Whatever the background to a merger, there are a number of considerations for charities to work through before and during the merger process to ensure a smooth and successful transition.

There are several reasons why charities may decide to merge with another charity: development and expansion of activities, changes in the funding or financial environment, lack of succession options, and a desire to reduce administration costs and streamline operations. If you are considering a merger opportunity, here are five ‘top tips’ to consider:

1: Exploratory stage / feasibility considerations

Before jumping into a constitutional restructure of any level, all parties involved (as there may be more than two) must conduct an initial review. At this stage, the parties are not aiming for a conclusive green light to proceed with the merger.

In order to reach a decision in principle and agree Heads of Terms, all parties must explore and assess their options to ensure they are feasible. This preparatory work is usually conducted by a small working group comprising of a mix of senior management team and trustees. The feasibility report is the first of the key documents on the path to a merger.

2: Consider the different types / structure of mergers

Once it is clear that all parties are working towards the same goal, the parties must decide on the appropriate structure of the merger.

The merger options include:

  • Assets and operations transfer from one to charity to the other, with the former then winding up.
  • Change of control merger where one charity’s Board is replaced in its entirety with the Trustees of the other charity’s board.
  • A new charity is established, and both charities’ assets are transferred to a new merged charity, with both then winding up.

The most appropriate structure will depend on a number of variables and is often guided by the size and position of the respective parties involved.

3: Due Diligence is key

How do you turn a decision in principle into a solid yes? The answer is due diligence. The level of due diligence required is subjective to each individual merger and is a different exercise from purely corporate transactions where there is a buyer and a seller.

The due diligence questionnaire will inform the parties of matters such as each organisation’s structure, governance and regulatory history, material contracts and litigation, funding arrangements, and the nature and title of assets, including intellectual property, property, and employment or pension matters.

Another key document in the merger process is the due diligence report, which summarises the information extracted from the due diligence exercise and highlights any significant liabilities and risks.

4: Project Plan and paperwork

Even in the simplest of mergers, there are a number of moving parts; a well-structured project plan can make or break the process. Whether you have a sophisticated Gantt chart or a RAG table, all the key stages, documents, actions, activity owners and timescales should be clearly identified and kept under review.

The documentation required to action the merger depends on the type of merger employed. An asset and operations transfer will need a Transfer Agreement; a change of control will require the resolving and recording of a change in trustees (the process for which will depend on the legal vehicle of the charity); and the creation of a new charity will require a new constitution and an OSCR application.

More minor ancillary documentation can easily be missed when the attention is on the major documents; this is where a good project plan will keep you right. Trustees’ Minutes, Board Minutes and Resolutions will be required at various stages throughout the merger to ensure there is a paper audit trail and that everything is properly recorded and agreed.

5: Remember, remember post-completion matters

Merger completion day has arrived – documents are signed and celebrations are held – what’s next? The continuing charity (or newly merged organisation) will be keen to continue with its charitable purposes and activities, and the transferring or winding-up charity will be keen to step down and possibly retire (as the case may be).

However, merger responsibilities do not stop at completion. Matters such as regulatory filings (including OSCR’s new Record of Mergers), outstanding contract assignations, physical delivery of assets, and the winding up process (if applicable) must all be addressed to tie up any loose ends of the merger.

Again, reliance can be placed on a good project plan to ensure nothing is missed at the conclusion of a merger.

Conclusion

Mergers can seem daunting and complex, particularly as they may be encountered only once in a charity’s lifespan. Trustees should take sufficient time to work through the above steps in order to act in the best interests of their charity and not to rush to a hasty undocumented and unconsidered outcome.

If you would like to speak to a member of the Charities & Third Sector Team at Lindsays in relation to your merger queries or any other charity matter, please get in touch.

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