of Detroit Mercy Law Review 78 (summer): 617–39.

——. 1995. "Traffic in Corporate Control—Greenmail: The Definition of the Reverse Premium-Bribe." University of Dayton Law Review 20 (spring).

Crain, Mark E. 1991. "Disgorgement of Greenmail Profits: Examining a New Weapon in State Anti-Takeover Arsenals." Houston Law Review 28 (July).

"Securities and Exchanges: Greenmail." 1991. United States Law Week 60 (November 5).