Greenmail meaning
Greenmail is a term used in finance and corporate governance to describe a situation where a shareholder or investor threatens to take control of a company by acquiring a significant amount of its shares, unless the company agrees to buy back those shares at a higher price than their current market value.
In other words, greenmail is a form of extortion where an investor demands a premium price for their shares in exchange for not taking control of the company. This can be done by threatening to launch a hostile takeover bid, which can be costly and time-consuming for the target company.
The term "greenmail" was coined because the investor is essentially "greenmailing" the company, or demanding a ransom in exchange for not taking control of it. Greenmail is often seen as a form of corporate raiding, where an investor seeks to profit from the company's assets rather than its underlying business.
Greenmail can be problematic because it can create uncertainty and instability for the company, its employees, and its customers. It can also lead to the diversion of resources away from the company's core business and towards defending against the takeover bid.
To prevent greenmail, companies may use various strategies, such as:
- Poison pills: These are provisions in a company's charter that make it more difficult or expensive for an investor to take control of the company.
- Share buybacks: Companies may buy back their own shares to reduce the number of shares available for acquisition by an investor.
- Defensive mergers: Companies may merge with another company to make it more difficult for an investor to take control.
- Proxy contests: Companies may engage in proxy contests to persuade shareholders to vote against the investor's proposal.
Overall, greenmail is a complex and controversial issue in corporate finance, and companies must carefully consider their options and strategies to protect their interests.