Australia: Not-For-Profits – To Merge Or Not To Merge?

With over 600,000 entities in the Not-for-Profit sector (NFP) in Australia, including more than 55,000 registered charities, merging as a restructuring option is increasingly being considered by NFP boards across the country.

The need to merge in the NFP sector has been recently highlighted in a joint research paper published by RMIT University and CPA Australia, titled "Mergers, Amalgamation & Acquisitions in the Australian not-for-profit human services sector".

The joint research paper supports mergers as an "alternative strategy for organisational growth, gaining scale efficiencies, wider revenue base and enhancing service choice within the NFP service sector" (pg. 4).

In the context of looking at the opportunities and risks of mergers in the Australian NFP sector, we highlight the:

  1. restructuring issues in considering a merger;
  2. the importance of collaboration before undertaking a merger; and
  3. the critical legal issues that need to be considered.

Restructuring issues in considering a merger

When considering a merger it is important to consider some of the restructuring issues that may arise. The merger of NFPs may involve various transactional structures, which will depend in part on the legal structure of the two NFPs that seek to combine. 

In some cases, one NFP may be wound up, with the assets being distributed to the "continuing" NFP.

In considering how to "combine" the two or more NFPs, attention will need to be given to the following three questions when considering the destination entity of the merging NFPs.

1. The transfer of assets and liabilities

How will the continuing NFP acquire all of the assets and (possibly) liabilities of the other NFP?

2.The transfer of membership

How will members of the "dissolving" NFP become members of the continuing NFP?

It is worthwhile noting that NFPs may be reluctant to consider merging, given their deep commitment to their purposes and objectives and the fact that membership to the NFPs is often based on that commitment.

In addressing any potential membership issues, the NFP board consult with members and other stakeholders at an early stage.

The consultation should highlight how any proposed merger will promote and align the cultural values, purposes and identity of the merging NFPs in addition to the economic benefits.

3. The creation of a new NFP

Is it preferable for the merging NFPs to transfer their assets and liabilities into the new NFP entity?

These benefits may stem from the tax implications of a universal transfer of assets and liabilities.

Additionally, the merging NFPs may transfer specific assets which may enhance the asset structure and long-term capacity of the new NFP entity as well as areas where cost savings were most evident.

Having considered these preliminary restructuring issues, the next step is to consider how the merging NFPs may collaborate effectively prior to undertaking the merger.

Collaboration between NFPs before the merger

Prior to a legal merger there are various ways that NFPs can "test the waters" to determine whether a merger is likely to meet the needs of the NFPS. This includes:

1. Collaboration

The NFPs could collaborate around the sharing of "back office" administrative support with sales and promotional activities, office space sharing and collaborative strategic outlook having regard to shared purposes and values.

2. Auspicing

Auspicing can take several forms. A fairly typical auspicing arrangement arises when an incorporated NFP takes an unincorporated NFP under its wing for a specific project that the unincorporated NFP wishes to undertake.

While each auspicing agreement will differ, it is generally the case that the incorporated NFP will agree to receive funding for the project on behalf of the unincorporated NFP, and will hold relevant registrations for the activities of the unincorporated NFP relating to the project to be undertaken.

3. Strategic Alliance

This may involve a memorandum of understanding or joint venture agreement where there will be more formally documented alliance between the NFPs with a view to a merger.

A strategic alliance ensures that both NFPs continue to operate independently but collaborate more formally around specific projects and funding initiatives.

Critical legal issues that arise as part of the due diligence process

As NFPs progress towards merger discussions, and before any legal frameworks can be considered, due diligence will need to be undertaken by both organisations to address a number of critical legal issues. Some key issues for consideration include

1. Review of membership register

Typically, as part of a merger, the NFP to be dissolved would require a 75% member approval of the winding-up and the distribution of assets to the continuing NFP.

The continuing NFP may also need member approval to update its governance and membership structure.

Often registers of members are out of date and do not accurately record the number and class of members. Updating the membership registers so that they are accurate is fundamental to any merger.

2. Impact on major sponsorship contracts and donor support including any government contracts

All major sponsorship contracts, donor support arrangements and government contracts need to be reviewed and the steps required to ensure that financial support is transferred to the new merged NFP entity must be identified.

This will involve a review of any donation conditions to ensure that the acquiring NFP's charitable purpose is consistent with what the donors consented so that the donations can be transferred to the acquiring NFP.

3. Foundations

Some charities and NFPs have separate foundations as their primary fund raisers and managers of their investment portfolio and investment income. Such entities often have separate governance arrangements to the merging NFP.

Careful examination of the trust deed or constitution of the foundation, and how its assets may be transferred for the benefit of the acquiring NFP or to the acquiring NFP's foundation, is essential.

A follow-on consideration for the acquiring NFP is whether it should take the investment assets onto its own balance sheet or set up its own foundation.

4. Board and CEO roles

Consideration will need to be given to the new board structure and will require agreement about the loss of any existing board positions.

Early agreement as to the composition of the new board and its chairman will greatly assist in progressing merger discussions between the NFPs.

Further, early agreement as to the new CEO and the role of the departing CEO in ensuring continuity is a key matter for successful NFP mergers.

5. Employment arrangements

Employment arrangements including employment contracts, contractor arrangements and any Enterprise Bargaining Agreements will need to be reviewed.

The review process will involve consideration of any redundancy arrangements, notice requirements and any scope for renegotiation of workplace staffing arrangements.

6. DGR endorsement, tax considerations and continuity of purpose

The DGR endorsement and tax concession status are generally critical to the NFP business model.

A review of these matters would also include a general constitutional due diligence review and possible amendment of the continuing NFP's structure and purposes to maintain the DGR endorsement and tax concessions.

NFPs should also consider whether any transfer of assets or assumption of liabilities has other adverse tax or stamp duty implications.

7. Third party obligations

Third party obligations to landlords, suppliers and any material business contracts need to be identified and renegotiated as appropriate. Consideration needs to be given to whether the contracts should be assigned or novated.

8. Legal claims made against the NFPs and insurance

NFPs should identify whether there are any legal claims threatened or on foot against the other NFP.

If claims are identified, the NFP should notify their insurer and seek confirmation that the insurer will indemnify the NFP in respect of any such claims.

Any significant uninsured legal claims against the NFPs are likely to inhibit the progression of any merger.

9. Intellectual Property review

A review of trademarks, copyrights, domain names and any patents needs to be undertaken. Consideration needs to be given to the transferring of intellectual property to the new merged NFP entity.

10. Social media

A review of all existing social media channels and their merger compatibility should also be undertaken, having regard to the size of their social media following and how followers can be transferred.

This list is not exhaustive and is provided as a general guide only.

Conclusion

A merger in the NFP sector provides an opportunity for long term sustainability and growth for the relevant NFP entities. Identifying at an early stage a roadmap for mergers having regard to both the legal and non-legal issues is critical to a successful merger.

Graduate Eshan Khot contributed to this article.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
25 Oct 2018, Other, New York, United States

Once again, Dentons is proud to bring together insurance industry leaders, lawyers and regulators for a full-day examination of the most current issues.

26 Oct 2018, Other, New York, United States

Selling your company may be the most important and complicated transaction of your life. To achieve an optimal outcome, you need to get educated.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions