Key Takeaways
- Allows financial help for share acquisition legally.
- Requires shareholder approval and ASIC notification.
- Ensures company solvency and transparency.
- Common in restructures and leveraged buyouts.
What is Whitewash Resolution?
A whitewash resolution is a legal mechanism that permits a company to provide financial assistance, such as loans or guarantees, for the acquisition of its own shares, which would otherwise be prohibited if it risks materially prejudicing the company or its stakeholders. This process is commonly governed by regulations like the Australian Corporations Act 2001 and ensures compliance through shareholder approval and regulatory filings.
This mechanism is especially relevant when companies with complex capital structures, including those with significant paid-up capital, need to facilitate share acquisitions without breaching legal restrictions.
Key Characteristics
The whitewash resolution offers a transparent framework to override general prohibitions on financial assistance by meeting specific legal requirements:
- Regulatory Compliance: Requires filing detailed notices and explanatory memorandums with regulators such as ASIC or the Companies Registration Office.
- Shareholder Approval: Involves passing a special resolution at a general meeting to validate the assistance.
- Director Solvency Declaration: Directors must confirm the company remains solvent post-assistance, ensuring no material prejudice.
- Waiting Periods: Prescribed timelines, such as a 15-day waiting period after regulatory lodgement, prevent immediate execution.
- Legal Safeguards: Though failure to comply may not invalidate a transaction, it exposes the company to legal risks and challenges.
How It Works
To implement a whitewash resolution, directors first assess the financial impact of providing assistance and confirm the company’s solvency under applicable standards. They then prepare and lodge a formal notice with regulators at least 22 days before the assistance occurs, including an explanatory memorandum detailing the transaction’s benefits and risks.
Shareholders receive notice at least 21 days prior to a general meeting where they vote on the resolution. Upon approval, the company lodges a confirmation form with the regulator, triggering a mandatory waiting period before executing the financial assistance, such as a loan or guarantee often used to support bank financing.
Examples and Use Cases
Whitewash resolutions are frequently employed in corporate restructures, leveraged buyouts, and share acquisitions where financial assistance is essential but regulated:
- Airlines: Companies like Delta have used similar legal frameworks to structure complex financing arrangements that involve guarantees or loans.
- Banking Sector: Firms listed in best bank stocks guides often engage in transactions requiring careful compliance with financial assistance laws.
- Credit Management: Businesses managing credit facilities may refer to concepts in best business credit cards to optimize funding strategies while respecting legal limits.
Important Considerations
Before pursuing a whitewash resolution, ensure thorough due diligence on the company’s financial health and shareholder structure. Directors should carefully document solvency assessments to guard against liability and support regulatory compliance.
Additionally, companies structured as a C corporation may face distinct considerations under jurisdictional laws governing financial assistance, making it essential to consult specialized legal guidance. Employing reliable information services like D&B can aid in verifying corporate standing and creditworthiness during this process.
Final Words
Whitewash resolutions enable companies to legally provide financial assistance for share acquisitions while protecting stakeholders through transparency and approvals. If you're considering such a transaction, consult legal and financial advisors early to ensure compliance and safeguard your interests.
Frequently Asked Questions
Whitewash Resolution is a legal procedure under Australian law that allows a company to provide financial assistance, such as loans or guarantees, for the acquisition of its own shares. This process bypasses the general prohibition on such assistance by ensuring shareholder approval and regulatory compliance.
Companies use Whitewash Resolution to legally provide financial help for share acquisitions without breaching laws that prevent material prejudice to the company or its stakeholders. It is commonly used in share sales, restructures, or leveraged buyouts where banks require company guarantees.
The process includes directors' approval, preparing and lodging a notice and explanatory memorandum with ASIC at least 22 days before assistance, notifying shareholders, holding a special resolution meeting, lodging a confirmation form with ASIC, and observing a 15-day waiting period before providing the financial assistance.
While Whitewash Resolution is primarily an Australian legal mechanism under the Corporations Act 2001, a similar but distinct process exists in Irish law under Section 60 of the Companies Act, which also involves shareholder approval and solvency declarations.
Failure to comply with the Whitewash Resolution steps does not invalidate the transaction or create a criminal offense, but it does expose the company to risks of non-compliance challenges and potential legal disputes.
Yes, certain timelines such as the notice period to shareholders and the 15-day waiting period after lodging forms with ASIC can be shortened if shareholders agree, allowing for a more flexible and expedited process.
Companies must lodge Form 2602 (notice and explanatory memorandum) at least 22 days before providing assistance and Form 2601 (confirmation of special resolution) within 14 days after the shareholder meeting, ensuring regulatory transparency.
The directors must first approve the transaction by reviewing the financial assistance, its benefits, risks, and the company's solvency. Subsequently, shareholders must pass a special resolution to formally approve the assistance.
