What Is a Whitewash Resolution?
The phrase “whitewash resolution,” which originated in Europe and was first used in connection with the Companies Act of 1985, must be approved before a target business in a buyout may provide financial support to the target’s acquirer. When directors of the target firm swear that the company will be able to pay its obligations for a minimum of 12 months, this is known as a “whitewash” resolution. An auditor is thus often required to verify the company’s solvency.
The Operation of a Whitewash Resolution
Some businesses have used acquisitions to secure funding and deplete the target company’s assets, leaving such firms in debt and unable to make payments.
The Companies Act of 1985 and the whitewash resolution aim to guarantee that the target firm will continue to be solvent and won’t try to settle its debts once the purchase is finished.
In a whitewash settlement, the buyer guarantees that the target business will remain solvent for at least one year. In this case, the auditor’s job is to ensure it’s financially feasible. The target corporation may then transfer accountability to the purchasing entity.
Particular Points to Remember
Corporate law is another kind of whitewash resolution in Singapore and Hong Kong. In this instance, the whitewash resolution renounces certain independent shareholders’ rights. By voting in favor of a whitewash resolution, these shareholders forfeit their right to an obligatory takeover by other shareholders.
An investor may appeal to an executive for a whitewash resolution (or whitewash waiver). If this waiver were accepted, the shareholders’ consent would be required.
A Whitewash Resolution Example
For example, imagine that business XYZ wants to buy private firm ABC. Company XYZ may get financial support from Company ABC to have sufficient funds to buy its shares.
Before this may occur, the board of Company ABC must approve a whitewash resolution. According to the resolution that Company ABC approved, the business will continue to operate for at least a year, even after receiving aid.
After the firm XYZ receives financial support for the acquisition, it must remain financially sustainable for at least 12 months. The deal also needs shareholder approval for Company ABC.
Conclusion
- Before providing financial support to the buyer, the target firm must approve a whitewash resolution.
- The company’s directors must attest that it can pay its obligations for a minimum of a year, and an auditor must often verify the company’s solvency.
- The goal of the whitewash resolution is to stop businesses from funding acquisitions by depleting the target company’s assets.
- The goal of the resolution is to shield acquired businesses from the acquirer’s financial depletion.
- The buyer guarantees via a resolution that the target firm will be solvent for at least one year; the auditor’s job is to ensure this is financially feasible. This is known as a “whitewash” resolution.
