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Legal greenmail

17:42 27/04/2011

By Arkady Smolin, RAPSI

 

Russia may give greenmailing a new lease of life. Fifteen years ago in Europe and the United States, this corporate raiding practice became unfeasible as a result of higher tax rates. However, the growing clout of bloggers might bring greenmail back to global markets as an internet tool for exerting political pressure.

In a conventional greenmail scheme, an investor buys stock in a prosperous company on the open market. After that, the new minority shareholder proceeds to lambaste the company’s management publicly. He might file lawsuits claiming violations of his rights or report the company’s allegedly unlawful actions to supervisory authorities. Such a minority shareholder will wage war against corporate “lawlessness” until the management buys the stock back at a premium.

Back in the heyday of greenmail during the late 1980s and early 1990s, corporate blackmailing was considered blatantly unethical. However, its recent internet-based avatar is seen by many as an effective method for legally exercising control over major transnational and state-run corporations.

Experts and the general public believe that the spread of greenmail will help establish a solid foundation for civil society. In other words, “public greenmail” claims to be a driving force behind state modernization from the bottom up.

The rationale for such expectations can be traced back to 1991, when the “greenmail king,” Kenneth Dart, acquired 4% of Brazil’s sovereign debt at the cost of $375 million. One year later, when the country became mired in crisis and the external debt skyrocketed to a whopping $121 billion, Dart single-handedly vetoed the government's restructuring plan.

His only political demand was that Brazil buy back the bonds at a price of $1.4 billion.

With the Brazilian sovereign debt campaign under his belt, Dart made a move against Argentina. In 2001, he bought about 5% of Argentina’s government bonds for $595.4 million. Later that year, when the country defaulted on its government bonds, Dart managed to win a lawsuit for $700 million in damages. In 2005, Argentina came up with a plan to restructure its $20 billion debt, but so far, Dart hasn’t given it the green light.

However, to insist that Dart makes a point of damaging foreign governments would be an overstatement. He didn’t obstruct the Ecuadorian authorities in any way. After Dart acquired one quarter of the Ecuadorian sovereign debt in 1999, the country defaulted twice on certain types of government bonds; yet Dart remained loyal to Ecuador’s leaders. This loyalty is, however, more likely due to the Ecuadorian government's decision to send him regular, voluntary interest payments than to the transparency and effectiveness of its economic policy.

However, no one in Europe expects “legal greenmail” to accomplish any lofty goals. In a free market, the vested interests of an investor do not contradict the idea of the public good. Most importantly, the greenmailer should be guided by socio-political considerations when targeting his next blackmail victim or choosing his methods of applying pressure.

Stimulators vs. Cynics

The success of Wikileaks last year encouraged European intellectuals to speculate about how the economic experience gained by Julian Assange could be used by highly specialized professionals. That is why they started referring to the nascent class of “internet greenmailers” as “marketplace Robin Hoods.” Using corporate blackmail as a money-making machine, they also protect small investors’ rights, promote better lawmaking and business practices, and help to clean the economy.

Saul Steinberg is one of such market “stimulators.” In the mid-1980s, his Reliance Insurance Company made a hostile takeover attempt against Disney, forcing Disney’s management to buy back 4.2 million shares owned by Reliance for $328 million. This shakedown boosted the international business of the renowned company. The newly built Disneyland in Tokyo, Japan, pulled the embattled company out of a seemingly hopeless downturn.

Warner Communications was going through a debilitating and systemic crisis at about the same time. However, the need to buy out 5.6 million of its shares from greenmailer Rupert Murdock at a hefty 33% markup called for a merger between Warner Communications Inc. and Time Inc in 1990, which sent the company back on its way to the list of global flagship companies. In 2001, Time Warner Inc. merged with AOL Inc. to become one of the world’s largest news and entertainment conglomerates.

A “cynical” variety of greenmail is much more widespread and leaves almost no chance of recovery for a company under attack. In the early 1990s, the practice of attacking third parties rather than the corporate managers in an attempt to siphon off money became a very popular tactic. Investors planning to reform a freshly acquired company were often chosen as prey.

According to the scheme, the minority shareholder devises all sorts of impediments. He may initiate numerous inspections and lawsuits, stonewall approval of major decisions, throw accusations at major investors and corporate management, or launch a dirty information campaign. Such a shareholder may advance numerous formal requests, but deep down, his only goal is to tarnish the majority shareholder’s reputation and ruin his action plan.

Given such circumstances, the investors face hard choices. They may choose to watch listlessly as their company goes to pieces, use illegal methods, or pay off the greenmailer. The sad irony of this situation is that the greenmailers use minor paperwork irregularities to launch a full-blown blackmail campaign. In other words, greenmailers project the illusion of fighting for clean business, whereas in fact they force the corporate management to commit serious legal violations in an attempt to save the company.

Drawing a line between a corporate blackmailer and someone who is genuinely concerned with compliance can be extremely hard. Perhaps the only way to tell is to spot the allegedly accidental, but in reality, very calculated, information leaks.

Therefore, the allegation that only competent managers and clean companies can survive corporate conflicts is rather controversial. In addition, the actions of “legal greenmailers,” who are more often “cynics” than “stimulators,” affect not only the top management but also the minority shareholders, whose interests the greenmailers supposedly protect.  Once the battle is won, the company is left with a seriously depleted account balance, which precludes any capability to pay dividends, conduct investment programs, or allow the capital to grow.

If a government is at stake, such practices will invariably undermine investors’ confidence in the domestic securities market. “Legal greenmailers” can wreak havoc on any country’s investment climate.

Legal procrastination

The United States banned this hostile takeover practice in 1987, after billions of dollars had been lost by major U.S. corporations in the wake of such greenmailers’ activities.

The greenmailing business remains a near-miss activity in the majority of European countries, including Russia. Formally, the blackmailers don’t break the law, but their requirements can never be fulfilled without inciting legal violations.

Fighting the greenmailers with the adoption of special laws is not practicable. However, they can be controlled using economic levers similar to those adopted by the United States, where all income made from selling stock above the market price is heavily taxed at a rate of 80%, thus eliminating the economic incentive for greenmailing.

However, even if such a provision is included in the Tax Code, companies are still unlikely to get full protection against “legal (or internet) greenmail.” The article on the protection of honor and dignity or on the accusation of blackmailing doesn’t seem to work either, since the companies can’t file suit against “legal greenmailers.” Their populist rhetoric turns any blackmailer into a public hero. Under such circumstances, any lawsuit might give rise to suspicions of political “reprisals” and severely damage the company’s goodwill, potentially leading to social upheaval, especially if a state-run company is involved.

Therefore, with a healthy amount of public trust now available to “internet greenmailers,” they seem to be immune from prosecution in most countries. The question is how they will use this trust. Will they use it to encourage the modernization of legal provisions in order to bring the law closer to today’s reality, or will they use it for the cynical purpose of undermining  strategically important corporations?

Last year, Assange made U.S. diplomatic documents public, thereby killing his chances of a safe retirement. Once it happened, European intellectuals dropped the accusations of populism and blackmail of politicians with which they had previously charged him. It seems that unless the greenmailers prove their civil stance by taking similarly resolute actions, the lawmakers will have to rely on procrastination and keep on discussing dead-end draft laws doomed for future repeal, such as equating internet blogging with mass media publications.

However, the actions of the current “legal greenmailers” reveal the oxymoronic nature of the term itself. So far, they haven’t been any different than their predecessors.

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Legal greenmail

17:42 27/04/2011 Russia may give greenmailing a new lease of life. Fifteen years ago in Europe and the United States, this corporate raiding practice became unfeasible as a result of higher tax rates. However, the growing clout of bloggers might bring greenmail back to global markets as an internet tool for exerting political pressure.
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