Whitewash Resolution

A Whitewash Resolution is a specific type of shareholder approval that is required in certain jurisdictions for a company to proceed with a transaction that would otherwise trigger mandatory offer requirements under takeover regulations. The concept is most commonly associated with corporate governance and the regulatory framework surrounding mergers and acquisitions (M&A). This article explores the intricacies of Whitewash Resolutions, delving into their purpose, procedural requirements, key stakeholders, and illustrative case studies.

Introduction

A Whitewash Resolution is typically invoked in situations where a company is looking to issue new shares or acquire shares without triggering a mandatory takeover offer. This is commonly seen in cases of rights issues, debt-to-equity swaps, or share purchase agreements. The resolution serves to absolve the entity from making a mandatory general offer to all shareholders, provided the majority of independent shareholders approve the transaction.

Regulatory Background

The regulatory requirements for Whitewash Resolutions can vary by jurisdiction. Here are examples of frameworks from different regions:

• United Kingdom: The UK Takeover Code governs the requirement for Whitewash Resolutions. Rule 9 of the Code stipulates that any individual or group acquiring 30% or more of the voting rights in a company must make a mandatory offer to all shareholders. However, a Whitewash Resolution can exempt the acquirer from this obligation if approved by the independent shareholders.

• Hong Kong: The Hong Kong Code on Takeovers and Mergers has similar provisions. Rule 26 mandates a general offer when a person’s shareholding breaches specific thresholds. A Whitewash Waiver can be granted if independent shareholders pass a resolution to this effect.

Purpose and Importance

Whitewash Resolutions serve several critical purposes:

1. Facilitating Capital Raising: They allow companies to raise capital efficiently without triggering onerous and costly mandatory offers.
2. Debt Restructuring: Enable companies to convert debt into equity, often essential in financial restructuring.
3. Corporate Flexibility: Affords companies more flexibility in managing their share capital and corporate structure.

Procedural Requirements

The process of obtaining a Whitewash Resolution typically involves the following steps:

1. Circular to Shareholders: The company must issue a detailed circular to shareholders explaining the transaction, its implications, and the Whitewash Resolution’s purpose.
2. Independent Financial Advisor (IFA): An IFA must be appointed to provide an opinion on whether the transaction and the Whitewash Resolution are fair and reasonable.
3. General Meeting: A general meeting of shareholders is convened to vote on the resolution. Only independent shareholders, i.e., those not involved in the transaction, are entitled to vote.
4. Regulatory Approval: In some jurisdictions, regulatory approval may also be necessary following the shareholder vote.

Key Stakeholders

Several key stakeholders are involved in the process of a Whitewash Resolution:

1. Board of Directors: Responsible for initiating the process and ensuring compliance with regulatory requirements.
2. Independent Shareholders: Their approval is crucial for the resolution to pass.
3. Independent Financial Advisor: Provides an impartial assessment of the transaction.
4. Regulatory Bodies: Oversee the process to ensure fairness and compliance with applicable laws.

Benefits

• Cost Efficiency: Avoids the significant costs associated with making a general offer to all shareholders.
• Speed: Facilitates quicker execution of transactions.
• Shareholder Value: Can enhance shareholder value by enabling more strategic capital allocation and restructuring.

Risks and Challenges

• Shareholder Opposition: Independent shareholders may not always approve the resolution.
• Regulatory Scrutiny: Extensive regulatory scrutiny can complicate the process.
• Conflict of Interest: Potential conflicts must be managed transparently.

Case Studies

1. Clarke v Dunraven: A significant case in the UK where the court ruled on the necessity of Whitewash Resolutions in share transactions.
2. Alibaba Group: In 2019, Alibaba issued a Whitewash Resolution as part of their strategic financial restructuring plan (https://www.alibabagroup.com).

Conclusion

Whitewash Resolutions are an indispensable tool in the corporate finance toolkit, allowing companies to execute transactions that would otherwise trigger burdensome takeover provisions. While they offer significant advantages in terms of flexibility and cost savings, they also require careful navigation of regulatory and shareholder approval processes. Understanding the intricacies of Whitewash Resolutions is crucial for corporate leaders, finance professionals, and shareholders alike to ensure optimal outcomes in M&A and capital-raising activities.