Greenmail occurs when a business buys back shares from a hostile suitor at a premium to their market price, thereby avoiding the risk of a hostile takeover. The potential acquirer pockets a significant profit, while the target company finds itself in a worse financial position because it was forced to pay cash and incur debt to make the greenmail payment. As part of the payment, the hostile suitor agrees not to buy the company’s stock for a certain period of time. The outcome is that company management remains in charge, so the transaction is an anti-takeover mechanism. A firm can incorporate various poison pill features into its corporate documents in order to make hostile takeovers more difficult for someone to achieve.
The greenmail name comes from the amount of money (greenbacks) required to make the hostile party go away. An excise tax on greenmail profits has resulted in a sharp decline in the number of greenmail payments having been made in recent years.