Today we look at the option for a charity to join forces with others as a way to pool resources giving a better outcome for its beneficiaries by way of merger.
The Charity Commission advises that as a key part of effective management and financial control all charities should keep under regular review the possibility of merger with other charities as one of the options to maximise the efficient use of the charity’s resources. To this end it is good practice for a charity to keep under review a list of other organisations with whom a merger may prove beneficial.
For the 18 months up to October 2020 there were 98 mergers, according to Eastside Primetimers “the Good Merger Index” https://ep-uk.org/covid-has-not-stopped-charities-merging-new-ep-research-finds/. These mergers involved 201 charities. This is comparable with similar figures for the previous period. Mergers do not appear to have been affected one way or the other by the impact of the COVID epidemic but this may be accounted for by the fact that it can take many months from initiation to completion and many of the mergers completed last year are likely to have been initiated prior to the pandemic.
For mergers to work both entities need to have completed a due diligence process not only to understand each other’s finances, but also to ensure that logistically operations and governance can be combined in a way that meet both parties’ needs and objectives. This can be a lengthy process which may ultimately result in both parties agreeing it is not a good fit. Conversely, a successful merger brings with it the potential benefits of economies of scale and new and improved ways of working.
Trustees of charities have a duty to act in the best interests of the charity and to further its purposes. Although they have a duty to manage the charity’s finances responsibly they do not have a duty to preserve the charity itself. Sometimes the charitable purpose can be best achieved through merger.
Mergers can take a number of forms, for example, Charity A may transfer all its assets subject to the liabilities to Charity B and thereafter Charity A is dissolved. Another may be that Charity B becomes a subsidiary of Charity A (this may be considered to be a takeover), or Charity A and Charity B transfer their assets (subject to liabilities) to Charity C (which can be either an existing or newly established charity with objects sufficiently wide to cover the objects of Charity A and B).
The merger process can be summarised by the following steps:
It is quite common for mergers of unincorporated charities to use the process to convert the merged organisation into a corporate body. This has the advantage of separating the trustees from the liability of ownership of the assets and being party to contracts on behalf of the charity and establishing a new legal entity through which the charity will operate. The corporate body can either be a charitable incorporated organisation (“CIO”) (a corporate body solely regulated by the Charity Commission), or a company limited by guarantee (a not-for-profit company regulated by the Charity Commission and Companies House).
The legal issues that must be addressed in the merger process are:
For charities to merge their objects must be similar. If the objects of the receiving charity are wider than those of the transferring charity, the assets transferred must be ring-fenced so that they are only used for the narrower purposes. Sometimes it is necessary or desirable to amend the charitable objects of one or more of the parties before the merger takes place. Any amendment of a charity’s objects requires the prior approval of the Charity Commission.
Power to transfer
Charities cannot transfer their assets without having the power to do so either expressly stated in their constitution or implied or otherwise provided for by statute. Failing this an application can be made to the Charity Commission for an order granting the necessary power(s) provided the Commission is satisfied that it is in the interests of the charity to do so.
Particular consideration should be given to the terms on which assets of the charity are held.
Some may be restricted to a particular use or purpose. Specialist advice should be sought to ensure that permanent endowment, restricted trust assets or designated land are appropriately handled through the process. The aim being to ensure that the terms on which the assets are held remain unchanged after the merger.
Statutory and Contractual Compliance
Transfer of assets and liabilities requires notification and often the consent of various third parties including:
The benefit of a contract can be transferred but any obligations under it cannot normally be transferred without the contracting party’s consent. This would include any grant funding. Fundamentally any third party rights over assets, e.g. charges or debentures, will prevent transfer of the affected assets without the consent of the charge holder. Merger can also sometimes crystalize a pension fund and specialist advice should be sought to ascertain the implications and options should this be the case.
A consequence of merger that may need to be addressed is what will happen to any legacies granted to a charity that ceases to exist after the merger – will they fail? In most cases they will not, provided the merger has been entered on the register of mergers at the Charity Commission. This has the effect of automatically transferring the legacy to the newly merged charity.
Implications of (in)solvency
Mergers should only be completed if it is in the interests of the charities involved. Trustees of the charities involved need to be satisfied that they are not disadvantaging their respective creditors. Whilst solvent charity trustees owe their duties to the charity and its beneficiaries if at any point in the merger process the trustees come to the conclusion that the charity will not be able to continue as a going concern and insolvent liquidation is unavoidable their duties switch and are then owed to the creditors to preserve assets for their benefit. Up to date financial information is therefore key.
Charities facing financial constraints may wish to consider a number of options before reducing their offering or closing their doors and one of these options could well be merger. It offers a number of potential benefits including more efficient use of the resources to achieve a better outcome for its beneficiaries, but it does require a degree of strategic planning and the drive and motivation to bring it to fruition and not least, the funds to complete the process. Hence the Commission’s guidance encouraging charities to regularly review the merits of merger as part of the effective management of a charity’s finances so that this option remains a choice rather than a necessity.
Lupton Fawcett Charities Department has advised on a number of mergers of various forms and sizes. If you would like further advice on any of the issues raised in this articles, please feel free to contact Lupton Fawcett Charities Team. In the first instance please contact Katie Dawson:
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.