Faced with the unprecedented challenges of the COVID environment, many charities are exploring whether closer collaborative working or merger may provide an improved level of operational resilience to help mitigate the economic uncertainty which lies ahead. This article focuses on the initial considerations for charities considering merging or working collaboratively in the light of COVID-19.
The Charity Commission’s guidance on collaborative working and mergers describes a ‘merger’ as ‘the transfer or combination of the assets (and liabilities) of two or more separately registered charities’. A merger can be effected by various methods, depending on the circumstances: creating a new charity into which the two merging charities transfer their operations; by one charity transferring its assets (and liabilities) to another and then (usually) dissolving; or by one charity becoming a subsidiary of another charity.
Some charities may not like the idea of losing control or being fully affiliated with another charity as a result of a merger or may not feel they have found a suitable merger partner. They may choose to work collaboratively with another charity or with a social enterprise, both as separate entities and each furthering their charitable purposes and missions. Collaborations can involve sharing resources with another charity or working together in a group or coalition structure, for example, working alongside a social enterprise with a similar vision and ethos.
Why consider merging or working collaboratively?
In the current uncertain climate, there are a number of reasons for which charities may choose to work collaboratively or merge with another charity or with a social enterprise.
- Financial difficulties – it is clear that COVID-19 and the lockdown has had a serious impact on the charity sector. Charities are facing enormous cash flow problems due to a slump in income and often an increase in demand. Working collaboratively and making savings, by sharing resources or merging, can help charities to address financial troubles (although not a substitute for insolvency advice, where needed).
- Strategic planning for growth – some charities may be in a position to plan a merger, where their combined resources would allow the newly merged charity to provide more services and reach more beneficiaries to better further its purposes. Similarly, collaborative working may allow a charity with limited resources to tap into the resources and network of its partner in order to further its purposes while allowing the partner, if a social enterprise for example, to further its positive social change.
- Potentially more funding opportunities – where charities are working together, either by merging or by joint working, there may be more funding opportunities available to them.
Who to merge or collaborate with?
Choosing a partner to merge or to work in collaboration with is a significant decision and there are some of key questions and considerations that should be thought about at the outset as part of the initial planning process, such as:
- Who would we want to work with? Are they known to us and do we already have an established trusted relationship?
- Is the potential partner in a stable financial position and what is their reputation like?
- Do our values, mission and charitable objects align with those of the potential partner?
- How would we envisage the relationship working? Is that how the potential partner also sees it? What is our business plan?
- What about the impact on our stakeholders?
- There are also some key initial legal questions to consider – do we have power to do what is proposed?
What is involved in a formal merger process?
The steps needed to achieve a merger will vary to an extent depending on which merger structure is being adopted. The steps to achieve a merger would, broadly, involve:
- Due diligence exercise – this is important because each party needs to understand what they are taking on – assets and liabilities. It can also draw out issues which would need to be addressed before the merger proceeds.
- Given the in-depth nature of the exercise, a confidentiality agreement is often part of the process at this stage, especially as sometimes the due diligence exercise may lead to the parties deciding that they are not appropriate merger partners.
- Negotiations including the preparation of heads of terms outlining the nature of the merger.
- Communication – the parties will need to agree how and when to communicate with stakeholders (which will need to be data protection compliant) and publicity for the merger.
- Implementation of the merger – the physical transfer of assets and commencement of operations in the merged charity.
- Legal steps:
- Is there power to merge?
- Are the two charities’ objects compatible – if not, will one need to seek Charity Commission consent to revise theirs?
- Is any other consent from, or other involvement of, the Charity Commission required? Are other regulators involved? Consider any tax or other regulatory issues (such as employment, data protection or intellectual property).
- Are there any restricted funds or permanent endowment that need to be dealt with?
- If setting up a new merged charity, agreeing the form and constitution of the new charity and making the registration application to the Charity Commission.
- Arranging any consents and other pre-transfer requirements.
- Where relevant, members’ decision(s) required for the merger.
- Effecting the transfer by way of a transfer agreement.
- Where relevant, arranging the dissolution of the transferring charity.
- Dealing with administrative tasks.
These are difficult times and many charity trustees are needing to find new ways to operate, including considering merging or collaborative working. Whatever decisions need to be made, even ones which might not have been contemplated only a few months ago, it will be important to continue to carry out the essentials – act within your constitution and make (and record) decisions which you consider are in the best interests of the charity.
Preena Patel is a solicitor at BDB Pitmans, working on the Charities and Not-for-Profit Team. Should you have any specific queries in relation to this article, or mergers and collaborative working more generally, please contact at firstname.lastname@example.org or visit https://www.bdbpitmans.com/.