What Is a Whitewash Resolution?

A whitewash resolution is a condition placed by the target firm before it is acquired by another company. In a whitewash resolution, the company being acquired pledges financial assistance to the acquirer as long as it remains financially viable for at least 12 months. The financial assistance must first be approved by the target company's shareholders. If approved, an auditor must then confirm the company's solvency before the firm's directors can proceed with the deal.

How a Whitewash Resolution Works

Mergers and acquisitions (M&A) are the combination of two or more companies into a single entity. Mergers tend to marry two similar companies together while acquisitions occur when one company (usually a larger one) buys another (usually a smaller one). The deals must be approved by shareholders and board members of each company.

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

This resolution is put forth by shareholders of the target to ensure it remains solvent and won't seek to discharge its liabilities once the acquisition is complete. Put simply, the buyer promises the target's shareholders that the target will be solvent for at least a year in exchange for financial assistance. An auditor then comes in to ensure this is financially possible. If approved, the target company can shift the responsibility to the acquiring company. 

Whitewash resolutions are commonly used by financially distressed companies that want to save themselves from insolvency by being purchased. As such, it acts like a rescue plan that allows the target company to remain financially viable for at least a year after it provides the acquirer with financing. and before its shares are fully acquired.

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 the rights of certain independent shareholders of a company.

Rather than financial assistance the whitewash resolution in this case is a waiver of rights for the independent shareholders to receive a mandatory takeover from shareholders of the other company. An investor can appeal to an executive for a whitewash resolution or whitewash waiver. If approved, this waiver is subject to the approval of shareholders. 

Example of a Whitewash Resolution

Here's a hypothetical example to show how whitewash resolutions work. Suppose 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's directors must pass a whitewash resolution. The resolution would note that even after assisting, the company will remain viable for at least a year. In addition to remaining financially viable for the next 12 months, Company ABC shareholders must approve the transaction.

The Bottom Line

Company shareholders generally have to approve of any major changes to the business. This includes any mergers or acquisitions that may occur. Financially distressed companies may seek out buyers to save themselves from going under. In certain cases, they may put in a whitewash resolution, which promises the acquirer financing as long as it ensures the target will remain viable enough to pay off its debt before being acquired.