What Is a Whitewash Resolution? How It Works and Examples

What Is a Whitewash Resolution?

A whitewash resolution is a condition a target company sets before it is acquired by another company. In a whitewash resolution, the company being acquired pledges to provide financial assistance to the acquirer as long as the company remains financially solvent for at least 12 months. This financial assistance must be approved by the target company's shareholders in advance. If approved, an auditor must then confirm the company’s solvency before its directors can proceed with the deal.

Key Takeaways

• A whitewash resolution must be passed before a target company can provide financial assistance to an acquirer.
• Directors must swear that the company is able to pay its debts for at least one year, and an auditor is often required to confirm the company's solvency.
• The whitewash resolution prevents companies from using an acquisition as a means to raise capital and drain target companies of their assets.
• Before the deal can go through, an auditor is brought in to ensure that the target company will remain financially solvent.

How a Whitewash Resolution Works

Mergers and acquisitions (M&A) are a combination of two or more companies into a single entity. Mergers usually combine two companies that are similar while an acquisition occurs when one company (typically a larger one) buys another (usually a smaller one). The deals must be approved by each company’s shareholders and board members.

Some companies use acquisitions as a means to raise capital and drain target companies of their assets, only to leave them saddled with debt and unable to pay their bills. To avoid this, some target companies promise to provide financial assistance to the acquirer as part of the deal. But this may come with a condition called a whitewash resolution.

This resolution is brought forward by the target company’s shareholders to ensure that the company remains solvent and will not seek to get out of debt obligations once the acquisition is complete. In simple terms, the acquirer promises the target company's shareholders that the target company will remain solvent for at least one year in exchange for financial assistance. An auditor will then be brought in to ensure this is financially feasible. If approved, the target company can pass on the liability to the acquiring company.

A whitewash resolution is often used by companies in financial distress that want to save themselves from insolvency by getting acquired. So, it acts as a bailout plan that allows the target company to remain financially solvent for at least one year after providing financing to the acquirer and before its shares are completely purchased.

The whitewash resolution is often used in conjunction with the Companies Act of 1985. This British law stipulates how companies can be incorporated as well as their rights and responsibilities, and the obligations of board members, directors, and key personnel.

Special Considerations

The term whitewash resolution is used in other parts of the world in corporate law. In Hong Kong and Singapore, a whitewash resolution represents a waiver of rights by certain independent shareholders of a company.

Instead of financial assistance, a whitewash resolution in this case is the waiving of the rights of independent shareholders to receive a mandatory buyout from the shareholders of another company. An investor may ask for a whitewash resolution or a whitewash waiver from a regulator. If approved, the waiver will have to be approved by the shareholders.

Example of a Whitewash Resolution

Here is a hypothetical example to illustrate how a whitewash resolution works. Say a private company ABC wants to be acquired by Company XYZ. Company ABC may offer financial assistance to Company XYZ to provide enough capital to purchase its shares.

Before this can happen, the directors of Company ABC must pass a whitewash resolution. This resolution would stipulate that even after the assistance, the company will remain viable for at least one year. In addition to remaining financially solvent for the next 12 months, the shareholders of Company ABC must approve the transaction.

How does a whitewash resolution work? A whitewash resolution is often used by financially distressed companies that want to avoid becoming insolvent. They seek out a buyer who guarantees that their shareholders will remain financially solvent for at least 12 months after providing financing to the acquirer. Doing so allows the target company to pay off its debts rather than have its assets and finances exploited by the acquirer.

What is an auditor’s role in a whitewash resolution? An auditor is brought into a whitewash resolution to ensure that the target company will be able to remain solvent after providing financing to the acquirer and before its shares are completely purchased by the acquirer.

What is financial distress? Financial distress is a condition in which an individual or company does not have the ability to cover their financial obligations. This means the entity does not generate enough revenue or income to pay off its debts. This condition may be the result of a decrease in income, a change in the economy, rising costs, poor budgeting, and/or overspending.

Conclusion

Company shareholders must often approve any major changes to a business. This includes any mergers or acquisitions that may occur. Financially distressed companies may seek out buyers to save themselves from going bankrupt. In some cases, they may throw in a whitewash resolution, which pledges to provide financial assistance to the acquirer as long as the acquirer guarantees the target company will remain solvent enough to pay its debts before being purchased.