1988 Articles

Drafting an Effective Greenmail Prohibition

Gilson, Ronald J.

From the perspective of the antitakeover forces, greenmailers are the worst example of exploitive, opportunistic players in the market for corporate control, threatening an acquisition that has no efficiency justification (and may impose significant costs) simply to garner short-term gains. Prohibiting the payment eliminates the incentive to engage in such exploitive activity in the first place. The unique overlap of interests means that both sides can agree on one aspect of takeover reform: greenmail should be prohibited. My purpose here is not to debate that conclusion but to comment on the more prosaic yet nonetheless pressing problem of how to implement a prohibition on greenmail. Some states already have adopted legislative prohibitions, and the takeover legislation now pending in Congress also would prohibit the practice. Additionally, a significant number of corporations have not waited for legislative action, instead adopting charter amendments that prohibit the individual corporation from paying greenmail. The problem is that the efforts to date to prohibit greenmail are seriously underinclusive because they misunderstand the problem. Indeed, I will make the stronger claim that, rather than prohibiting greenmail, existing and proposed prohibitions in fact serve to legalize greenmail by creating a safe harbor within which it safely can be paid.