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Greenmail is a term that refers to a type of corporate takeover defense strategy. It involves a hostile bidder, typically an activist investor or a corporate raider, acquiring a significant stake in a target company's stock, usually through a proxy fight or a tender offer. The bidder then threatens to take control of the company or to break it up, unless the target company's management agrees to certain concessions, such as buying back the bidder's shares at a premium or making significant changes to the company's operations.
The term "greenmail" was coined because the bidder is essentially "greenmailing" the target company, demanding a ransom in exchange for not taking control of the company. The practice is often criticized because it can be seen as a form of extortion, and it can disrupt the normal operations of the target company.
Greenmail can take many forms, including:
- Proxy fight: The bidder acquires a significant stake in the target company's stock and then nominates its own slate of directors to replace the existing board.
- Tender offer: The bidder makes a tender offer to buy a certain percentage of the target company's outstanding shares at a premium price.
- Share buyback: The bidder demands that the target company buy back its shares at a premium price.
- Breakup: The bidder demands that the target company break up into smaller pieces or sell off certain assets.
Greenmail is often used by activist investors or corporate raiders who are seeking to unlock value in a target company by forcing changes to its operations or capital structure. However, it can also be used by companies to fend off unwanted takeovers or to negotiate better terms with a bidder.