DEFINITION of Whitewash Resolution
Whitewash resolution is a European term used in conjunction with the Companies Act Of 1985, which refers to a resolution that must be passed before a target company in a buyout situation can give financial assistance to the buyer of the target. A whitewash resolution occurs when directors of the target company must swear that the company will be able to pay its debts for a period of at least 12 months. Oftentimes, an auditor must then confirm the company's solvency. Only after this takes place may a target company give the purchasing company any type of financial assistance.
BREAKING DOWN Whitewash Resolution
Some companies have used acquisitions as a means of obtaining financing and draining the assets of the target companies only to leave those companies debt ridden and unable to pay their bills. The Companies Act Of 1985 and the whitewash resolution is meant to ensure that the target company will remain solvent and will not seek to discharge its liabilities once the acquisition is complete.
Example of a Whitewash Resolution
For example, if private company ABC wishes to be purchased by company XYZ, it might provide financial assistance to company XYZ in order to give it enough capital to purchase its shares. However, this can only occur after the directors of company ABC pass a resolution and state that the company, even after providing the assistance, will remain viable for at least 12 months after the date the financial assistance is issued to company XYZ for the purchase. Shareholders of ABC must also approve the transaction.