Is your not-for-profit (NFP) contemplating a merger? This is part one 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 fundamental differences between a NFP merger and a for-profit merger. It is critical to understand these differences, as they will inform the drivers for the merger, influence the scope and focus of the due diligence process and impact the available merger types.
Different drivers
The drivers for a merger are different. For-profit mergers typically focus on growth and shareholder value – whether through increasing market share, reducing competition or increasing sales. By contrast, NFP mergers are usually purpose driven. NFPs considering merger want to ensure that the merged organisation will better fulfil their vision and mission and better serve their beneficiaries. This means that alignment of purpose is a primary consideration. For many merger types, alignment of purpose is also an essential requirement to permit the transfer of assets from one entity to another or preserve tax concessions and endorsements.
Not a purchase
Since a for-profit merger is often structured as a purchase, valuation is a key consideration in the due diligence process – is the “acquiring” organisation paying a fair price? An NFP merger usually involves the transfer of assets for no cost. This means that an “acquiring” NFP’s focus in the financial due diligence process is not on price, but rather on overall financial risk – would the merger introduce unsustainable levels of financial risk or liability that could adversely impact the merged NFP?
Different regulators and regulation
NFPs are subject to different or additional regulation. NFPs that are registered charities are regulated by the Australian Charities and Not-for-profits Commission (ACNC). NFPs and charities are often income tax exempt and may have tax deductibility, which impacts what they can do with their assets, including in a merger process. It is imperative that directors are aware of and actively monitor the NFP’s compliance with legislation, regulations and standards such as the ACNC Governance Standards.
NFP structures
Finally, NFPs have specialised legal structures (including companies limited by guarantee (CLG), incorporated associations (IA), unincorporated associations, co-operatives and charitable trusts). These structures (and their limitations and opportunities) are not always well understood outside the NFP sector and will impact the available merger types. For example, most jurisdictions require an IA to have more than one member, which means that those IAs cannot merge to become a subsidiary of another NFP. A CLG on the other hand can have a single member or multiple members and can implement most merger types (more on this in part two of the series). Amalgamation is a process available only to incorporated associations which allows two or more incorporated associations in the same State or Territory to become a single incorporated association. The legal structure of merging NFPs and the chosen merger type will determine whether member approval is required to enable a merger to proceed.
It is essential that your advisors (lawyers, accountants and consultants) supporting the NFP merger take these important differences into account throughout the merger process.
How we can help
Considering a merger? Moores specialises in working with NFPs and understand the unique considerations that apply to NFP mergers. Reach out to our Charity and Not-for-profit Law team if you would like more information on how we can provide support at any stage of the merger process.
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.