In share purchase agreement where the target company buys back its own company stocks in a hostile takeover bid from the raider for an inflated price at a hefty premium in order to ward off the acquisition; such payment of premium is called ‘Greenmail’. In exchange of such premium payment by the greenmailer, the raider agrees not to buy any more shares of the target company or refrain from the takeover attempt for a specified number of years.
With unwelcome corporate takeover on the rise, the year 1983 witnessed the emergence of the practice of greenmail in corporate circles. This practice was perceived to be at least less disgraceful than ‘blackmail’.
Blackmail is wrongful and illegal extortion of money under threat or duress, while greenmail could be used openly and legally to thwart takeover attempts. In greenmail the predator makes fat profits and gains only at the cost of the target company. Since this practice was openly in vogue in the financial markets and green is the color associated with money and because this custom was not covert or illegal (black); it came to be popularly known as greenmail, as distinguished from ‘blackmail’.
The practice of paying greenmail came to be condemned as both illegal and wrongful for the first time during the great merger wave of the 1980s. Such deals were projected as nothing less dishonorable, if not worse, than bribes or kickbacks. The custom was portrayed as a collusion involving embezzlement of corporate funds by company directors and blackmail by corporate raiders, which is nothing short of corporate bribery. By the mid 1990s legislatures of some states for the first time outlawed the practice of payment of greenmail in their jurisdictions through legislation.
Most states or jurisdictions had passed anti takeover laws, many of which have anti-greenmail provisions. The Ohio and Pennsylvania laws are among the most drastic, mandating raiders to refund greenmail gains to the target company. However, the constitutional validity of these anti greenmail laws is not settled beyond doubt.
