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Simple English definitions for legal terms
anti-greenmail provision
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A quick definition of anti-greenmail provision :
An anti-greenmail provision is a rule in a company's charter that stops the board of directors from paying a shareholder more than their shares are worth to avoid a hostile takeover. Hostile takeovers happen when someone tries to take control of a company by buying up a lot of its shares. Greenmail payments are bad for the company because they waste money that could be used for other things. Anti-greenmail provisions help prevent this from happening, but they also make it easier for someone to take over the company if they really want to. Nowadays, there are other ways to stop hostile takeovers, so greenmail payments are not as common as they used to be.
A more thorough explanation:
An anti-greenmail provision is a rule in a company's charter that stops the board of directors from making greenmail payments. Greenmail payments are when a company pays a shareholder an inflated price to buy their stock. This practice became popular in the 1980s when raiding was common. Raiders would take over companies through hostile takeovers and sell off their valuable assets. To avoid this, companies would use greenmail payments to buy out the raider's interest. However, this harms the company by reducing the money available for other business purposes.
Anti-greenmail provisions prevent executives from abusing this practice and reduce the potential for harm to the company. However, it also increases the chances that a raider will successfully liquidate the company. In recent years, the use of greenmail has decreased due to the adoption of poison pill clauses and regulatory taxes designed to reduce the profitability of greenmail-related practices.
For example, if a company has an anti-greenmail provision in its charter, the board of directors cannot make greenmail payments to a shareholder who is threatening their position. This prevents executives from using company funds to protect their jobs instead of investing in the business.
Another example is if a raider tries to take over a company, but the company has an anti-greenmail provision in place. The raider cannot force the company to make greenmail payments, which makes the takeover less profitable and less likely to succeed.