Is your not-for-profit (NFP) contemplating a merger? This is part two of a five-part article series that will offer some practical guidance to your board or merger advisory committee. Subscribe to receive the remaining articles in the series.
There are a range of available NFP merger types depending on the legal structure of the organisations that propose to merge. Determining which of these available merger types is most appropriate requires an assessment of what is important to your NFP, including control, structural simplicity and containment of risk. Identifying the preferred merger type early on will:
- inform the drafting of the pre-merger agreement;
- help determine the focus and scope of the due diligence process;
- enable the parties to determine what stakeholder decisions will be required to enable the merger to proceed;
- inform each board’s risk assessment (as part of the decision regarding whether or not to proceed with the merger); and
- if the parties decide to proceed, inform the drafting of the merger agreement.
The five most common merger types are summarised below, together with their pros and cons. Note that, depending on the structure of the merging organisations, some merger types may not be possible.
1. Transfer from NFP B to NFP A
Under this model, NFP B transfers its assets and operations to NFP A. NFP B ceases to exist. This option may be appropriate if NFP A has multiple assets and complex operations and is considering merging with NFP B which has less assets and simple operations.
Pros
- One surviving NFP which provides for less administrative burden.
- Unknown liabilities of NFP B may be quarantined in NFP B on closure.
- Appropriate for all kinds of legal structures provided purposes are aligned.
Cons
- It may be harder to claim bequests to NFP B post merger.
- Need to provide for redundancy or transition of NFP B employees.
- Both NFPs must have aligned purposes and the winding up clause of NFP B must permit the transfer to NFP A.
- Will need to novate or assign all NFP B contracts to NFP A (including funding agreements) or terminate contracts.
- All assets and operations of NFP B must be manually transferred to NFP A.
- May be perception of NFP B as “lesser” merger partner.
- Closure will require approval of the NFP B members.
2. NFP A becomes parent of NFP B
Under this model, NFP A becomes the parent of NFP B (by becoming the sole member of NFP B) and NFP A has control of NFP B. Both organisations survive and NFP B’s assets and operations remain in NFP B. This merger type may be appropriate if it is necessary to maintain separation, possibly because the two NFP’s purposes are not aligned or NFP B has known liabilities which need to be contained.
This may be an appropriate “transitional” step where NFP A controls NFP B for a period while transferring NFP B’s assets and operations into NFP A (before ultimately closing NFP B).
Pros
- Maintaining separate incorporation quarantines risk and liability (to an extent).
- Easier to claim bequests to NFP B.
- NFP A and B do not need to have aligned purposes.
- Can be a transitional step towards a single merged entity.
- No need to novate or assign NFP A and NFP B contracts to NFP C (including funding agreements). May need to notify of change in control.
Cons
- Ongoing requirement to manage conflicts of interest and related party transactions between the two NFPs.
- Ongoing administrative burden – maintaining two NFPs is less efficient than maintaining one.
- Only appropriate where NFP B can have a single member (e.g. if NFP B is a CLG or another kind of structure that can have a sole member)
- Requires NFP B members to resign.
3. Establish NFP C and close NFP A and NFP B
Under this model, NFP C is created as a new entity. Both NFP A and NFP B transfer their assets and operations to NFP C before they both cease to exist. This merger type may be appropriate if both NFP A and B want a fresh start on an equal playing field.
Pros
- NFP C can be established without disruption to NFP A and B.
- A sense of “equality” – both NFP A and B merge into a new entity.
- NFP C’s governing body and governing document will be agreed between the two NFPs.
- Unknown liabilities of NFP A and NFP B may be quarantined in NFP A and NFP B respectively on closure.
Cons
- It may be harder to claim bequests to NFP A or NFP B post-merger.
- Need to provide for redundancy or transition of NFP A and NFP B employees.
- NFP A and NFP B must have aligned purposes and the winding up clauses of NFP A and NFP B must permit the transfer to NFP C.
- Will need to novate or assign all NFP A and NFP B contracts to NFP C (including funding agreements) or terminate contracts.
- All assets and operations of NFP A and NFP B must be manually transferred to NFP C.
- Closure will require approval of the NFP A and NFP B members.
4. New parent for NFP A and NFP B
Under this model, NFP C is created (a new entity). NFP C is usually the parent (sole member of NFPs A & B) and NFP C would have control over both NFP A and NFP B. The outcome is that all three organisations remain in existence. This merger type may be appropriate if it is necessary to maintain separation (possibly because the two NFP’s purposes are not aligned, NFP A or NFP B have known liabilities which need to be contained or the complexity of their different operations means separate incorporation is preferable).
Pros
- A sense of “equality” – both NFPs become subsidiaries of NFP C.
- Maintaining separate incorporation quarantines risk and liability (to an extent).
- Easier to claim bequests to NFP A and NFP B as the beneficiary remains incorporated.
- Ability to have different charitable purposes and flexible operations.
- No need to novate or assign NFP A and NFP B contracts to NFP C (including funding agreements). May need to notify of change in control.
- More options in relation to where assets are held.
Cons
- Maintaining three entities may be administratively burdensome.
- Ongoing requirements to manage conflicts of interest and related party transactions between the three NFPs.
- Multiple governing documents and policies to understand and comply with.
- Requires NFP A and NFP B members to resign.
5. Amalgamate NFP A and NFP B to form NFP AB
Under this model, NFP A and NFP B (incorporated associations in the same State and Territory except the Northern Territory) amalgamate to become a new NFP AB. The effect of amalgamation is that NFP A and NFP B cease to exist. NFP AB will assume all assets and liabilities of NFPs A and B and ordinarily, there is no need for assignment or novation of contracts.
Pros
- A sense of “equality” – both NFPs merge to form one amalgamated NFP AB.
- One surviving NFP AB which provides for less administrative burden.
- Both NFPs have continuity of legal identity, so it is easier to claim bequests.
- No need to transfer assets and operations.
- No need to novate or assign NFP A and NFP B contracts to NFP AB (including funding agreements). May need to notify of change in control.
Cons
- The NFPs must have aligned purpose(s) (at least under current law).
- Any liabilities of either NFP will be retained.
- Only available to two incorporated associations in the same State or Territory (except the Northern Territory – statutory transfer process instead).
- Requires approval of NFP A and B members.
How we can help
Choosing the appropriate merger type is essential. The Charity and Not-for-profit Law team at Moores can help you understand the available merger types available to your merging organisations including the pros and cons of each option.
Contact us
Please contact us for more detailed and tailored help.
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Disclaimer: This article provides general information only and is not intended to constitute legal advice. You should seek legal advice regarding the application of the law to you or your organisation.