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Greenmail and Corporate Defense Mechanisms

By Daniel Unoke.

Business, Advertising, Marketing, Entrepreneurship.
Oyemaja, Greenmail and Corporate Defense Mechanisms

One of the most noteworthy events in the Nigerian corporate arena in recent times was the news of Femi Otedola, a prominent business magnate, selling his stake in Transcorp Corporation Plc. This transaction was particularly intriguing since it occurred shortly after Otedola had acquired shares in the same company. This development prompted me to conduct research, which eventually led me to the topic we will be discussing, namely Greenmail and Corporate Defense Mechanisms.

There are multiple reports from various media sources suggesting that Otedola may have sold his stake in Trancorp by utilising a tactic known as "Greenmail."This term is a combination of the words "Green,"which refers to money, and "Blackmail,"which denotes a threat of damage or harm.

Greenmail is a practice in which an investor amasses a significant block of shares in a company with the intention of threatening a hostile takeover. The investor then offers to sell their shares back to the company at a premium, with the implicit threat that if the company refuses to buy back the shares, the investor will continue to acquire additional shares until they gain a controlling stake in the company. It is worth noting that these reports have yet to be proven, but the term "Greenmail"is widely used in financial circles to describe this particular investment strategy.

While viewed as a sinister practice that is highly unethical and banned in many jurisdictions, some of its benefits to a company include;

  1. Control: Greenmail can help the target company maintain control over their business. By purchasing the acquirer's shares at a premium price, the target company can prevent the hostile takeover and continue to operate as they see fit.

  2. Quick resolution: Greenmail can be a quick way to resolve a hostile takeover attempt. By buying back the acquirer's shares, the target company can end the threat of the takeover and move on.

  3. Negotiation: Greenmail can be used as a negotiation tactic. By offering to buy back the acquirer's shares at a premium price, the target company may be able to negotiate a more favourable deal with the acquirer, such as a merger or acquisition on better terms.

  4. Cost-effective: Greenmail may be more cost-effective than other takeover defence strategies, such as a poison pill or a golden parachute. By buying back the acquirer's shares, the target company may be able to avoid the legal and financial costs associated with other defence strategies.

  5. Avoidance of shareholder litigation: In some cases, greenmail can help avoid shareholder litigation. By buying back the acquirer's shares at a premium price, the target company can demonstrate to their shareholders that they are taking steps to protect their interests and avoid a hostile takeover.

Frequently, investors may not have altruistic intentions and may seek to engage in greenmail tactics to pressure a company into settling with them. As a result, companies have created defence mechanisms to safeguard themselves from greenmail and other forms of unwarranted acquisition. These mechanisms include:

  1. Poison Pill: This tactic is a corporate strategy aimed at making the company unappealing to potential acquirers. This is accomplished by implementing specific provisions within the company's bylaws, which grant current shareholders the opportunity to purchase additional shares at a discounted rate if a certain percentage of the company's shares are acquired by a potential buyer. Shareholders of Twitter considered utilising this strategy as a means of defence when they perceived Elon Musk's proposed acquisition as a potential threat to the company.

  2. Poison Put: This provision resembles a poison pill, but it pertains to a clause present in a bond or loan agreement that grants the bondholder or lender the right to require full repayment of the loan or bond if an unfriendly acquisition takes place.

  3. Golden Parachute: This is a type of severance package that is typically offered to senior executives in the event of a change in control of the company, such as a merger or acquisition. The package usually includes a substantial payout, stock options, and other benefits that make it challenging for the acquiring company to replace the executive. In recent news, it was reported that Twitter's former CEO, Jack Dorsey, left the company and was followed by Parag Agrawal, who assumed the position. Following Musk's acquisition of Twitter, Agrawal was terminated from his position, and it was reported that his severance package amounted to approximately 43 million USD.

  4. Crown Jewel Defense: This strategy involves divesting the most valuable or profitable assets of a company in order to reduce its attractiveness to potential acquirers. Although no real-world example comes to mind, this tactic was depicted in Season 1, Episode 7 of the television series Suits. In the episode, Harvey Specter utilised this strategy to deter a hostile takeover.

  5. Pac-Man Defense:This defence mechanism involves the target company retaliating against the acquiring company by making a counter-offer to acquire the acquirer. This strategy is aimed at shifting the balance of power in the deal and allowing the target company to gain control of the situation.

  6. White Knight: This is when a friendly company or investor is sought out to acquire the target company and protect it from a hostile takeover.

  7. Supermajority Provision: This is a provision in the company's bylaws or articles of incorporation that requires a high percentage of shareholder approval (usually 66% or more) for any major decisions, such as a merger or acquisition.

  8. Shark Repellent: This is a general term for any defence mechanism that makes a company less attractive to a potential acquirer, such as staggered board elections, which make it difficult for a hostile bidder to gain control of the board of directors.

In conclusion, corporate defence mechanisms are critical strategies for companies to protect themselves from hostile takeovers, which can be disruptive and potentially harmful to the interests of shareholders and other stakeholders. However, these strategies can be controversial and may be perceived as anti-shareholder if not implemented with care.

The use of corporate defence mechanisms requires a delicate balance between protecting shareholder interests and maintaining the company's reputation and ethical responsibilities to its stakeholders. Companies must be transparent in their use of these tactics and should prioritise the long-term interests of their shareholders and other stakeholders.

Ultimately, the decision to employ corporate defense mechanisms must be based on a careful evaluation of the risks and benefits involved, with a focus on ensuring that the company's actions align with its values and long-term goals. By utilising these tactics thoughtfully and transparently, companies can protect themselves from hostile takeovers while maintaining their integrity and reputation as responsible corporate citizens.

Originally published by Daniel Unoke on LinkedIn

Reach Daniel Unoke on LinkedIn.

Oyemaja Executives.


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