Anti-Greenmail Provision Explained (2025): Protect Your Company from Hostile Takeovers

Definition: An anti-greenmail provision is a specific clause embedded in a company's corporate charter designed to stop the board of directors from paying a premium to repurchase shares from corporate raiders attempting hostile takeovers.

What Exactly Is an Anti-Greenmail Provision?

This provision acts as a defense mechanism within a firm's charter, forbidding the board from approving greenmail payments. Greenmail occurs when a company repurchases shares at a premium from an unwelcome party seeking control through a hostile takeover.

Such payments disadvantage shareholders by diverting company resources to appease aggressive investors. Anti-greenmail provisions deter these raiders by removing the incentive for a quick, lucrative exit.

Key Points to Remember

• Anti-greenmail provisions are clauses in corporate charters.
• They prevent boards from paying premiums to buy back shares from hostile investors.
• Often, if a premium is offered to one greenmailer, the same must be offered to all shareholders.
• Alternatively, any greenmail payment may require a shareholder vote and majority approval.

How Do Anti-Greenmail Provisions Function?

During the 1980s, corporate raiders emerged as investors who acquired undervalued companies to quickly dismantle and profit, rather than foster long-term growth.

This opportunistic behavior, combined with weak defenses against hostile takeovers, led to the rise of greenmail practices. Raiders would buy significant stakes to threaten takeovers, forcing companies to repurchase shares at a premium to avoid losing control.

Quick Fact

The term "greenmail" combines "greenbacks" (money) and "blackmail" to describe this coercive financial tactic.

Anti-greenmail provisions eliminate this option, stopping boards from paying premiums to hostile investors focused solely on quick profits. They ensure that if a premium is paid, it must be extended equally to all shareholders or approved by a majority vote.

Important Note

Shareholders typically have the right to vote on adopting or removing anti-greenmail provisions, giving them greater control over corporate defense strategies.

Pros and Cons of Anti-Greenmail Provisions

These provisions empower shareholders by limiting management’s ability to negotiate premium buybacks that may not benefit the company long-term. Some argue boards might favor greenmail payments to protect their positions during takeover threats.

Paying greenmail uses company funds that could otherwise support growth, so involving shareholders in such decisions promotes fairness.

However, anti-greenmail rules may push raiders to seek alternative, potentially more damaging tactics like pressuring for asset sales, which could harm shareholder value. Still, their presence can deter hostile takeover attempts altogether.

Additional Insights

Institutional Investor Support

Institutional investors generally back anti-greenmail provisions. For example, American Century Investments advocates that any premium repurchase of large stock blocks (5% or more) should require shareholder approval.

They state, "We believe repurchases at premium prices must be subject to shareholder voting, and thus support anti-greenmail measures."

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