Greenmail refers to a strategy used by corporate boards of directors to prevent the takeover of a corporation or the increasing influence of an adverse shareholder. Greenmail became extremely popular in the 1980s with the rise of takeovers of public corporations. In its traditional use, greenmail was a repurchase of stocks from a hostile shareholder typically for more than the stock’s market value, preventing a takeover. The practice received heavy criticism for a variety of reasons such as the tactic preventing directors from being replaced or making the corporation cover unnecessary expenses. Some courts allowed directors to use greenmail under the lenient coverage of the business judgment rule, assuming that the directors were independent. Other courts limited their use in different ways like requiring the advice of a financial advisor, requiring shareholder approval, or preventing extreme greenmail prices. For example, New York only allows greenmail payments for less than 10% of outstanding stocks unless the shareholders approve. Some courts required the directors to show how the greenmail actually benefited the corporation. The federal government and some state governments also enacted heavy taxes on some greenmail, but many directors found loopholes around these taxes.
While the traditional greenmail is much less frequent today, directors have used “greenmail'' in different circumstances. For example, directors sometimes use greenmail to buy stocks from adverse shareholders that may be attempting to control the replacement of leaving directors. These new methods have avoided many prior restrictions on greenmail and continue to evolve, but all greenmail tactics see heightened scrutiny by courts where the directors seem to be taking extreme measures or are conflicted.
[Last updated in February of 2022 by the Wex Definitions Team]
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