What Is a 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.

Key Takeaways

  • A whitewash resolution must be passed before a target company can offer financial assistance to the buyer. 
  • Directors must swear the company can pay debts for at least a year and many times an auditor must confirm the company’s solvency. 
  • The whitewash resolution is meant to prevent companies from using acquisitions as a means of financing and draining the assets of the target companies.  
  • The resolution is meant to protect acquired companies from being financially drained by the acquirer. 
  • The whitewash resolution means the buyer promises via a resolution that the target company will be solvent for at least a year and the auditor’s role is to ensure it’s financially possible. 

How a Whitewash Resolution Works

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.

The whitewash resolution means the buyer promises via a resolution that the target company will be solvent for at least a year. The auditor’s role in this is to ensure this is financially possible. Once this is done the target company can shift the responsibility to the acquiring company. 

Special Considerations

Another form of whitewash resolution is a corporate law concept in Hong Kong and Singapore. The whitewash resolution, in this case, is a waiver of rights of certain independent shareholders. A whitewash resolution is a waiver of rights for these shareholders to receive a mandatory takeover from other shareholders.

An investor can appeal to an executive for a whitewash resolution (or whitewash waiver). This waiver, if approved, would be subject to the approval of shareholders. 

Example of a Whitewash Resolution

As a whitewash example, say private company ABC wishes to be purchased by company XYZ. Company ABC might provide financial assistance to Company XYZ to give it enough capital to purchase its shares. 

Before this can happen, Company ABC directors must pass a whitewash resolution. The resolution passed by Company ABC would note that even after providing assistance the company will remain viable for at least a year. 

The company must remain financially viable at least 12 months after the financial assistance is issued to Company XYZ for the purchase. As well, Company ABC shareholders must approve the transaction.