Is your not-for-profit (NFP) contemplating a merger? This is part three 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.
While each not-for-profit (NFP) merger is unique, most NFP mergers will tend to follow some, or all of the steps set out below. This article provides an overview of those steps, which help NFPs navigate the complexities of a merger whilst ensuring purpose alignment, legal compliance and operational continuity throughout the process.
1. Confirm alignment
Ensuring purpose and cultural alignment is a crucial step for parties considering a merger.
- Purpose: As a preliminary step, NFPs and registered charities proposing to merge must consider whether there is purpose alignment. An organisation’s purpose is principally ascertained from the purpose (sometimes referred to as “objects”) set out in its governing document. Registered charities must be able to demonstrate that they are meeting the requirements of Governance Standard 1 – which includes working towards their charitable purpose. Similarly, NFP’s that are not registered charities must act within the scope of their purposes.
If there is insufficient purpose alignment, merger types that maintain separate incorporation of the merging parties may be appropriate (such as one entity becoming a subsidiary of the other entity). Purpose alignment will be more important if the merger is likely to involve a significant transfer of assets from one entity to another (such as where one entity transfers its assets, operations and employees to the other before closing).
Additionally, NFPs that are endorsed as a Deductible Gift Recipient (DGRs) must ensure they are acting in a manner that is consistent with the conditions of their endorsement. For example, if a DGR is wound up in the course of a merger, it is prohibited from transferring its assets to another entity that is not endorsed as a DGR.
- Culture: A merger can look great on paper but fail due to lack of cultural alignment. Culture encompasses an organisation’s values, management practices, and operational norms. Parties that propose to merge should evaluate how each NFP’s mission and vision are reflected in the NFP’s daily practices and decision-making processes. The assessment of cultural alignment includes both a structured and an informal element. The structured element is discrete and involves obtaining and reviewing formal data such as staff surveys, retention rates, exit interviews and net promoter scores. The informal element is continuous and will be ongoing until any merger agreement becomes unconditional. This informal assessment includes observations (both at board and management level) gleaned from engagement with the prospective merger partner through the merger process – Is there transparency? How is conflict resolved? How are challenges addressed? Are behaviours consistent with the organisation’s espoused values?
2. Identify the appropriate merger type
The next step is to consider and agree on an appropriate merger type. The appropriate merger type will depend on factors including: the current legal structure of each party; the nature and extent of each party’s assets, operations and employees; the role each party will have post merger; and the appropriate governance framework for the merged entity. More information on common merger types can be found in part two of our article series.
Depending on the preferred merger type, parties may need to make preparatory changes including: changes to governing documents, changes to director appointments and changes to membership.
3. Set clear expectations
Before time, resources and energy are invested, it is important for the parties to articulate their expectations for the merger. This helps to guide critical decisions during the merger process, as well as informing the final assessment of whether the merger will be beneficial and should proceed. This process involves:
- defining non-negotiables upfront. This might include continuity of certain services, continuing to service particular client groups, requirements around geographic reach, branding changes, how redundancies will be managed and who will hold key leadership roles in the new entity.
- developing shared merger principles that guide critical decisions aligned with the collective vision and goals.
These expectations should be documented in a letter of intent or memorandum of understanding.
4. Conduct due diligence
Thorough due diligence is essential to mitigate risks and ensure informed decision-making by the board of each NFP. While the primary role of due diligence is to assist the boards to determine whether or not the merger should proceed, it also has a secondary role in identifying issues that may need to be prioritised and addressed as soon as practicable following the merger. The due diligence process should include:
- defining the scope and objectives of the due diligence process (this is dependent on the size and complexity of each organisation and the proposed merger type).
- coordinating efforts among the board, executive team, legal advisors (particularly those with expertise in dealing with NFPs), accountants, and other consultants to efficiently review the documents and information disclosed.
- assessing potential risks, including legal, operational, strategic, and reputational risks, to evaluate the feasibility and benefits of the merger. These risks should be assessed in the light of each organisation’s risk appetite and objectives for the merger.
More information on the due diligence process will be in part four of our article series.
5. Document the merger
Formalise the merger agreement once due diligence is complete and all conditions are met:
- include conditions precedent that must be fulfilled before the merger can proceed. These could include: the establishment of a merger advisory committee; obtaining regulatory approvals; member support; and obtaining agreement from key funders to the assignment of contracts.
- define completion obligations that must be carried out at completion to give effect to the merger. These could include: delivery of documents to demonstrate that conditions precedent have been satisfied or waived; necessary board or member resolutions taking effect; asset transfers, and regulatory filings.
- allow for a trade-out period post-completion to manage any remaining contractual obligations or transitions smoothly.
A comprehensive completion checklist that includes provision for conditions precedent, completion obligations and post completion obligations is invaluable. The checklist can provide a structure for regular meetings with the other NFP (and any steering group) until completion to ensure that everything remains on track for a successful merger.
How we can help
The Charity and Not-for-profit Law team at Moores regularly assists NFP and charitable clients through all stages of the merger process, from preliminary assessment, to due diligence through to effecting the merger.
Contact us
Please contact us for more detailed and tailored help.
Subscribe to our email updates and receive our articles directly in your inbox.
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.