Term and Legal Context of Whitewash
The term Whitewash refers, in a legal context, to various procedures and measures designed to remove or circumvent certain legal obstacles or prohibitions—particularly in corporate and capital market law—while complying with formal requirements. The term is often used in connection with the bypassing of capital maintenance or creditor protection provisions by following specific approval or consent procedures. Originally coined in Anglo-American law, whitewash has also gained significance in the German-speaking legal sphere, especially due to cross-border transactions and corporate restructurings.
Whitewash in Corporate Law
Origin and Development
In English law, the whitewash procedure was introduced to relax the strict restrictions related to financial assistance (a company’s financial support in the acquisition of its own shares and share transfers) under certain conditions. Relevant provisions existed, for example, in the Companies Act 1985 (UK), but were later modified in the Companies Act 2006.
Areas of Application
Financial Assistance
The whitewash procedure is primarily intended to enable a company to participate in financing measures when, for example, a third party acquires shares in the company and wishes to receive collateral or loans from the target company itself to finance this acquisition. This is generally prohibited by capital maintenance rules (see §§ 71a ff. AktG and § 43 para. 3 GmbHG in Germany), but may be allowed by way of specific procedural requirements.
Shareholders’ Resolutions
As part of the whitewash procedure, a special shareholders’ resolution is usually required, to be passed with a qualified majority in a general or shareholder meeting. In many cases, a statement by the directors (Directors’ Statement) regarding the company’s ability to continue its business is also necessary. These measures serve to protect creditors and ensure transparency for shareholders and third parties.
Creditor Protection Measures
As part of a whitewash, the company often also has to fulfill publication requirements, such as announcements that allow creditors to file objections or request collateral.
Legal Consequences of Compliance and Breach
By complying with the whitewash procedure, a measure that was originally prohibited—such as granting a loan or security by the company to a purchaser of its shares—may become legally permissible. Violation of the relevant whitewash requirements can result in the nullity of the measure, claims for damages, or even criminal consequences.
Whitewash in Capital Market Law
Market Manipulation and Deception
In stock exchange and capital market law, the term whitewash is sometimes used for procedures by which undesirable or prohibited market activities—such as market manipulation or deception—are retrospectively legitimized through disclosure, subsequent notifications, or obtaining retroactive approvals from shareholders or supervisory authorities. Legal instruments for the ‘whitewashing’ of certain events are, however, subject to strict requirements, which are monitored by the respective stock exchanges and regulatory authorities.
Whitewash in Takeover Transactions and Group Law
Takeover Law
In the context of public takeover offers, a whitewash procedure may be required if a company exceeds a takeover-relevant threshold and needs the consent of the other shareholders (e.g. “Whitewash Resolution”). This is intended to prevent minority shareholders from being unfairly disadvantaged or control of the company being changed without their consent.
Squeeze-out and Delisting
Similar considerations apply to squeeze-out or delisting procedures, in which the rights of minority shareholders and creditors must be safeguarded. A whitewash procedure here is intended to ensure that these groups are informed and involved in the procedure and enjoy adequate protection.
International Comparison
Whitewash in Different Legal Systems
- United Kingdom: Procedures surrounding financial assistance are now largely limited, as the pertinent prohibitions have been abolished in many instances.
- Australia: Extensive whitewash regulations in the Corporations Act with detailed requirements regarding shareholder resolutions, accounting, and solvency certifications.
- Germany and European Countries: Under German law, a restrictive approach applies; the concept of whitewash is legally recognized but is often much more narrowly structured than under common law.
Criticism and Legal Policy Assessment
Benefits and Risks
The whitewash procedure is sometimes viewed critically, as it can remove or weaken the strict protective mechanisms of corporate and capital markets law. There is potential for abuse, particularly if shareholder majorities allow measures that can harm the interests of minority shareholders or creditors. On the other hand, whitewash enables flexibility in restructurings and transactions, which, if formal requirements are met, can still be legally secure.
Legal Limits and Oversight
The admissibility and boundaries of whitewash are specified by statutory provisions, case law, and—in the international context—by European directives and the requirements of securities regulators. Nevertheless, the scope of application of whitewash remains a sensitive area in many legal systems and is regularly reviewed and adjusted.
Literature and Further References
For a deeper understanding of whitewash in its legal context, it is recommended to consult monographs and specialist journals from the fields of corporate and capital market law, as well as relevant decisions by international and national courts.
Summary: Whitewash refers, in a legal context, to specific procedures by which, subject to strict requirements and the involvement of relevant stakeholders, certain statutory prohibitions or restrictions—particularly in corporate and capital market law—may exceptionally be lifted. The term is widely used in international legal systems and is of central importance for the protection of creditors and minorities and for maintaining market integrity.
Frequently Asked Questions
What legal requirements must be met for a whitewash measure?
A whitewash measure requires compliance with numerous corporate law provisions, which may vary according to national law. For example, under German corporate law, a so-called ‘whitewash resolution’ is required, which generally demands a qualified majority of shareholders. Before such measures are implemented, it is often necessary to prepare an audit or confirmation note concerning the retention and continued existence of the share capital or equity. Furthermore, the company’s solvency and absence of over-indebtedness must still be assured after the measure. In certain jurisdictions, there are also participation or creditor protection regulations to observe—such as confirmation by an auditor that creditor interests have been adequately considered. Violations of these formal and substantive requirements render whitewash measures contestable or void and may entail personal liability for the company’s officers.
What legal risks do managers face in the event of an unlawful whitewash measure?
Managing directors and board members face significant liability risks if whitewash measures are not lawfully executed. If the requirements for a return or reduction of capital or for granting financial assistance to shareholders are not met but such measures are still carried out, civil claims for damages by the company and—in the event of insolvency—by the insolvency administrator may arise. In addition, under certain circumstances, there can even be tortious liability or criminal responsibility, especially if the measure has impaired the share capital or violated creditor interests. The duties of care under §§ 43 GmbHG and § 93 AktG oblige the management to comply with high legal standards in whitewash transactions and, where necessary, to seek professional advice.
Can creditors take legal action against a whitewash measure?
Creditors of the company have various civil law options to act against a whitewash measure if their rights are affected. In particular, for measures involving a reduction of capital or asset outflows to shareholders, creditors may file actions for annulment or demand collateral. In principle, many legal systems provide both a time-limited right to object and certain protection periods within which creditors can assert claims or request security. If the measure is carried out despite a justified objection, this can result in nullity or, at least, ineffectiveness against the creditors. In the event of insolvency, avoidance actions under §§ 129 ff. InsO and claims for compensation against company officers may also be considered.
How does a whitewash measure relate to capital maintenance principles?
The whitewash measure is closely linked to the statutory principles of capital maintenance, as set out particularly in § 30 GmbHG or § 57 AktG for companies in Germany. According to these provisions, payments to shareholders are generally only allowed if they do not affect the company’s share or registered capital. A whitewash measure allows for exceptions within narrow limits, for example when granting financial assistance for the acquisition of own shares, provided that neither capital nor creditor interests are jeopardized by the measure. The legislator specifies detailed requirements for evidence and resolutions in part to prevent abuse and protect capital.
What influence does insolvency law have on whitewash measures?
Insolvency law has a significant impact on the effectiveness and permissibility of whitewash measures. Above all, repayments, asset transfers, or financial assistance to shareholders during the company’s crisis or within certain repayment periods may qualify as (insolvency-)voidable transactions according to §§ 129 ff. InsO. This means that, in the event of subsequent insolvency of the company, the insolvency administrator can reverse such measures and reclaim the amounts from recipients. Moreover, insolvency law emphasizes the necessity that no whitewash measure may trigger over-indebtedness or insolvency; otherwise, managing directors become personally liable pursuant to § 64 GmbHG a.F. or § 15b InsO n.F. Therefore, a thorough insolvency law review is an essential prerequisite for every whitewash measure.
Are there international differences in the legal treatment of whitewash measures?
The legal frameworks for whitewash measures differ significantly between jurisdictions. While Germany, Austria, and other continental European countries have comparatively strict capital maintenance rules and formalistic whitewash procedures, common law jurisdictions—such as the United Kingdom—sometimes apply less restrictive rules. There, the so-called ‘whitewash procedure’ is particularly common in connection with financial assistance by companies, where the directors and shareholders must certify compliance with solvency and capital tests. Some countries have specific creditor protection mechanisms, while others rely more heavily on shareholder and management autonomy. In cross-border cases, the respective national requirements must always be observed to avoid violations and the liability risks associated with them.
