Mergers and Collaborations

What is a merger?

A merger is the joining of two or more charities. Mergers between charities usually take one of the following forms: (1) The original charities dissolve and pass their assets (and liabilities) to a new charity formed for the purpose; (2) one charity dissolves and transfers its assets to an existing receiving charity; and (3) two or more charities are grouped together, with one charity (or its trustees) becoming the trustee body of the other charity – though this is not really a merger because assets don’t transfer and two charities will remain.

What is collaborative working?

Working in collaboration with another charity may be an alternative to merger. This is where two or more charities work together on a project but remain separate from each other. The project may relate to administration, resource sharing, streamlining of costs, service delivery and fundraising activity, or advertising and raising public profile. Many types of collaborative working will involve informal arrangements but more formal agreements may be appropriate in some cases. 

Examples of collaborative working:

Examples include outsourcing functions such as accounts, HR, IT systems and payroll services; sharing resources such as training, transport or staff; sharing accommodation; and pooling resources to secure staff or services.

Collaborative working – points to consider:

Trustees should be sure that there will be worthwhile benefits to their users and beneficiaries, which could include cost savings; quality of service improvements; or improved ability to reach beneficiaries. The use of a written agreement to regulate the arrangement should be used where appropriate to safeguard the charity’s interests. Trustees should always ensure that there is a termination clause to bring the arrangement to an end if it doesn’t work out. Trustees should assess the risks involved.

Why merge?

Charities usually merge together in order to save costs and improve services. Sometimes it is to continue the work of an ailing charity. Ultimately, a merger should be to better meet the needs of the beneficiaries of all the charities involved.

Types of merger:

See the heading ‘What is a Merger?’ but the most common way of merging is for one charity to dissolve itself (but sometimes remain registered as a ‘shell' charity to receive legacies) and transfer its assets (and liabilities) to another charity.

Due Diligence on merger:

A due diligence exercise is a suitable use of charitable funds for all charities involved in a merger. Trustees must ensure that they are acting in the best interests of their charity and cannot, therefore, take on another charity's liabilities without full knowledge of the implications. These liabilities could include liabilities to staff or unexpected tax liabilities. In many cases, charities use external consultants to carry out due diligence exercises. The level of due diligence required depends on the income and activities of the charities involved. Some may call for a more rigorous due diligence exercise - for example charities with complex service delivery, or those which have links with affiliated charities, or trading subsidiaries, extensive property holdings and assets, restricted funds or permanent endowment. Charities should take professional advice to assess the level of due diligence appropriate for their charity.

Power to merge:

A charity’s governing document will usually contain the power needed to allow a charity to merge with another but usually the power is linked to dissolution of the charity and will require that the assets are passed to another charity with the same or similar purposes. Sometimes the charity’s governing document specifically requires consent from the Charity Commission and if the governing instrument doesn’t contain the appropriate power it may be necessary to obtain authority form the Charity Commission.

Special trusts, restricted funds, permanent endowments and failed gifts:

It will usually be necessary to ensure that any special trusts, restricted funds and permanent endowments which are to be transferred to the new charity, continue to have a separate and ring-fenced existence. However, the terms of special trusts or restricted funds sometimes enable the funds to be wound up and transferred over to the general assets of the recipient charity. If the terms do not allow this, it will usually be possible for the trustees of the existing charity to appoint replacement trustees for the special trusts (likely to be the trustees of the recipient charity), to take over once the merger has happened. Also, whilst a permanent endowment can be held by a charitable company on trust (as a corporate trustee) it cannot be held by a limited company as corporate property without a trust. This can require a Charity Commission Scheme. Also if the transferring charity is to be dissolved, its trustees should consider if any gifts should be returned to grant-givers because those fund have not yet been used for the intended purpose.

Merger Agreement:

Preparation of an asset transfer agreement from one charity to the other will usually be essential. The agreement would contain, amongst other things, provisions for the assignment of its property, contracts, transfer of staff (taking into account the TUPE Regulations) and assumption of its liabilities. Certain assets such as land or IP rights need to be separately conveyed or transferred to the receiving charity.

Can charitable funds be used to meet the cost of a merger?

Yes. The costs of a merger are proper uses for charity funds.

Register of Mergers and notification of dissolution:

If a charity is dissolved as part of the merger process, notification must be given to the Charity Commission (and to Companies House if a limited company charity). Also, the merger can be registered with the Charity Commission. This addresses uncertainty over whether a legacy to a charity which has merged and ceased to exist can pass to the transferee charity.

If you have an enquiry in relation to Mergers and Collaborative Working or simply want to speak to a member of our expert Team for further information and guidance, please use the request a call back or make an enquiry option to get in touch.

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