Properly planning charity mergers
The starting point for any decision to merge is the trustees’ belief that this will offer a better way of advancing the charity’s objects and delivering public benefit.
The legal structure of a merger can be one of the following: a) Your charity transfers its assets and liabilities to a partner charity – or vice versa. b) Both merger partners transfer their assets to a newly established charity which assumes their respective liabilities.
Other varieties of merger are available! Such as where one charity is appointed as sole member of a corporate charity or sole trustee of another charity. These are not necessarily seen as full mergers, and trustees may struggle conceptually with the powers and duties applicable to them when acting as a board member of a corporate trustee or corporate member of a charity.
Charity incorporations are also a form of merger. This occurs when the trustees of a charitable trust or unincorporated association conclude that it is preferable to operate under a corporate structure, for example, to limit their liability to third parties and attract future board members. The unincorporated charity merges with a new corporate body by transferring to it all assets and liabilities for the better fulfilment of its purposes.
This article focuses on key considerations for operational mergers in the form of a) or b) above, whereby two established charities pool their assets and streamline their activities to become a single, integrated organisation.
Quest for financial sustainability
Operational mergers are often driven by the quest for financial sustainability. In an environment where charities compete for the same funds and operate under squeaky tight margins, combining forces can achieve the efficiencies and economies of scale needed for a viable business model. A lot of mergers are induced by pressures on the publicly funded sectors, such as care, the arts and voluntary services.
Equally, the compliance and regulatory expectations on service delivery charities can cause trustees to seek out merger partners who can offer more robust “back office” structures providing good internal governance systems and processes.
Sometimes mergers are a logical choice for the end of a charity’s natural life. This may come about due to a reduced need for the charity’s services, or other shifts in the operating environment, requiring significant adaptations to the charity’s business model in order to keep pace. Trustees may decide that they have simply “run out of steam” and, having neither the means nor appetite to see through such a change themselves, feel that a merger is the best option.
Future legacies
You might ask why trustees don’t just allocate remaining charitable funds to appropriate causes and close the charity in these circumstances? The answer is, often, to capture future legacies. Under Charities Act 2022 provisions which sought to close a statutory loophole, the effect of registering a merger on the Charity Commission’s register of merged charities is that all subsequent gifts to the transferor take effect as a gift to the transferee.
In a true charity merger, there is at least one transferor which folds into a transferee charity and then dissolves. The decision as to which charity is to wind up depends on several factors, including its structure, the nature of the assets it holds, the terms of contracts and liabilities, the charity’s name and future branding considerations.
The choice may be clear from the circumstances but otherwise needs to be discussed and agreed between the parties. Merger partners generally want to try to avoid a perception of a takeover.
Important steps to take
It's useful to consider the various steps and key considerations involved in a charity merger:
PLAN AND PREPARE. In a pre-merger planning stage, the transferor would be advised to undertake a house keeping exercise to ensure that all its records and registers are up to date. Copies of all contracts, accounting records etc. should be placed onto a secure data system.
THE “KNOW YOUR PARTNER” PHASE. The merging charities will need to get to know one another intimately. There is a particular onus on the receiving charity trustees to understand what it will be taking on. A charity merger involves acquiring all the assets and liabilities of the transferor - not cherry picking. The due diligence phase of a charity merger is key and should not be rushed or short-circuited.
Legal agreements covering access to personal data and sensitive information sharing can facilitate a secure and confidential exchange of data between the parties.
SIMILARITY OF OBJECTS. The very first task is to assess the compatibility of the charities’ objects. One charity may need to modify its purposes to be sufficiently like those of the other charity. Objects changes are “regulated alterations” that require prior consent from the Charity Commission. There is also a possibility that the governing document (usually of the transferor charity) will need amending to include an express power to merge.
PROCESS. It is important to figure out at this stage the legal mechanism and timetable for agreeing the merger – will this require a vote of the charity’s members or is a trustee decision sufficient? Are there other bodies who need to be involved (such as a regulatory or umbrella body). Is Charity Commission approval of the merger required?
HEADS OF TERMS. It is helpful at an early stage to document the key terms and milestones for the merger, and establish a project group with representatives from both boards to work within the parameters set out in the heads of terms. These should identify mission-critical points to be provided for in the merger documentation.
COMMUNICATIONS STRATEGY. The communication, branding and consultation strategy will need to be a joint undertaking between transferor and transferee. Aligned to the heads of terms, it should set out the approach to be taken when consulting with stakeholders and informing them of the merger and the messaging around the transaction.
CONSULT WITH STAKEHOLDERS. This should be done early on in any merger process. Stakeholders are people who work with the charity in all sorts of ways including its beneficiaries, funders and supporters. Consultation may take the form of newsletters, surveys, webinars or physical meetings at which the draft merger strategy is developed.
Worry about changes
It is important not to disenfranchise people by presenting the decision as a “fait accompli”. It is natural for people to worry about how changes will affect them and whether the charity’s personal and/or community ties will be lost by being absorbed into a larger entity. Boards should listen to concerns and provide as much reassurance as the circumstances permit.
Mergers can also be a difficult time for employees as they will be aware of possible workforce duplication and that redundancies may result. Their rights are protected by Transfer of Undertakings (TUPE) regulations. Charities must inform and consult their employees in line with TUPE requirements and ensure that any redundancies made after the merger are for economic, technical or organisational reasons.
IDENTIFY THIRD PARTIES. Operational mergers frequently involve an array of contractual obligations that need to be either formally ended or passed on to the transferee. This often means bringing third parties such as commissioners, funders, lenders, suppliers, and landlords into the equation.
Early liaison with pension providers is essential to understanding the consequences of winding up the transferor and/or transferring members out of the scheme. This can prove critical to the viability of a merger.
Passing over liabilities
Getting third party consents to the assignment or novation of the transferor’s obligations to the transferee can add significantly to time and legal costs. The transferor needs to pass all its liabilities over to the transferee on the agreed merger date because post-merger, it will be little more than a “shell” charity, devoid of assets and unable to meet any operational obligations.
Although indemnities are generally provided as part of the transfer agreement, ideally the aim is to avoid the charity and/or its trustees retaining any liabilities associated with operating the charity beyond the merger date.
DOCUMENT THE MERGER APPROPRIATELY. There is generally a suite of legal documents to put in place for the merger, including a vesting declaration, transfer or merger agreement which will document the business transfer and highlight any restricted assets, including permanent endowment, that must be ring-fenced by the transferee.
Trustee and/or member resolutions documenting a “best interests” decision making process will be needed. It is suggested using the seven principles in the Commission’s CC27 as a guide.
BOARD CONTINUITY. Within the merger framework, some of the transferor trustees may join the board of the transferee charity, which can have several positive impacts. It preserves a degree of continuity and gives reassurance to staff and beneficiaries that their interests will be represented in the new world of the merged charity (although it is important to remember that this can also result in a conflict of interest or loyalty for those trustees).
The transferor trustees can help to ensure that the merger strategy is implemented in accordance with the letter and spirit of the merger agreement, and oversee practicalities such as the orderly winding up of the charity and registering the merger with the Charity Commission.
Remembering the human factors
In the current climate of uncertainty and rapid change in society and technology, choosing to collaborate – via a charity merger – rather than to compete, may be the way to turn these challenges into an opportunity. This article has explored the legal aspects of a charity merger, it is no less important to highlight the softer, human factors like a shared culture and values which are just as, if not more, fundamental. Like any marriage or alliance, it is the groundwork that you put into knowing your partner and building up mutual trust and respect that ultimately determines the success of a charity merger.
