ACCA Advanced Financial Management (AFM) Practice Exam

What is referred to as "greenmail" in stock repurchases?

1. Selling shares at a profit

2. Buying off a hostile bidder at a premium

3. Distributing dividends instead of repurchasing

4. Issuing new stock

The correct answer is: Buying off a hostile bidder at a premium

"Greenmail" refers specifically to the practice of a company repurchasing its own shares from a hostile bidder at a premium price to prevent a takeover. This situation typically arises when an outside entity accumulates a significant number of shares in a company with the intention of gaining control. The target company, wanting to fend off this takeover attempt, offers to buy back the shares at a higher price than the market value, effectively 'buying off' the aggressor. This strategy allows the company to maintain its independence, albeit at a cost. In this context, buying off a hostile bidder is a strategic move often used by management to stabilize control over the company without engaging in a prolonged struggle or risking a change in governance. This maneuver is seen as controversial because it can use company resources to enrich shareholders who might have otherwise been willing to sell their stakes at fair market value.