Strategic and Legal Considerations of Non-Profit Integrations

Not one of the data contained herein is supposed to represent authorized recommendation.

The proliferation of nonprofit organizations lately, mixed with the present financial local weather, has impacted many charities and resulted within the elimination of significant packages or the closure of operations. Particularly, the present robust financial occasions have come after years of continued enhance within the variety of nonprofit organizations in america – in keeping with the City Institute and the Nationwide Heart for Charitable Statistics, as of 2006 there have been over 2.3 million 501(c)(3) nonprofit organizations in america (this quantity is up over 36 p.c from the info accessible in 1996).

Like for revenue organizations and people, nevertheless, nonprofits should additionally adapt their functioning and thought-processes to outlive in these arduous financial occasions. In a December 2009 article, the Chronicle of Philanthropy (citing a current Bridgespan Group report surveying roughly 100 nonprofit leaders) famous that “54 p.c of respondents are scaling again or eliminating some packages to free sources for different packages, up barely from a yr in the past…[and that] [n]early two-thirds of the respondents (63 p.c) mentioned they have been transferring workers members to help core packages.” (Ben Gose, Because the Economic system’s Ache Continues, Extra Charities Abolish Applications, THE CHRONICLE OF PHILANTHROPY, Dec. 10, 2009)

Whereas many organizations have determined to chop again on programming, there may be one other viable possibility for charities to proceed to serve their constituents whereas assembly the underside line – merger or integration. As soon as primarily regarded as transactions reserved for the for revenue neighborhood, mergers and acquisitions within the nonprofit business will not be solely potential, however generally is a very important factor of survival. In actual fact, one other current analysis report performed by The Bridgespan Group champions the opportunity of nonprofit integrations not solely as a method of survival in a tricky financial local weather, but additionally as a strategic software for fulfillment. In its report, The Bridgespan Group cited a current ballot of nonprofit government administrators that discovered that nonprofit leaders think about “mergers and acquisitions (M&A) reactively, a technique to shore up funds, to make their organizations seem extra enticing to funders or to handle a succession vacuum [but that the time] can also be ripe for leaders of wholesome organizations to think about M&A proactively – as a technique to strengthen effectiveness, unfold finest practices, develop attain and – sure -t o do all of this extra cost-effectively, making finest use of scarce sources.” (Alexander Cortex, William Foster and Katie Smith Milway, “Nonprofit M&A: Extra Than a Software for Robust Instances,” The Bridgespan Group, February 2009). As such, though this text discusses the advantages of mergers in mild of this tough financial system, organizations can at all times think about integration as a invaluable software for fulfillment.

One of many first vital precursors to contemplating a merger is the group understanding and appreciating that no man is an island, and with a purpose to higher the continent, it’s a must to construct bridges. This may occasionally sound apparent; nevertheless, many small nonprofits are literally restricted by core teams of leaders who’re keen about their trigger and the constituency they serve. Whereas this zeal and diligence generally is a true asset to a charity, it may also be a hindrance as it might doubtlessly restrict the angle of organizational management. This phenomena is typically known as “founder’s syndrome,” which Wikipedia defines as “a label usually used to discuss with a sample of conduct on the a part of the founder(s) of a corporation that, over time, turns into maladaptive to the profitable accomplishment of the organizational mission.” Accordingly, a foremost hurdle for small organizations involved in integration is overcoming the dominant voice of management with tunnel imaginative and prescient. As soon as that is achieved, the group is better-suited to strategy potential relationships with an open-mind.

One other vital consideration for nonprofit mergers is the tradition and surroundings inside every group in addition to the governance construction related therewith. Though two organizations could serve almost similar functions, they will diverge on many governance points, similar to variety of board seats, board choice course of, board efficiency evaluations and relationships with workers. For instance, a corporation with sub-par board participation and low assembly attendance will possible have a remarkably completely different administration type from a corporation with fifty lively and engaged board members. This variable is not going to solely have an effect on the company governance of the respective organizations, however may also have an effect on the functioning of underlying workers and packages. Equally, the organizations should consider and think about their respective company picture, core values, work surroundings and management type in deciphering the feasibility of integrating the cultures of the 2 organizations.

Other than the above inner components, program companies, services and gear are additionally very important elements to the right analysis of a merger. Examples of those variables embrace the variety of people served by this system, the geographic protection and “shopper” demographic, the utilization of know-how, “rivals” available in the market, service areas, actual property preparations, main gear stock, upkeep contracts and know-how programs. Furthermore, one of many remaining main components that organizations ought to think about in mild of a possible merger is human sources, together with paid workers and volunteers. The subparts to this element embrace salaries, advantages, expense reimbursement, skilled improvement, legal responsibility insurance coverage, efficiency analysis, volunteer program construction and coaching/orientation, recruitment and analysis/recognition.

As soon as the group has decided these core points, the remaining authorized issues regarding a merger or integration are ruled by relevant state and federal legislation. Relying upon the construction of the transaction, i.e. a real merger versus an outsourcing of administration re-composition of the board of administrators or asset switch, the organizations will possible be required to acquire sure governmental approvals earlier than consummating the transaction. Additional, in a real merger, it’s advisable that the organizations interact in in-depth due diligence adequate to fulfill themselves that they’re conscious of the opposite’s standing (and within the case of the surviving company, that it’s absolutely apprised of the property and liabilities it’s assuming by mentioned merger).

In California, particularly, with a purpose to interact in a statutory merger, the Lawyer Basic have to be notified and sure filings have to be accomplished with the Secretary of State as additional set forth in Sections 6010, et. seq. of the California Companies Code. Beneath these sections, the legislature has set forth varied logistical necessities that have to be met to ensure that a corporation to have interaction in such a transaction. Particularly, with out first acquiring written consent from the California Lawyer Basic, a public profit company (which is usually how most non-religious 501(c)(3) organizations are organized within the State of California) is barely permitted to merge with one other public profit or spiritual company with particular dedication of property language in its constitution. CAL. CORP. CODE §6010(a). Additional, the Lawyer Basic have to be furnished with a duplicate of the proposed settlement of merger, which should include specified phrases and situations, together with however not restricted to the overall phrases thereof, the amendments, if any, to the articles of incorporation and bylaws of the surviving company, and an in depth description of how memberships shall be transferred from the disappearing company to the surviving entity. CAL. CORP. CODE §6010(b); CAL. CORP. CODE §6011. There are additionally many different provisions that ought to be clearly and precisely set forth in an settlement of merger between two group, which embrace however are actually not restricted to the remedy of staff of the disappearing company (i.e. will they be employed on by the surviving company, and if that’s the case, what occurs to accrued advantages, trip, and so forth.), warranties and representations in regards to the accuracy and completeness of paperwork offered by every respective group throughout the due diligence course of (for apparent causes, this guarantee will assist shield a corporation that’s counting on paperwork offered to it by the opposite, similar to monetary statements and annual experiences), and the obligations of the events after the “closing” of the merger transaction. The merger settlement should then be authorized by the board of every group (in addition to the members, if relevant) and the surviving company is required to file a duplicate of the settlement with an officer’s certificates.

As referenced above, with merger transactions, the quantity of due diligence that’s advisable to carry out is elevated, particularly as a result of the surviving company shouldn’t be solely buying the property of the opposite group, but additionally assuming its liabilities. It’s well-established that “[w]hen a merger of nonprofit public profit companies turns into efficient, ‘the separate existences of the disappearing events to the merger stop and the surviving get together to the merger shall succeed, with out different switch, to all of the rights and property of every of the disappearing events to the merger and shall be topic to all of the money owed and liabilities of every…” Catholic Healthcare West v. California Insurance coverage Assure Related, 178 Cal.App.4th 15, 28 (2009) (citing CAL. CORP. CODE §6020(a)). As such, paperwork and knowledge that ought to be reviewed and analyzed in a merger transaction embrace organizational paperwork (e.g. articles of incorporation, bylaws, minutes, permits and listing of present board members and phrases), financials (e.g. stability sheets, budgetary projections, annual experiences, copies of letters from auditors and listing of accounts receivable and payable), tax issues (e.g. Varieties 990 and 199, Lawyer Basic registrations and renewals, copy of IRS Kind 1023 and duplicate of IRS willpower letter), donor and grant data (e.g. listing of restricted donations and grants, listing of pending grant purposes, copies of donor supplies and listing {of professional} fundraisers), worker issues e.g. (listing of all staff, paperwork regarding advantages, copies of personnel insurance policies and handbooks and organizational chart), enterprise contracts and commitments (e.g. copies of all materials contracts similar to leases, joint ventures, buy agreements and gear and merchandise contracts), insurance coverage (e.g. listing of all insurance coverage insurance policies with an outline of dangers, protection limits and premiums and duplicate of administrators and officers indemnity/legal responsibility insurance coverage protection), litigation (e.g. itemizing of all pending and potential litigation and contractual disputes and any memoranda of counsel with respect to pending or threatened litigation) and different data or particulars regarding any and all precise or potential liabilities of the dissolving entity. (Please notice that that is meant to be exemplary of the paperwork that organizations ought to be reviewing and is certainly not exhaustive)

In different kinds of integration transactions, similar to an asset switch, the assuming company can choose and select the property it’s buying, whereas limiting publicity by selecting to not assume any liabilities. That being mentioned, nevertheless, even in this kind of transaction, the transferring group is required to offer written discover to the Lawyer Basic at the very least twenty days earlier than it “sells, leases, conveys, exchanges, transfers or in any other case disposes of all or considerably all of its property until the transaction is within the common course of actions or until the Lawyer Basic has given the company a written waiver of this part as to the proposed transaction.” CAL. CORP. CODE §5913.

As such, care have to be taken in such a transaction to make sure that every group has a reliable and educated tax and authorized advisor accessible to reply questions and supply recommendation in regards to the construction of the transaction and due diligence technique and steering, in addition to counsel in regards to the preparation of the required paperwork and filings with relevant state companies.

As will be seen, though there are clearly many variables concerned in a profitable merger or integration, the potential advantages will be invaluable to nonprofit organizations. Not solely can entities obtain economies of scale whereas growing their donor bases and geographic attain, however extra importantly, maybe, they will enhance the standard and effectivity of programming whereas additionally tapping into the abilities and skills of a better pool of potential board members.

Source by Kent Seton

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