For some years the Charity Commission (and many others concerned with duplication of effort and the lack of resources within smaller charities) has recommended that trustees consider periodically whether their charity can best achieve its objects by operating alone or by entering into a merger or some form of collaboration. Trustees should always remember that a charity is there to meet its objects and not to preserve the organisation. That sometimes means a merger is an appropriate step to consider.
This checklist is designed to highlight some key issues to consider when thinking about mergers. It does not purport to be comprehensive or a complete statement of the issues you must consider.
Identifying appropriate merger partners
Charity law requires merging organisations to have compatible objects. As such most of the time merger partners will work within the same sector as your organisation.
Often there will be an umbrella organisation representing organisations in the particular sub-sector such as Hospices UK, Clinks or Voluntary Organisations Disability Group. It is likely therefore that many partners are already known to you.
If the charities' objects are not aligned, depending on the proposed nature of the future activities, one or both charities may need to amend their objects. This will need advance Charity Commission approval in addition to approval under its own governing document.
Often a merger will involve two charities but it may involve more.
Consider setting up a joint merger committee with representatives from the charities. This might include both staff and trustees and may speed up negotiations.
Using additional resource and an “independent” project manager can greatly assist the process.
Ultimate decisions to merge will need to be taken by the respective boards of trustees but a merger committee can be delegated authority to identify the proposed benefits and explore the options.
The tone and timing of communications are vital to ensure stability amongst stakeholders in particular staff and funders.
It is vital to ensure there is a clear vision of future benefits deriving from the merger and that trustees remain focussed on these so that personal attachment to independence and their particular charity does not obscure the bigger picture.
Understanding the post-merger structure and governance arrangements is also important in particular to try to avoid a perception of “takeover”.
Mergers are of course a very significant milestone in the life of a charity and trustees should undertake appropriate due diligence on a range of issues to satisfy themselves whether a merger will indeed deliver benefit for their beneficiaries and to ensure the merger process does not trigger unforeseen liabilities.
There is no right or wrong list of issues to assess but they are likely to include a review of finances, assets, employees and pensions, beneficiary and donor data, contracts, legal compliance (tax, VAT, Charity Commission, health and safety, etc.), subsidiary companies, legacies and other issues. We have produced a charity merger due diligence checklist which can be found here.
Depending on governing documents, there may be a need to obtain approval of members – or this may be something that is not legally required but seen as desirable.
Charity Commission approval may be required depending on the structure of the merger, but this is not usually difficult to obtain. You will also need to consider if other regulatory consents are required from relevant regulators such as the CQC or Ofsted.
Pension issues are increasingly a concern especially with charities which are members of multi-employer defined benefit pension schemes, and some proposed charity mergers have failed due to pension risks. Specialist advice should be taken.
Merger structures vary. The main examples are:
- Existing charity A transfers its assets to existing charity B which assumes A's liabilities.
- Existing charities A and B transfer their assets to a new charity which assumes their liabilities.
- Existing charity A becomes sole member of existing corporate charity B or becomes its corporate trustee. This can be used multiple times with various charities joining the group.
Often this structure is adopted where the subsidiary charities continue to be operational and maintain separate legal entities but are under common control.
In due course elements of the relevant operations can be integrated, so for example the back office functions of the subsidiary charities may be transferred to the parent.
It is important to understand the benefits of legal structures to isolate risk and manage the merger process. It may of course be attractive to assume control by way of a parent/subsidiary or “group” structure which is relatively quick and lower cost and then integrate the two over a period by transferring assets and liabilities at a more appropriate time.
Your due diligence exercise may well give rise to issues that dictate the structure of the merger. For example data protection and electronic communication regulations may limit one charity’s ability to transfer its donor databases to a merger partner without seeking fresh consents.
Mergers usually require a certain amount of legal documentation.
If you are implementing a group structure this generally requires a members' resolution to adopt new articles of association and procure the replacement of existing members by the merger partner. Assuming the members vote in favour this can generally be implemented fairly simply. There will need to be some additional governance documentation to clarify decision making responsibilities as between the various boards.
If you are combining the two charities into one by transferring assets and liabilities, this requires a legal transfer agreement or vesting declaration and will need careful consideration to deal with assets and liabilities appropriately.
If the merger involves a transfer of assets and liabilities by a charity which has employees, the TUPE regulations are likely to apply. This would not normally apply with a group structure.
Many mergers will have been conceived as a way of reducing costs and if that is the case a planned transitional process is critical.
- This might include combining back office functions which in itself may lead to the redundancy of employees and/or the need to harmonise employees' terms and conditions.
- Advice should be taken to ensure that changes to terms do not trigger employment claims. It is important to ensure that an appropriate process is followed to comply with TUPE and that any redundancies to be made after the merger fall within an economic, technical or organisational reason.
- There may also be a need to terminate third party contracts and careful consideration should be undertaken to ensure termination rights are exercised properly.
- There will be a multiplicity of things to ensure happen from novating agreements, assigning leases, changing bank mandates, standing orders and gift aid claims, changing corporate stationery, etc. and as such a detailed implementation plan is essential.
In regards to legacies, you should consider whether to close "transferor" charities and register the merger on the Charity Commission's public register of mergers or keep the "empty shell" charity in existence.
Remember also that charities can and do often collaborate in other ways that fall short of full merger. For example, a group of charities may jointly establish a new company to bid for contracts, which may then subcontract back to the existing charities.
We are always pleased to have an initial no obligation conversation about issues you may have in relation to mergers. If you would like to speak to someone please contact Andrew Studd or Gareth Roy in the charities team.