By Alison Sadler, Law Graduate

In response to changes over recent years, mergers have become a trending concept in the not-for-profit (NFP) sector and are often considered as an option for survival in challenging economic climates.

Australia does not have a register of merged charities to record how prevalent mergers are, but there is no doubt that mergers are happening and are being seriously considered by many Australian NFPs. The results of the 2016 NFP Governance and Performance Study revealed that:

• over a third of directors reported that their board had discussed a merger in the last twelve months;
• 6% reported that they have completed a merger in the last year; and
• 8% reported that they are currently undertaking a merger.[1]

What is a merger?

A merger is when two or more entities come together to form one entity (or one group of entities) to better meet the needs of the beneficiaries or users of the organisations, and make the best use of their assets. A merger can assume a number of different legal forms. In practice, mergers of NFPs involve one of the following:

• one organisation assuming control of another;
• two organisations merging into a new organisation; or
• organisations being grouped together in a parent/subsidiary structure.

Why merge?

Whilst there are a number of reasons and incentives which might drive a charity or NFP to consider a merger, there are also significant risks that a NFP should be aware of which may hinder the ultimate success of a merger. Organisations should conduct thorough investigations and undertake extensive planning and discussions before commencing the merger process. The risks and benefits should be carefully weighed up to determine whether the proposed merger would achieve positive long-term results for each entity.

In basic terms, a merger should only proceed if the two organisations are confident that they will be better and more successful working together.[2] One of the most common reasons to consider a merger is as a mechanism to reduce the implications of financial uncertainty or challenging economic conditions.[3] Organisations experiencing financial difficulty may approach a more financially robust partner in an effort to preserve their business efficacy and success. Mergers also become prevalent in times of crisis, for instance where there is a major shift in the regulatory framework of the sector, or when an organisation undergoes a change in leadership.[4]

Possible benefits of a merger

The predominant purpose of pursuing a merger is that it would allow two or more organisations to pursue their objects both more effectively and more efficiently, by pooling their resources and avoiding duplication of administrative tasks. Other benefits may include the following:

• allowing the organisations to provide the best possible service to members or beneficiaries through combining resources, which in turn results in greater satisfaction for all stakeholders involved;
• enabling organisations to achieve advantages of scale and subsequently increased reach and impact;
• increased funding from both the government and private sector as mergers provide the opportunity for charitable organisations to increase their impact;
• enhancing the potential to win public service contract tenders as governments tend to favour larger charities when allocating the main public service contracts; and
• allowing organisations to exploit synergies by sharing knowledge and skills and establishing additional means for pursuing their missions and objectives.

Possible disadvantages of a merger

Despite these prospective benefits, there are some potential drawbacks to NFP mergers. Some potential drawbacks include the following:

• achieving advantages of scale and costs savings can take significant time to achieve;
• losing out on new initiatives, opportunities or income sources because of time spent on the merger;
• possible disruptions (e.g. through office relocation or through redundancy processes);
• a lack of unique identity;
• loss of existing funding (e.g. where a funder is currently donating to both organisations but their policy states that they can only give to one organisation);
• significant fees including accounting fees, due diligence fees and legal fees for reviewing contracts and agreements;
• potential difficulties transferring important contracts such as funding contracts, subcontracting arrangements or lease arrangements; and
• cultural incompatibility.

Due Diligence

Due diligence is a key component of the merger process and allows an organisation to consider the efficacy of a merger prior to entering into a binding contract with the other party. The goal is for each party to discover, assess and analyse important components of the other organisation in order to make an informed decision about whether to proceed with the merger or not.[5] The cost of due diligence is a proper use of NFP funds, but should be forecast and reviewed to ensure it remains proportionate to the risks involved in the potential merger. Further, the nature of due diligence checks should be proportionate to:

• the amount of income and expenditure of the NFP;
• the size and nature of the proposal; and
• the nature of existing and planned activities.

Documents that will ordinarily be exchanged during due diligence may include the following:

• corporate documents;
• financial;
• fundraising documents;
• personnel documents;
• contracts; and
• statements regarding pending, anticipated or threatened litigation.

Merger Agreements

Once all necessary preliminary research, investigations and internal discussions have been completed, the next step is to draft the deed of merger. This may involve negotiating the terms of the deed, addressing any areas of concern, establishing an integration committee and deciding on their objectives, and finally signing the deed.

Mission Preservation

Typically, an organisation will approach another organisation which has a similar mission, to merge. This can be a mechanism to help NFPs combine resources and better serve the community.[6] However, it is best that both organisations discuss in the concept phase a new mission which incorporates what services both organisations provide, as well as what they would like to achieve in the future together. [7] This exercise will ensure that the organisations are working together towards a positive and focussed future. It is important that both organisations explain the new mission to key stakeholders i.e. members, employees, and customers.

[1] Australian Institute of Company Directors, ‘2016 NFP Governance and Performance Study’, page 18.

[2] John Copps, ‘What place for mergers between charities?’ (New Philanthropy Capital, June 2009), p 5.

[3] Sarah Cassidy, ‘Charities forced to merge or lay off staff as economic crisis hits their funding’, Independent (online), 8 December 2015 <http://www.independent.co.uk/news/uk/home-news/charities-forced-to-merge-or-lay-off-staff-as-economic-crisis-hits-their-funding-1836055.html>.

[4] John Copps, ‘What place for mergers between charities?’ (New Philanthropy Capital, June 2009), p 6.

[5] Nous Group, Conduct Due Diligence, NFP Mergers < http://www.nfpmergers.com.au/conduct-due-diligence>.

[6] Gary W Jenkins, The Powerful Possibilities of Nonprofit Mergers: Supporting Strategic Consolidation through Law and Public Policy http://www-bcf.usc.edu/~usclrev/html_articles/074403/074403.htm.

[7] Peter Kramer – Nonprofit Finance Fund, Advice to Strengthen Strategic Mergers and Collaborations (2016) https://nff.org/sites/default/files/paragraphs/file/download/Catalyst Fund Report FINAL_1.pdf.