A whitewash resolution is a strategic condition placed by a target firm before it is acquired by another company. It involves the company being acquired pledging financial assistance to the acquirer, under the provision that it remains financially viable for at least 12 months. This financial assistance must first be approved by the target company’s shareholders. Once approved, an auditor must confirm the company’s solvency before the deal can proceed.
Key Takeaways
- A whitewash resolution must be passed before a target company offers financial assistance to the buyer.
- Directors must declare the company can pay its debts for at least a year, often requiring an auditor to confirm solvency.
- This resolution helps prevent acquisitions that exploit target companies’ assets, ensuring they remain financially viable.
- An auditor’s verification ensures the target company’s financial health before finalizing the transaction.
How a Whitewash Resolution Works
Mergers and acquisitions (M&A) involve combining two or more companies into a single entity. Mergers usually join similar companies, while acquisitions typically involve a larger company purchasing a smaller one. These deals need approval from shareholders and board members of both companies.
Sometimes, companies use acquisitions to raise capital and deplete the assets of the target companies, leaving them debt-ridden. To counter this, a whitewash resolution can be proposed, ensuring the target’s solvency and ability to cover its liabilities post-acquisition. An auditor then assesses this viability. If confirmed, the responsibility for ongoing financial stability shifts to the acquiring company.
Whitewash resolutions are often employed by financially distressed companies as a rescue strategy. This ensures they remain financially viable for at least a year following acquisition by providing the acquirer with financing and before their shares are fully acquired. They are also commonly used under the Companies Act of 1985, a British law detailing corporate registration requirements and the duties of board members and directors.
Special Considerations
Whitewash resolutions are applicable in various jurisdictions. For example, in Hong Kong and Singapore, it often represents a waiver of certain shareholder rights during a takeover. Instead of financial assistance, these resolutions waive independent shareholder rights to a mandatory takeover. This waiver, subject to shareholder approval, helps streamline the transaction process.
Example of a Whitewash Resolution
Imagine private company ABC aims to be acquired by Company XYZ. ABC might offer financial assistance to XYZ for purchasing its shares. Before proceeding, ABC’s directors must pass a whitewash resolution, confirming the company’s viability over the next 12 months. Shareholders then need to approve this transaction.
FAQs
How Does a Whitewash Resolution Work?
A whitewash resolution is typically used by financially distressed companies to avoid insolvency. They seek a buyer who ensures—by promising the target company’s shareholders—that the company will remain financially viable for at least a year after financing is provided to the acquirer. This enables the target company to address its debts and ensures its assets aren’t exploited.
What Is the Role of an Auditor in a Whitewash Resolution?
The auditor’s role in a whitewash resolution is crucial. They ensure that the target firm remains solvent after providing financial assistance, and before the acquirer buys out all their shares.
How Do You Define Financial Distress?
Financial distress is when an individual or company cannot meet their financial obligations due to insufficient revenue or income. This can result from low income, economic downturns, higher expenses, poor budgeting, or overspending.
The Bottom Line
Shareholder approval is essential for any significant change within a company, including mergers and acquisitions. Financially distressed companies may use whitewash resolutions, which promise acquirer-financing, to remain viable enough to settle their debts and achieve a successful acquisition.
Related Terms: acquisitions, financial assistance, solvency, shareholders.
References
- Real Business Rescue. “Companies Act 1985 Definition & Overview”.
