Greenmail

Quick Facts

Etymology: "Greenback" (money) + "blackmail"

Peak era: 1980s corporate raider period

Tax penalty: 50% excise tax (Revenue Act of 1987)

Status today: Effectively extinct due to tax and legal consequences

Greenmail (pronounced GREEN-mail) is the practice where a company buys back its shares from a hostile acquirer at a premium to prevent a takeover. Essentially, it's paying the acquirer to go away—a form of corporate blackmail that benefits the raider at the expense of other shareholders.

The Bottom Line

Greenmail was essentially legalized extortion—and it worked spectacularly, until the IRS got involved. Today, activists still shake up companies, but they do it through proxy fights rather than demanding payoffs.

How It Works

Hostile investor accumulates significant stake in target company
Threatens takeover or proxy fight
Target company offers to buy back shares at premium
Raider accepts and walks away with profit
Other shareholders don't receive the same premium

Origin of the Term

"Greenmail" combines "greenback" (slang for money) and "blackmail." The practice defined the 1980s corporate raider era—a time when figures like T. Boone Pickens and Carl Icahn made fortunes threatening takeovers they never intended to complete.

Famous Examples

Saul Steinberg vs. Disney (1984)

Steinberg's Reliance Group accumulated 12% of Disney stock and threatened a hostile takeover. Disney paid $325 million to buy back his shares—$60 million more than market value. This "greenmail" payment sparked shareholder outrage and helped fuel anti-greenmail legislation.

T. Boone Pickens vs. Phillips Petroleum (1985)

Pickens accumulated a stake in Phillips and threatened a takeover. Phillips paid greenmail to Pickens, buying back shares at a premium. Other shareholders sued for equal treatment.

Ronald Perelman vs. Gillette (1986)

Perelman acquired 13.9% of Gillette (just under the 15% poison pill trigger). Gillette bought back his shares at a $40 million premium to avoid a takeover fight.

Why Companies Paid

Cheaper than defense costs: Legal fees and proxy fights are expensive
Protects management: Avoids risk of losing jobs in hostile takeover
Buys time: Removes immediate threat while developing long-term strategy
Avoids disruption: Takeover battles distract from operations

Why It Was Controversial

Unfair to shareholders: Only the raider gets the premium price
Rewards bad actors: Encourages corporate raiders to extort companies
Wastes corporate assets: Uses company cash to enrich a single shareholder
Signals weakness: May attract more raiders

Legal Status

The Revenue Act of 1987 imposed a 50% excise tax on greenmail profits, effectively killing the practice. Today, greenmail is extremely rare due to:

Tax penalties: 50% excise tax on gains makes it uneconomical
Shareholder lawsuits: Boards face fiduciary duty challenges
Reputational damage: Both raiders and companies face public backlash
SEC scrutiny: Enhanced disclosure requirements
Improved corporate governance: Poison pills and other defenses

Modern Alternatives

Instead of greenmail, companies now use:

Poison pills (prevent accumulation above threshold)
Staggered boards (make proxy fights harder)
White knights (friendly alternative buyers)
Pac-Man defense (counter-bid for the acquirer)

Today's activists pursue change through proxy fights and public campaigns rather than demanding buyouts.

Practical Takeaways

For founders: Greenmail is no longer a threat you need to worry about—the 50% tax killed the practice. Modern activists want board seats and strategic changes, not buyouts. Focus on governance and performance instead.

For investors: If you see a company paying above-market prices to buy back shares from a single shareholder, raise a red flag. This may violate fiduciary duties and could trigger shareholder lawsuits.

Hostile Takeover — The threat that drove companies to pay greenmail
Poison Pill — The modern replacement for greenmail payments
White Knight — A more shareholder-friendly alternative
Proxy Fight — How today's activists pursue change instead