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What Is a Whitewash Resolution?
Let me explain what a whitewash resolution is—it's a condition that the target firm sets before being acquired by another company. In this setup, the company being acquired commits to providing financial assistance to the acquirer, but only if it can stay financially viable for at least 12 months. You need to know that this assistance first requires approval from the target company's shareholders, and then an auditor has to confirm the company's solvency before the directors can move forward with the deal.
Key Takeaways
You should understand that a whitewash resolution must be passed before the target company can offer any financial assistance to the buyer. The directors have to swear that the company can pay its debts for at least a year, and often an auditor must confirm the company's solvency. This resolution stops companies from using acquisitions just to finance themselves and drain the target's assets. Before the deal proceeds, an auditor ensures the target will remain financially viable.
How a Whitewash Resolution Works
Mergers and acquisitions involve combining two or more companies into one entity—mergers typically join similar companies, while acquisitions happen when a larger one buys a smaller one, and both need approval from shareholders and boards.
Some companies exploit acquisitions to raise capital by draining the target's assets, leaving it buried in debt. To prevent this, targets might offer financial assistance but attach a whitewash resolution as a condition.
This resolution comes from the target's shareholders to make sure the company stays solvent and doesn't dodge its liabilities after the acquisition. Essentially, the buyer assures the target's shareholders that the target will be solvent for at least a year in return for the assistance. An auditor verifies if this is feasible, and if approved, the target can pass the responsibility to the acquirer.
You'll see whitewash resolutions often with financially distressed companies looking to avoid insolvency through acquisition. It works like a rescue plan, keeping the target viable for at least a year after financing the acquirer and before its shares are fully taken over.
Important Note
Whitewash resolutions are frequently linked to the Companies Act of 1985 in the UK, which covers company registration, rights, responsibilities, and obligations for board members, directors, and key personnel.
Special Considerations
The term whitewash resolution appears in corporate law elsewhere, like in Hong Kong and Singapore, where it means a waiver of rights for certain independent shareholders.
In these cases, it's not about financial assistance but waiving the right to a mandatory takeover offer from the other company's shareholders. An investor can request this waiver from an executive, and if granted, it still needs shareholder approval.
Example of a Whitewash Resolution
Consider this hypothetical: Private company ABC wants to be bought by Company XYZ. ABC could provide financial assistance to XYZ to fund the share purchase.
First, ABC's directors must pass a whitewash resolution stating that even after the assistance, the company will stay viable for at least a year. Plus, ABC's shareholders have to approve the transaction.
How Does a Whitewash Resolution Work?
As I mentioned, it's used by companies in financial distress to avoid insolvency. They find a buyer who promises shareholders the target will remain viable for 12 months after providing financing, allowing the target to pay debts instead of being exploited.
What Is the Role of an Auditor in a Whitewash Resolution?
The auditor's job is to confirm that the target firm can stay solvent after giving financing to the acquirer and before all shares are purchased.
How Do You Define Financial Distress?
Financial distress means an individual or company can't meet financial obligations due to insufficient revenue or income to cover debts, often from income drops, economic changes, higher costs, poor budgeting, or overspending.
The Bottom Line
Shareholders usually approve major business changes, including mergers or acquisitions. For financially distressed companies, seeking a buyer can prevent collapse, and a whitewash resolution might promise financing to the acquirer if it ensures the target stays viable to pay debts before full acquisition.
