Anti-Greenmail Provision

What Is an Anti-Greenmail Provision?

An anti-greenmail provision is a special clause in a company's corporate charter that prevents its board of directors from approving greenmail payments. Greenmail is when a company pays a premium to buy back the shares of an unwanted party that is attempting a hostile takeover.

Greenmail payments leave shareholders worse off because they use company resources to pay off hostile suitors. By preventing a company board from making these payments, anti-greenmail provisions can deter corporate raiders hoping for a quick payday.

How Anti-Greenmail Provisions Work

In the 1980s, a certain kind of investor known as a raider rose to prominence. These deep-pocketed investors would snap up undervalued companies and then controversially dismember them for their value. The goal was to bag a quick profit, rather than work to improve the long-term prospects of the target company.

This kind of opportunistic behavior—along with the fact that many companies lacked proper defenses against hostile takeovers—led to a surge in the practice of greenmailing. This is when raiders purchase a large enough stake in a company to mount a hostile takeover. Their aim is to force the target company to buy back the shares at a premium. Greenmailing is akin to blackmailing, where the green denotes money. In many cases, paying greenmail to hostile suitors was the only way to thwart a takeover attempt and protect long-term shareholder value.

Anti-greenmail provisions take this controversial option off the table, preventing a board from buying back company stock at a premium from a hostile investor who is primarily interested in a quick payoff rather than a genuine business relationship. These provisions stipulate that if a premium payment is made to the greenmailer, the same premium payment must be offered to all shareholders.

There is also one alternative available in some anti-greenmail provisions. Rather than making a premium payment to the hostile party and to all shareholders, the provision requires any one-off greenmail payment be subject to a shareholder vote and majority approval.

Advantages and Disadvantages of an Anti-Greenmail Provision

Anti-greenmail provisions give more power to shareholders. A company's management often contends it should not be restricted from negotiating a deal to buy out a shareholder at a premium if it believes this would be in the best interests of the company. Others argue that board directors who support paying greenmail are motivated by self interest, as these directors will likely lose their job in a takeover.

Paying greenmail deprives a company of cash that could otherwise be used to grow its business. Because a significant use of corporate assets is at stake, it seems only fair that shareholders be given a voice on the matter.

Anti-greenmail provisions make this possible. However, they also increase the chances a corporate raider could find more potentially damaging ways to recoup a decent return from their investment. For example, a raider could lobby the board to sell off the company crown jewels, potentially eroding shareholder value even further. However, the existence of anti-greenmail provisions or other anti-takeover measures could deter raiders from ever mounting a hostile takeover attempt.

Special Considerations

Institutional Support of Anti-Greenmail Provisions

Institutional investors normally favor of anti-greenmail provisions. American Century Investments, which manages exchange-traded funds, notes that many anti-greenmail proposals prevent a corporation from paying a premium to buy out a 5%-or-greater shareholder without first holding a shareholder vote.

"[American Century Investments] believes that any repurchase by the company at a premium price of a large block of stock should be subject to a shareholder vote. Accordingly, it will generally vote in favor of anti-greenmail provisions," it said.