Canada: Joint Ventures And Mergers In The NFP Sector

Edited by Victoria Prince

A. BACKGROUND

Collaboration and integration are not just buzzwords, they are a reality in the not-for-profit sector.

Recent government stimulus packages to combat the recession have given way to austerity measures to cut spending and balance budgets. The private sector is similarly tightening its fiscal belt. The not-for-profit and charitable sector will not be spared from these cuts. Consequently, organizations in this sector will need to work together more frequently and more deeply to leverage complementary resources, reduce costs and create economies of scale if they wish to successfully continue to receive government and other sources of funding.

Recent examples of collaboration in the not-for-profit sector range from the Ontario hospital "mergers" to nation-wide projects, like the Retire Your Ride vehicle recycling program funded by Environment Canada, in which multiple not-for-profits and charities "collaborated" to seamlessly deliver a program to users.

Depending on the nature and length of the projects and the comfort level of the organizations involved, these collaborations can take different legal forms, ranging from contractual joint ventures to mergers.

B. JOINT VENTURES

A joint venture is an arrangement in which one or more entities come together to deliver a specific project; on completion of the project, the entities typically go their separate ways.

A joint venture is best implemented by a written and legally enforceable agreement. Without a written contract, a court may find that the parties (inadvertently) entered a partnership rather than a joint venture (which is problematic because, inter alia, each partner in a general partnership is jointly and severally liable for the actions of every other partner).

From a practical perspective, written agreements confirm the nature and scope of a project and each participant's roles and responsibilities, which reduces uncertainty and decreases the likelihood of disputes.

The details of a joint venture agreement would vary based on the project and the goals of the parties, but most joint venture agreements would include provisions dealing with the following matters:

Contribution of Resources:

What is each party contributing to the venture (human resources, equipment, cash, intellectual property, know-how, etc.)?

Operations Management:

How will the venture be run? How will decisions be made?

Reporting:

Who will be responsible for reporting? What will be reported and when?

Wind-up and Termination:

Is there a defined end-date to the venture? How will the venture wind-up? Can one or more parties unilaterally terminate early? Who owns the intellectual propeprty developed by the venture?

Dispute Resolution:

What happens if the venture goes off the rails or parties disagree?

C. MERGERS

A merger is the combination of two or more distinct corporate entities into one corporation. In Canada, the legal term used to describe a merger transaction is "amalgamation". As a matter of law, all the rights and privileges (and all the liabilities) of each amalgamating corporation flow together and become the assets and liabilities of the successor "amalgamated" corporation.

Since an amalgamation is a simple transaction to implement from the legal perspective, it is preferred in situations where the "collaboration" will be for an indefinite period of time.

Amalgamations are also favourable vis-a-vis joint ventures because they reduce corporate compliance requirements (one only needs to prepare financial statements and hold annual meetings for one company rather than for each participating companyin a joint venture).

To implement an amalgamation, each amalgamating corporation would need: (i) meetings of the board and the members to authorize the amalgamation; (ii) an amalgamation agreement setting out the new membership structure (and how existing members would transition to the new structure) as well as how the successor corporation would operate.

Some of the key concepts to include in an amalgamation agreement are listed below:

Objects:

What will be the purpose (i.e. objects) of the successor entity?

Board of Directors:

What will be the size of the new board and who will be the first directors following amalgamation?

By-laws:

What will the new by-laws of the amalgamated corporation look like?

One issue organizations must consider when determining the timing of an amalgamation is that an amalgamation creates a deemed year-end for each amalgamating corporation. Unless the amalgamation can occur in conjunction with the fiscal year of all the amalgamating corporations, 'stub' financial statements would need to be prepared.

A second issue worth noting is that organizations which are looking at a "merger" but are uncomfortable with inheriting all the features of other amalgamating corporations (i.e. because of unfavourable pensions, collective agreements, contracts, potential exposure to litigation, etc.) may be able to integrate by taking the "good" assets and leave the rest. Legally, integration typically is effected using an asset transfer agreement.

D. CONCLUSION

Collaboration in the not-for-profit and charity sector is of ever-increasing importance in the current economic climate.

Collaboration can take many legal forms, and organizations should be very careful to properly document their arrangements to ensure that the actual result of the collaboration is the same as what was intended. Consulting your legal advisors to determine what structure to use and what concepts to include in the agreement governing the collaboration is a prudent and appropriate use of your organization's resources to protect the interests of the organization (and will almost always be less expensive than dealing with the unintended consequences of a collaboration-gone-bad).

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