Whitewash Resolution

Definition

A Whitewash Resolution is a type of legal permission given by shareholders of a financially distressed company, allowing its directors to conduct business transactions that would ordinarily be construed as violations against insolvency laws. This often pertains to transactions involving financial assistance for the purchase of its own shares, or payments of dividends during insolvency. It’s called “whitewash” because it permits potentially harmful actions with shareholder approval.

Phonetic

The phonetic pronunciation of “Whitewash Resolution” is: /ˈhwaɪtwɒʃ rɛzəˈluːʃən/.

Key Takeaways

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1. Whitewash Resolution is a term often used to refer to an agreement that hides any evidence of wrongdoings or cover-ups within a corporation or organization.
2. Such resolutions are typically used as a method to prevent any legal repercussions or public backlash against the individuals or entities that may be involved in unlawful activities.
3. While a Whitewash Resolution might help to protect a company’s image in the short term, it can lead to ethical and credibility issues in the long run, if the truth is unveiled later.

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Importance

A Whitewash Resolution is an essential financial term in the context of business transactions and corporate finance, primarily related to situations when a company is making an acquisition or undergoing reorganization that might breach financial regulation laws. The term is used when a business is acquiring an asset but can’t demonstrate to the authorities that it will remain solvent afterwards. In this context, the resolution serves as a formal statement declaring that company directors have scrutinized the financial consequences carefully, affirming that the company will continue to operate in a sound financial manner after the transaction. The “whitewash” here refers to the process of scrutinizing these adverse financial circumstances and essentially ‘clearing’ the transaction, reassuming creditors and investors about the financial health of the company. Therefore, a whitewash resolution is important for maintaining transparency, trust and ensuring that businesses operate within the confines of legality.

Explanation

The primary purpose of a Whitewash Resolution is to permit a company, whose dire financial status would otherwise prohibit it, to offer financial aid to a person looking to acquire or purchase shares in that company. This mechanism is typically used when the company’s solvency is in question, and it seems as though the company may not be able to remain financially viable if it were to provide any form of financial assistance for the purchase of its own shares. Whitewash resolutions allow the acquirer to gain control over the company, which could potentially lead to an improved financial state for the corporation in the long run.A Whitewash Resolution is often seen in situations where the acquisition of a company with poor financial health is being considered. It’s a way to safeguard the interests of the shareholder by ensuring that if a company lends financial assistance for the acquisition of its shares, the shareholders must unanimously approve the decision after being fully informed about the company’s financial condition and risks involved. With this resolution, a degree of protection is provided to shareholders as it ensures transparency about the company’s financial affairs and likely outcomes. Therefore, one could argue that Whitewash resolutions act as a check and balance in situations of financial instability, promoting transparency and responsible decision-making.

Examples

A Whitewash Resolution, in business and finance, refers to a resolution passed that allows directors to approve and carry out actions that might otherwise be deemed as being in their own personal interest, and thus a potential conflict of interest. It is primarily used when a company is in financial distress.Here are three hypothetical real-world examples: 1. **Danby Electronics Limited**: A situation may arise where Danby Electronics Limited, an established electronics company, is facing severe financial turmoil. To stay afloat, the directors decide to conduct a personal buyout of the company’s debt – a move which might usually be perceived as a conflict of interest. However, they pass a Whitewash Resolution, thereby explaining and justifying their actions to the shareholders. 2. **Rogers Retail Corporation**: Consider a large retail chain like Rogers Retail Corporation that needs significant funds for its expansion plans but lacks sufficient financial resources. The company directors propose to lend personal resources to the company for the cause. To confirm the legality of this action, the directors might seek the approval of independent shareholders and pass a Whitewash Resolution, spelling out that the action is not in self-interest but for the wider good of the company.3. **Smithson Machinery Inc.**: Smithson Machinery Inc. might be a family-owned business going through a significant financial crisis. To resolve the situation and protect the company, the directors propose to leverage their personal assets to secure a much-needed loan. Susceptible to being viewed as a conflict of interest, this move needs the approval of a Whitewash Resolution as a safeguarding measure.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Takeover Bid
• Shareholder Approval
• Related Party Transactions
• Financial Disclosure
• Corporate Governance

Sources for More Information

• Investopedia
• Corporate Secretary
• Practical Law – Thomson Reuters
• AccountingTools