Almagamate by the book

When merger is on the cards, Anne-Marie Piper says trustees need to focus on careful planning and expert legal advice to make the process as smooth as possible. Anne-Marie Piper is head of the charities group at Paisner & Co.

Charity mergers have a lot in common with love and marriage – often the path to the merger of two or more charities is a bumpy one and the union itself will almost inevitably take longer to plan and cost more than the parties anticipate at the outset.

Like family arrangements, mergers come in all shapes and sizes, with full amalgamation at one end of the spectrum and shared administrative arrangements and joint ventures at the other.

An increasing number of mergers are taking place in today's harsh funding climate – it is frequently becoming a case of merge or die.

Unfortunately, merger talks are often well advanced before anyone considers getting legal advice. This regularly leads to disappointment because clients learn that there are legal difficulties with the plans they have painstakingly negotiated.

High on the list of possible problems is that of incompatible objects. Many charities carry out very similar activities on the basis of quite different constitutions. This is rarely an insurmountable problem but it can lead to the merged charity having to retain funds which are restricted according to its predecessors' original objects.

Many modern charity constitutions contain an express power to amalgamate. Older charities are rarely so fortunate, so it is necessary to discover whether other powers can be used for this purpose.

A power to make donations in cash or in kind will often be sufficient. In other cases the dissolution provisions will be used. Sometimes it is only with the help and powers of the Charity Commission that a merger can proceed.

It is often the case that one charity is merged into another. In this situation the trustees will need to review and, if necessary, amend the constitutional documents of the successor charity to change the name and/or to ensure that they contain the necessary powers for the combined activities and appropriate provisions relating to trustees and members.

Similarly, the occasion of a merger is a good time for charity trustees to think again about legal structures.

For example, the trustees of two unincorporated service-providing charities may be well advised to consider the incorporation of a new, bespoke charitable company to enable them to have the benefit of limited liability.

A commercial company can, of course, be sold on the basis of nothing more than a cheque and a stock transfer form. Unfortunately, charity law principles make such simplicity impossible for charity trustees.

The requirement that they act prudently, exercising proper stewardship over charity assets, means that charity trustees must undertake a thorough due diligence exercise.

For charities with only a few paid staff this is often a difficult and time-consuming task, particularly if their constitutional documents and records are in less than perfect order or if there has been a high turnover of trustees.

As part of the due diligence exercise it is necessary for the trustees – or their advisers – to review all of the charity's contractual arrangements.

Questions that need to be addressed include: whether contracts can be assigned or whether novation or termination is the answer; whether the charity's bankers will agree to any refinancing or consolidation plans; and whether the staff of the merging charities will be transferred under the Transfer of Undertakings (protection of Employment) regulations 1981 (Tupe).

The trustees of merging charities also need to plan carefully – not only how the merged charity will operate in the long term, but how they will get to that position.

For example, transitional or interim arrangements are often required, particularly in relation to staff (whose numbers may need to be reduced) and properties (which may be difficult to sell or relinquish).

One issue which charity trustees overlook at their peril is legacies. It is often necessary to leave the old charity or charities in place in order to receive legacies which may not become due for many years.

After the complexity of the preparations, the merger agreement is often a short and very straightforward document dealing with the “big picture” rather than with the minutiae of the merger arrangements.

However, as soon as the ink is dry on the agreement, the transfer arrangements have to be implemented – properties will need to be transferred and assets delivered.

If the merger vehicle is a new company then bank accounts will need to be opened, stationery printed, trade marks registered and so on.

There will also be many people and organisations who have to be informed about the merger, including the tax and rating authorities, the utility companies and the members of the merging charities, who may have to be invited to sign new membership applications and/or covenants.

In practice it is usually many months after the announcement of the merger before all the necessary legal and administrative work is complete.