Greenmail provision

The Greenmail Provision!

The Greenmail Provision is a provision in the Securities Exchange Act of 1934, which is a federal law in the United States that regulates the securities industry. The provision is also known as Section 13(d) of the Act.

In essence, the Greenmail Provision prohibits a person or entity from acquiring a significant amount of stock in a publicly traded company with the intention of forcing the company to buy back the shares at a higher price, thereby generating a profit for the acquirer. This practice is often referred to as "greenmail."

Here's a brief history:

In the 1970s and 1980s, some corporate raiders, such as T. Boone Pickens and Carl Icahn, would acquire significant stakes in companies they believed were undervalued. They would then use this leverage to pressure the company's management to buy back the shares at a higher price, often by offering to sell their shares back to the company at a premium. This practice was seen as a way to extract profits from the company without adding any value.

The Greenmail Provision was enacted in response to concerns that this practice was unfair and could harm the company's shareholders, employees, and the overall economy. The provision makes it illegal for an acquirer to acquire a significant stake in a company with the intention of forcing the company to buy back the shares at a higher price.

The key elements of the Greenmail Provision are:

  1. Acquisition of a significant stake: The acquirer must acquire a significant stake in the company, typically 5% or more of the outstanding shares.
  2. Intent to sell: The acquirer must intend to sell the shares back to the company at a higher price.
  3. No intention to participate in the company's management: The acquirer must not intend to participate in the company's management or operations.

If an acquirer is found to have violated the Greenmail Provision, they may be subject to fines, penalties, and even criminal charges.

In summary, the Greenmail Provision is a federal law that prohibits corporate raiders and other acquirers from acquiring significant stakes in companies with the intention of forcing the company to buy back the shares at a higher price, thereby generating a profit for the acquirer.