What is Whitewash Resolution?

709 reads · Last updated: December 5, 2024

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.

Definition

A whitewash resolution is a European term used under the 1985 Companies Act, referring to a resolution that must be passed by the target company before providing financial assistance to a buyer in an acquisition scenario. This resolution requires the directors of the target company to swear that the company will be able to repay its debts for at least the next 12 months.

Origin

The whitewash resolution originated from the 1985 Companies Act, designed to regulate the provision of financial assistance by companies during acquisitions. The act was introduced to protect the interests of companies and their shareholders, ensuring that providing financial assistance does not jeopardize the company's financial stability.

Categories and Features

The main features of a whitewash resolution include the directors' declaration and the auditor's confirmation. Directors must declare the company's ability to repay debts over the next 12 months, while auditors need to confirm the company's solvency. This process ensures the financial health of the company when providing financial assistance.

Case Studies

Case Study 1: In an acquisition, the board of directors of Target Company A passed a whitewash resolution, declaring the company's ability to repay debts over the next 12 months. The auditors confirmed the company's financial status, facilitating the acquisition. Case Study 2: Company B failed to pass a whitewash resolution during an acquisition because its auditors could not confirm the company's solvency, leading to the acquisition plan being halted.

Common Issues

Common issues include directors failing to accurately assess the company's solvency or auditors not providing an objective financial confirmation. These issues can lead to the failure of passing a whitewash resolution, affecting the acquisition process.

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