Definition and significance of Greenmail
Greenmail refers to a controversial strategy in corporate law, in which an investor or a group of investors acquires a significant stake in a publicly traded company in order to exert pressure on the management. The aim is usually to have the threat of a takeover or other unwanted influence bought off by the management—generally at a price well above market value. The term is a combination of ‘Greenback’ (colloquial for US dollar) and ‘Blackmail,’ implying a form of financial extortion. Greenmail became widely known through takeover movements in the USA during the 1980s, but it remains a focal point in international corporate and capital markets law discourse.
Manifestations and process
Greenmail usually manifests through the gradual acquisition of shares, with the goal of reaching a blocking minority or a threshold that represents a short-term threat. The management often responds by offering a premium for the repurchase of these shares in order to fend off a takeover, restructuring, or unwanted influence. The investor realizes considerable short-term profits in this way, without actually taking over the company.
Typical procedure
- Building up the stake: The investor purchases publicly traded shares of the target company and gradually acquires a significant voting stake.
- Threat of further measures: By actively disclosing their shareholding and possible takeover plans, the investor puts pressure on the management.
- Negotiation and compensation: The company management enters into negotiations and offers compensation (usually above the market price) to induce the investor to abandon their plans.
- Sale of the stake: The investor sells their shares at a profit, usually as part of a buyback by the company itself.
Greenmail in corporate and capital market law
Legal classification in Germany
In German stock corporation law, Greenmail is neither explicitly regulated nor prohibited by statute. Nevertheless, Greenmail transactions touch upon various legal areas, especially regulations of the German Stock Corporation Act (AktG), the Securities Trading Act (WpHG), and takeover law.
§ 71 AktG – Acquisition of own shares
The repurchase of own shares by the company is generally only permitted under the strict requirements of § 71 AktG. A targeted buyback to fend off a takeover, as frequently practiced in Greenmail cases, is therefore tightly restricted in Germany. The targeted granting of advantages beyond the market price to individual shareholders could be seen as a violation of the principle of equal treatment (§ 53a AktG).
Principle of equal treatment (§ 53a AktG)
The principle of equal treatment obliges the company to treat all shareholders equally. If a shareholder—typically the greenmailer—is granted special advantages or disproportionate compensation, other shareholders may take action against this and assert claims for damages or compensation.
Capital market law aspects
Within the framework of notification obligations pursuant to §§ 33 ff. WpHG, investors are required to report when certain shareholding thresholds are crossed, ensuring transparency among the shareholders. In certain situations, public tender offers and insider trading regulations may also be relevant.
Takeover law regulations
According to the German Securities Acquisition and Takeover Act (WpÜG), a mandatory offer must be made upon reaching certain shareholding thresholds (e.g., 30%). However, Greenmail can occur below this threshold but is nevertheless regulated by existing disclosure and behavioral obligations.
Tax implications
Profits from Greenmail transactions are subject to capital gains tax. Additionally, tax obligations can arise from buybacks, premium payments, or dividend distributions. The tax treatment is determined according to national legislation and is relevant for both the company and the investor.
Greenmail: Legal policy and international aspects
Defense and prevention from a corporate law perspective
In many countries, including Germany, statutory protective mechanisms have been developed to prevent abuse. Companies also implement measures such as voting rights restrictions in their articles of association, convertible bonds, or employee participation schemes to deter undesirable investor strategies like Greenmail.
International developments
In the USA in particular, Greenmail is partly restricted by legislation. Many listed companies established so-called ‘anti-greenmail provisions’ in their bylaws in the 1980s, which exclude or make it more difficult for individual shareholders to receive targeted compensation. Legal provisions such as the Securities Exchange Act and, in particular, Regulation 13D govern disclosure obligations and takeover processes.
Legal-ethical assessment
Greenmail is widely considered ethically controversial, as the investor gains economic advantage at the expense of the public and other shareholders, without contributing to sustainable corporate management. The legal assessment lies in the tension between legitimate investor rights, corporate law protection of minorities, and the need for management in the public interest.
Greenmail in contrast to other takeover strategies
Greenmail differs from regular takeover bids or classic hostile takeovers in that the greenmailer rarely aims for an actual takeover but rather focuses on short-term extraction of compensation premiums. Unlike legal corporate takeovers, which often pursue a sustainable impact on the company’s structure, Greenmail exclusively exploits a situational pressure point.
Conclusion
Greenmail represents a specific form of strategic influence in the context of corporate power struggles and requires a detailed examination of corporate and capital market regulations as well as tax and ethical aspects. In many jurisdictions, legislative and corporate law protective measures have already been implemented to prevent abuse of this strategy. Companies and their board members are required to adequately consider the risk of Greenmail as part of their duty of care.
This article provides a comprehensive overview of the term Greenmail, with special consideration for the legal framework and practice-relevant developments at both the national and international levels.
Frequently Asked Questions
Is Greenmail a criminal offense in Germany?
Greenmail is not explicitly defined as a separate criminal offense under German law. However, such actions can entail various civil and, in some cases, criminal implications, depending on the specific circumstances and context. In particular, if Greenmail involves deceitful actions, threats, coercion (§ 240 StGB), or insider trading (§ 38 WpHG, § 119 WpHG), it may become criminally relevant. Additionally, Greenmail may be considered as unlawful influence on a general meeting under the Stock Corporation Act (§ 405 AktG) or as market manipulation under the Market Abuse Regulation (MAR), if the requirements for targeted abuse of market-relevant information are met. Ultimately, criminal liability depends on the individual case, so a detailed legal analysis is always necessary.
How does German corporate law protect companies from greenmailing?
German corporate law protects companies, in particular through stock law regulations concerning general meetings, voting arrangements, and notification obligations under the Securities Trading Act (WpHG). Larger acquisitions of shares must be reported (§ 33 WpHG), allowing companies to learn of significant shifts in ownership at an early stage and react accordingly. The Stock Corporation Act also provides mechanisms such as the right to repurchase shares (§§ 71 ff. AktG), enabling companies to buy back their own shares to prevent abusive influence or buy out a minority. Anti-takeover measures like voting right restrictions, registration requirements for bearer shares, and maximum voting rights can be incorporated into the articles of association, though these measures are subject to strict legal limits and may be subject to judicial review in individual cases.
Can companies take civil action against Greenmail?
Yes, companies can take civil action against Greenmail. This is often done by challenging general meeting resolutions, seeking temporary injunctions, or filing claims for damages. Civil law instruments such as the prohibition of immoral conduct (§ 826 BGB) may be invoked if a greenmailer abuses statutory or corporate law tools in a manner contrary to good faith. For example, if a greenmailer seeks an unlawful financial advantage by repeatedly threatening to file lawsuits, a claim for an injunction or removal may be considered. The company may also seek to counteract with defense strategies such as targeted contractual arrangements or the inclusion of shareholder agreements.
What role does capital market law play in regulating Greenmail?
Capital market law contains important rules on transparency and market integrity, which can also be applied to Greenmail scenarios. There are extensive notification obligations for the acquisition and sale of significant shareholdings (§§ 33 ff. WpHG), designed to prevent investors or greenmailers from secretly influencing companies. In addition, the market abuse regime (MAR) and the WpHG prohibit insider trading and market manipulation, thereby preventing targeted distortion of information or artificial interference with share prices. Violations may be sanctioned with fines or criminal penalties.
What legal options do affected minority shareholders have in cases of Greenmail?
Minority shareholders affected by Greenmailing can take various legal measures. On one hand, they can assert their rights at shareholders’ meetings, such as by filing an objection against resolutions (§ 245 AktG) or by filing a rescission action. On the other hand, in cases of immoral conduct by the greenmailer, they may pursue civil claims for damages (§ 826 BGB) or seek injunctive relief. Furthermore, if legal violations are suspected, complaints may be filed with the relevant authorities, such as BaFin.
Are there precedents or landmark decisions by German courts on the topic of Greenmail?
Although Greenmail as a term originates primarily from US law, German courts have addressed comparable cases in individual instances. The individual elements of Greenmail are generally assessed under general civil and corporate law provisions, for example under §§ 134, 138, 826 BGB (violation of a law, immorality, intentional injury). There are no landmark decisions explicitly addressing the phenomenon of “Greenmail” to date; instead, courts assess the circumstances of each individual case regarding abuse of shareholder rights and the fiduciary duty of shareholders.
To what extent is Greenmail specifically regulated in the European context?
In the European context, specific regulations are mainly found in the area of securities supervision and corporate governance protection, for example, in the Takeover Directive (2004/25/EC), the Transparency Directive (2004/109/EC), and the Market Abuse Regulation (MAR). These directives and regulations aim to increase transparency in shareholding structures, improve the protection of minorities, and prevent market abuse and transaction manipulation. This strengthens the legal framework for the prevention and sanctioning of Greenmail in the European context, even though the term itself is not used in EU legislation.
