Nonprofit organizations may find themselves engaging in mergers or other business combinations in the same way as for-profit businesses. The reasons vary, including advancing strategic alliances, efficiency of operations, expanding services, and protecting assets. Whereas a merger traditionally is thought of a marriage of two or more entities, the merger may take many forms including statutory (i.e., “true”) mergers, asset transfers, a parent-subsidiary relationship, and the dissolution of one entity that distributes its assets to the other, among others. This post will focus on statutory mergers.
In the case of a statutory merger, the entity that remains in existence at the conclusion of the merger is designated the “Surviving Corporation.” The others are designated “Disappearing Corporations.” When they merge, all of the assets and liabilities of the Disappearing Corporations are assumed by the Surviving Corporation.
Deciding which organization becomes the Surviving Corporation and the Disappearing Corporation involves consideration of many factors, such as:
- The government licenses, contracts or registrations held by each organization;
- The organizations’ histories;
- Each organization’s current and future funding commitments and their transferability in the event of a merger;
- The comparative advantages and disadvantages of each organization’s agreements, as well as the difficulty of transferring each in the event of a merger;
- The extent of each organization’s matching grants and restricted funds;
- Each organization’s standing with the IRS, state and local regulators (which typically must be current prior to merger);
- Any lawsuits, legal proceedings or other claims in which any organization is a party; and
- Benefits and retirement plans in place for employees of each organization.
Planning the Merger
After deciding the form of the merger and which parties will be the Surviving and Disappearing Corporations, they must begin to plan how to achieve the merger. Successful nonprofit mergers often require careful due diligence, coupled with new money and a significant pool of available volunteer time, to be successful. Due diligence, i.e., reasonable research and investigation, allows each organization to make an informed decision on the probability of success and the merger being in each organization’s best interests.
Some significant factors in planning a merger include:
- Operational considerations for how the Surviving Corporation will assume the Disappearing Corporation’s assets, liabilities, obligations, and transferable rights.
- The process for obtaining approval of the merger from each organization’s board of directors and voting membership (if applicable). If there are members, additional consideration may be required to address high quorum or voting requirements as well as potential member objections.
- Issues related to the transfer of real estate and leases from the Disappearing Corporation(s) including property tax liability, environmental reviews, securing needed consents on leases and loans, clouded title and other liens.
- Potential legal liability including actual or threatened lawsuits and unasserted claims.
- Issues related to any employees of the Disappearing Corporation(s) becoming employees of the Surviving Corporation, such as collective bargaining agreements, accrued vacation liability, employment agreements, severance pay, reconciliation of employee benefits plans, workforce integration and disparate compensation rates.
- Any special requirements regarding naming of programs or the election of directors from the Disappearing Corporation’s board to the Surviving Corporation board.
- Timing considerations.
- Regulatory approvals that may be required, including that of state charity regulators where required.
Ultimately, these and other factors will be incorporated into the merger agreement. Merger agreements take time to negotiate and must be drafted and reviewed by the legal counsel of all parties to the merger.
Get Help with a Non-Profit Merger
The decision of whether to merge by whatever form will hinge on the course of action that serves the mutual interests, objectives, and missions of the merging entities. The attorneys at The Law Firm for Non-Profits have handled countless mergers of various sizes and complexity. We are here to answer questions, give advice on your unique situation, and assist you with due diligence, risk management, structuring asset transfers, and other complex matters involved in mergers every step of the way. Reach out to us today by contacting us online or calling us at (818) 623-9898 to get started.