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Charity Mergers - a Strategic Option for Charities

on Friday, 19 February 2021.

There have been mixed statistics about whether charity mergers have increased as a result of the coronavirus pandemic and about the resulting financial and operational challenges that this has presented to charities.

In our view, the picture will not be clear for some months as charities continue their strategic thinking and assess the long term impact on their operating models.

What are the Benefits of a Merger?

Traditionally, there has been some hesitancy to look at mergers within the charitable sector, but it is certainly something trustees should consider as part of their overall thinking and planning. Trustees should properly assess whether a potential merger could bring benefits to the way in which their charitable purposes are advanced for the benefit of the charity's current and future beneficiaries.

The benefits of a merger within the charity sector are well documented and range from potential cost savings to investment in joint infrastructure, access to an increased pool of donors, the ability to bid for larger contracts and to resolving succession issues. Every situation will be unique to the parties and should be well understood and assessed.

The legal process of a merger can sometimes be confusing but generally follows some well-established lines, which are broadly:

  • identifying the benefits of a merger and documenting the understanding of the parties as to how they will progress in a non-technical and non-legally binding way - this will include the structure of the merger, any regulatory issues and the general commercial terms that the parties have agreed
  • a process of due diligence where the parties assess the assets, liabilities and commercial position of the other party, usually with the help of specialist lawyers and accountants to fully understand whether a merger is in the best interests of their charity
  • putting in place a legally binding agreement giving effect to the merger

The technicalities of these stages will, of course, depend on the parties involved, their existing charitable structure, the complexity of their operations and the regulatory bodies and other third parties that may need to be involved.

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Where To Start?

One of the first areas that should be investigated is the charitable objects of the parties involved and whether they are compatible and allow for a merger. This is usually achieved by the transfer of assets from one party to the other, or to a newly established charity that will take on the assets and liabilities of both organisations.

The other legal issues to be aware of include:

  • employees and the applicability of the TUPE Regulations, as well as pension issues
  • the charity's property, whether freehold or leasehold, and how that can be transferred for the benefit of the merged charity
  • funding agreements, grant agreement and other commercial contracts that need to be transferred to the merged charity
  • regulatory issues and the involvement of regulatory bodies, which will depend on the nature of the charities' operations
  • the implications of data protection legislation

While the legal process of a merger can sometimes seem overwhelming, our experience is that where charities are able to jointly identify the benefits for both charities involved and keep this in focus throughout the process and the parties are appropriately advised, they are able to achieve a sustainable and robust merged charity.

Find Out More - Join Our Free Webinar

Our upcoming webinar, 'Charity Mergers - A Look Behind the Legal Process', will give practical tips to trustees, chief executives, and finance directors (as well as other stakeholders) on the merger process, and improve knowledge and understanding on the topic to assist charities in making strategic decisions in the interests of their beneficiaries. Book your free place today.

For further information on the specialist support we can offer your charity, please contact Emma-Jane Dalley in our Charity Law team on 07584 055017, or please complete the form below.

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