Governance

Mergers: should more charities consider them?

20 October 2017

More charities should be considering mergers or other forms of collaborative working, however, there are organisational, technical and legal barriers, that put them off.  

The Lords Select Committee on Charities published a report, ‘Stronger charities for a stronger society’ in March 2017. The report notes the duplication of work by some charities, which was raised as an issue by some witnesses who believe that collaborations, partnership work and, where appropriate, mergers should be considered more frequently to improve the service they deliver to their beneficiaries.

The new Charity Governance Code, published earlier this year, advises charity boards to undertake or oversee strategic reviews that consider partnership working, mergers or dissolution if other organisations are fulfilling similar charitable purposes more effectively and/or if the charity’s viability is uncertain.

However, there are risks and barriers to merging, including a lack of desire to merge, technical problems such as how to deal with legacies and liabilities (e.g. pensions), high costs and poor financial management. There is also the view that mergers create temporary sustainability and over the long-term lead to mission drift and a less effective delivery of the charity’s mission. It is also important to remember that not all mergers are successful and creating other forms of partnership working, either on a formal or informal basis, can be more effective.

Ways of merging

If a charity wishes to merge with another charity, it must transfer its operations to the merged charity. A merger is usually structured in one of the following ways:

  • Charity A dissolves and passes its assets to charity B.
  • Charity A and charity B dissolve and pass their assets to a new charity C. Charity C has a joint trusteeship made up of charity A and charity B trustees and, where relevant, a joint charity A and charity B membership.
  • Charity A is appointed as the sole trustee of charity B which then becomes a subsidiary charity of charity A.
  • Charity A has a representation on charity B’s board of trustees and vice versa. Charity A has powers of appointment and removal of charity B’s trustees. Until those powers are exercised charity B is managed by charity B but there are funding and resource sharing arrangements.

Issues to consider

Before undertaking any merger activity, all parties must carefully consider the following issues:

  • Name: What would be the name of the merged charity?
  • Trusteeship: How would each charity be represented on the board of merged charities? How will future trustees be elected or appointed? The resolution of this issue will be sensitive as it will dictate whether the situation is merger or complete takeover.
  • Membership: Will all the existing members of each merging charity continue to be members? Is there any need for new categories of members? Is the membership structure flexible to take into account future members?
  • Power to merge: Does the charity have the power to merge e.g. from an express power in its governing document, or a statutory power? If the trustees have no power to transfer the charity’s property to a new corporate body then they must seek a scheme from the Charity Commission authorising the merger.
  • How will the charity transfer staff (TUPE considerations and other employment law issues), contracts, assets and liabilities? In relation to incorporations, what indemnities will be sought from the corporate body in respect of any liabilities the trustees have personally incurred on behalf of the charity?
  • Has the charity sought specialist tax advice on the proposed merger?
  • Has the charity put in place a strategy for planning and communication with stakeholders?

The Charity Commission has produced a checklist for mergers which will help charities identify the key areas for consideration.

The Law Commission’s recent report, ‘Technical issues in charity law’, examined in great detail some of the problems with the legislation that governs the merger and incorporation of charities. It has made various recommendations to facilitate, where appropriate, charity mergers and incorporations including relating to gifts to merged charities, vesting declarations and vesting permanent endowment following a merger.

The next stage is for the government to respond to the Law Commission’s recommendations and pass the draft Bill into law. Hopefully the resolution of some of the technical barriers to mergers, together with the renewed emphasis placed on trustee responsibilities to consider mergers as part of good governance, will encourage more charities to consider them as part of their strategy, rather than it being a ‘last resort’ scenario.

Share this article
Sarah Clune

 

Solicitor in the Charity & Social Enterprise Team at Stone King LLP
Read more articles by this author

Comments

Leave a comment

Your Name:
Your Organisation:
Job Title:
Email Address:
Telephone:
Your comment:
 

Unless you state otherwise, we will publish your comment on the website
Don't publish my comment

Type the letters you see in this picture to verify that a person is creating this email and not an automated program.

The letters are all lowercase