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A Theoretical Analysis of Corporate Greenmail
Abstract
Few issues in corporate law or governance have moved from the wings to the center stage of public attention as rapidly as the issue of negotiated stock repurchases, popularly known as "greenmail." The tactic was little used until recently. With the rise of "corporate raiders" like Victor Posner and Carl Icahn, however, greenmail payments are now more frequent and more controversial. Between April 1983 and April 1984, corporations paid over four billion dollars to repurchase blocks of stock from individual shareholders. In March 1984 alone, four major American companies bought out holders of large minority blocks of shares at substantial premiums, including Warner Communications' repurchase of 5.6 million of its shares from Rupert Murdoch at 33 percent above the market price. Saul Steinberg's greenmail agreement with Walt Disney Productions, concluded later in 1984, was perhaps the best-publicized negotiated repurchase of all.
... 9 It seemed as if greenmail was everywhere: Between April 1983 and April 1984 alone, corpora- tions paid some $4 billion in greenmail. 10 Indeed, the threat didn't even have to be to take over the company, just to make life uncomfortable for the CEO. Occidental Petroleum paid David Murdock, a director who dared to question legendarily imperial CEO Armand Hammer, some $57 million to go away. ...
Some regard corporate governance as a legal or compliance discipline, while others focus on how to align information, responsibility, and accountability. However, corporate governance is also about money and power. In the 1980s, not only had institutional investors amassed economic power, or at least potential economic power, but they were about to learn to play by a new set of rules. While defense remained the name of the corporate-governance game, the nature of the game itself soon changed. The focus morphed from defense against specific disadvantageous activities (such as greenmail) or structures (such as conflicted boards) into defense against underperforming companies. By the 1990s, the strategy had morphed to offensive in targeting underperformers for change as a core profitable investing strategy, thereby setting the stage for today's activist hedge funds. Early activism was dominated by major pension funds such as California Public Employees Retirement System.
As the ongoing shareholding structure reform continues to reduce the level of ownership concentration of Chinese listed companies, hostile takeovers have been on the rise in China, so has the use of takeover defences. The recent high-profile case of Vanke vs Baoneng has generated an intensive social debate on the use of takeover defences and their regulation in China. This paper undertakes an in-depth study of the Chinese regime for takeover defences both in the books and in practice. From a comparative perspective, it reveals that Chinese law is a mixture of experiences transplanted from overseas jurisdictions, but functions differently due to the unique local conditions in China. It then empirically examines how takeover defences are used in practice, finding that takeover defences, particularly ex ante defences, are widely adopted by Chinese listed companies. This is a matter of concern given that takeovers have important economic functions particularly at the present stage of China’s economic development. In spite of this, the paper refutes the idea of a blanket ban on the use of takeover defences, because takeover defences have both beneficial and detrimental effects. In regulating takeover defences, there needs to be a delicate balance between allowing the use of takeover defences and protecting shareholders’ rights. It is submitted that the primary power to decide on the use of takeover defences should be vested in the hands of shareholders. Considering the local situation in China where the main agency problem of corporate governance is between majority and minority shareholders, it is further argued that the issue of takeover defences should not be left entirely to shareholders in the name of corporate autonomy, but rather need to have some legal intervention to protect the rights of shareholders, particularly minority shareholders, in relation to the use of takeover defences.
Advances in electronic communications technology promise to invigorate shareholder voting as a viable tool for corporate governance, for example by decreasing the cost, and thereby increasing the frequency and effectiveness, of proxy fights. Increased use of shareholder voting, though, forces renewed focus on issues related to the shareholder voting process. One such issue is vote-buying. Traditionally, courts have treated vote-buying in the corporate context as per se illegal. More recently, however, courts have relaxed their attitude toward such transactions, a move generally applauded by commentators. This article argues that the newfound judicial acceptance of vote-buying is problematic, at least for publicly-held corporations. The article examines the reasons offered in support of vote-buying in such corporations, and suggests that the same benefits could be obtained, without the threat of harm presented by vote-buying, through the use of turnout payments to encourage shareholder participation in corporate voting contests. With regard to closely-held corporations, however, the article argues that vote-buying serves a useful preference aggregation function and generally should be permitted.
This paper evaluates the fidelity of corporate law and governance scholarship to institutional facts. It evaluates the legal literature’s “contractarian” theory of corporate governance in light of the past three decades of empirical work, and concludes that the facts do not support the theory — not with respect to the IPO stage, the supposed “race to the top,” or the ongoing governance of public companies. Market forces alone do not promote innovative or customized governance arrangements as the theory posits, and there is no basis on which to conclude that market forces yield socially optimal governance arrangements. The design and widespread use of corporate governance indices in the empirical literature is another point of divergence between academic work and institutional fact. Many elements of commonly used governance indices have no potential to entrench management or otherwise reduce firm value. For example, among the common misconceptions embodied in governance indices is the idea that more takeover defenses means greater insulation against the takeover threat. This is not true. Once a company has a staggered board, additional defenses provide no protection at the margin, and even in companies without staggered boards multiple defenses are generally redundant.
This paper examines empirically whether management is acting in the best interests of non-participating shareholders when it engages in a targeted share repurchase. Over the full purchase-to-repurchase period, non-participating shareholders earn significantly positive abnormal returns, providing additional evidence that shareholders benefit from the initial investment that leads to the share repurchase. On the repurchase date, however, shareholders experience a significant decrease in their wealth position that cannot be attributed solely to a wealth transfer from the non-participating to the participating shareholders. Consequently, one cannot generalize about management's intentions for a targeted share repurchase.
This paper analyzes the Italian rules concerning the decision to adopt defensive tactics in the face of a hostile bid. The regulation presents an enabling aspect in that it does not set ex ante the level of resistance that firms can implement. Rather, it merely sets a pro-resistance default rule. Firms can thus opt out of this regime and model a resistance policy that suits their needs. At the same time, Italian law recognizes that agency costs may plague the decision concerning whether or not to adopt defensive tactics. The law, therefore, introduces a procedural mandatory requirement of shareholders' approval for all decisions that may obstruct a hostile takeover. This mandatory requirement applies, however, only after the launch of a hostile bid. This temporal limitation appears consistent with the need to protect managerial discretion and flexibility in the corporation's ordinary course of business. I posit that this regime strikes an overall efficient equilibrium in the trade-off between the costs and benefits generated by resistance. The paper also analyzes the possible shortcomings of a rule that requires shareholders' vote, that is, the possibility that under certain circumstances incumbent managers and blockholders abuse defensive tactics for entrenchment purposes. Finally, a tentative "public choice" history of the evolution of defensive tactics regulation in Italy is attempted. The picture that emerges appears to confirm the prediction that unitary systems tend to produce more efficient takeover regulation than federal systems.
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