Greenmailing refers to the method of threatening a hostile takeover by buying enough stocks from a company unless the company agrees to repurchase its own stocks at a premium. In mergers and acquisitions, the companies use greenmailing as a defensive mechanism to avoid a takeover by the corporate raider. The term ‘Greenmail’ is derived from combining blackmail and greenbacks (ie. Dollar bills) by the United States of America.
Some Investors see Greenmail as an impeccable way to weed out companies with bad operations, while some see it as a way of extortion that affects the shareholders. Greenmailing is a debatable tactic that may benefit some investors for short-term profits but at the expense of a large shareholder base. After the company pays the premium and purchases its own stocks back, the corporate raider generally backs off from taking over the company. Greenmailing is not explicitly mentioned in Indian laws, but India does have regulations on takeovers, which are mentioned under various legislations such as The Companies Act, 2013; The Competition Act, 2002: Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. In countries like the USA, there are still practices of greenmailing in different forms, and the IRS (Internal Revenue Service) has levied higher percentages of taxes on profits from greenmailing. There are various alternatives available for greenmailing where companies can seek a middle ground on ways to improve the performance of the company to avoid a hostile takeover or engage in friendly merger/acquisitions that would benefit both the company and the shareholders because one main reason for greenmailing is bad management of operations in a company.
AUTHOR:
Saraswathy Thogainathan, 5th year BBA. LL.B (Hons.), Saveetha School of Law, Chennai