What it means
Under the UK Takeover Code, a person who acquires 30% or more of the voting rights in a listed company, or who already holds between 30% and 50% and acquires more, must normally make a mandatory offer to all other shareholders. The rule protects minority shareholders by giving them the chance to sell at a fair price when control changes.
The offer must be made in cash or with a cash alternative, which can be very costly for the investor. Sometimes this rule is awkward.
A company that needs fresh funding might issue a large number of new shares to an investor, which would push the investor over the threshold. Forcing the investor to bid for the whole company could scare the investor away, even though the shareholders may prefer the funding.
The whitewash procedure provides a way through. Independent shareholders, meaning those who are not connected with the investor, can vote to waive the obligation to make an offer.
The regulator, called the Takeover Panel, must agree to the procedure, and the circular sent to shareholders must set out the details, including what the investor will own afterwards. The vote gives the minority a real choice, but it also means they give up a protection.
If the whitewash passes, the investor can hold a large stake, perhaps over 30%, without paying a premium to buy out others. Independent shareholders should therefore read the circular carefully and ask whether the funding is worth the loss of the right to an offer.
Finance teams should know the practicalities. Timing is tight, the paperwork is detailed, and the investor's later purchases may still be restricted.
Similar concepts exist in other markets, but the rules and thresholds differ, so check the local requirements. Documentation is detailed.
The circular usually includes an independent adviser's opinion on whether the terms are fair and reasonable, a statement of the investor's intentions for the business, and the percentage the investor will hold afterwards. Shareholders should read these sections rather than rely on the headline summary.
In practice
Real-world examples.
Example
A struggling listed retailer needs $30,000,000 of new capital, and a supportive investor will provide it only in return for shares. The board asks independent shareholders to approve a whitewash so that the investor can pass 30% without bidding for the company.
Example
A small listed biotechnology firm raises funds from its largest shareholder. The company calls a general meeting and seeks independent approval, telling shareholders that the alternative would be to cut research spending.
Example
A shareholder in a listed company receives a circular proposing a whitewash and notes that the investor will own over 35% afterwards. She votes against, because she would prefer to keep the right to receive a cash offer. Her vote is counted along with the other independent holders.
Formula
Calculation
Investor stake after issue = (shares already held + new shares) / (total shares outstanding + new shares)
Suppose a company has 100,000,000 shares outstanding, and an investor holds 18,000,000 shares, which is 18%. The company proposes to issue 30,000,000 new shares to the investor. The investor's stake becomes (18,000,000 + 30,000,000) / (100,000,000 + 30,000,000) = 48,000,000 / 130,000,000 = 36.9%. This is above the 30% threshold, so the investor would need a whitewash approval to avoid making a mandatory offer.Case study
Seen in the real world.
Oakmoor Textiles is an illustrative, fictional listed company that needed $20,000,000 to repay a loan. Its largest shareholder, Greyfield Partners, offered to buy new shares for that amount, which would lift its stake from 22% to about 41%.
The board explained to independent shareholders that without the funding the lender might demand repayment, and that Greyfield would not proceed if forced to bid for the entire company. After a detailed circular and a meeting, independent holders approved the waiver.
The funding went ahead and the company repaid the lender. The illustrative lesson is that a whitewash trades one protection for another, so it needs a clear explanation of why the funding is in the minority shareholders' interests. The board also publishes an independent adviser's opinion, which several large holders cited when explaining their support.
Watch out
Common mistakes.
- Counting all shareholders in the vote, when only independent shareholders may decide a whitewash.
- Assuming the vote is a formality, when shareholders can and do reject it.
- Forgetting that the rule thresholds belong to a particular country's code, and applying UK numbers to other markets.
Questions
People also ask.
Why is it called a whitewash?
The name suggests that the vote wipes away the investor's obligation to make an offer, which would otherwise arise automatically.
Who decides whether the procedure can be used?
The regulator, the Takeover Panel, must be consulted and agree, and independent shareholders must then vote on it.
What happens to the investor's later purchases?
Further buying can be restricted, and the investor may still be required to make an offer if it increases its stake beyond what shareholders approved.
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