As is often the case in a challenging environment, mergers between charities are on the increase. Mergers can deliver significant benefits, such as realising economies of scale and improvements to services. However, merging is a complex process that requires a great deal of careful planning.
A key consideration in any charity merger is whether the proposed merger partners have compatible objects. Charities are required to engage in activities that further their objects, so as a starting point cannot merge with another charity if the objects of that other charity are different to and/or wider in scope than their own. If charities with incompatible objects want to merge, particular steps have to be taken first. These can include obtaining the prior consent of the Charity Commission to change one or both charities' objects, the recipient charity agreeing to use the assets of the transferring charity only for purposes that the existing objects of the transferring charity permit, or one charity transferring its operation into another charity that has objects that are similar to but narrower in scope than its own.
As with any merger, a thorough due diligence process is essential to determine whether the prospective merger partner has significant potential liabilities that could affect the viability of the merged entity. These can take the form of contractual obligations, employment and pensions issues, data protection, banking covenants or relate to property that the partner leases or owns. If any land will be changing hands as part of a merger, it's worth remembering that requirements relating to the transfer of charity land can be complex, particularly for unincorporated charities whose assets are held on trust, or if land is held under any form of permanent endowment. Land that a charity may have held for decades is not registered at the Land Registry, which can cause complications if deeds are old or incomplete. Effective due diligence helps avoid or at least mitigate surprises that may not otherwise come to light until after the merger.
Governance issues will be of particular importance in both the pre and post-merger contexts. Prior to any merger, trustees need to be satisfied that that the proposed union is in their charity's best interests, and must ensure that the correct corporate procedures are followed when it comes to approving and effecting the merger. The post-merger environment needs to be considered in depth too. Any merged entity may well have a reshaped board and executive team, and a strategy will be needed for the short, medium and long terms. This being the case, decisions relating to future structure and direction will need to be taken well in advance of any merger.
Key stakeholders will rightly expect to be consulted over merger proposals, and effective communication with donors, commissioners, beneficiaries, staff, and volunteers can go a long way towards determining the success (or otherwise) of a merger project. Mismanagement of these processes can lead to reputational damage, regulatory scrutiny, staff dissatisfaction and potentially loss of funding.
Practical considerations include alignment of financial systems, and IT systems, obtaining commissioner consents, ensuring arrangements with banks and HMRC are in place, and informing and (where necessary) obtaining the consent of regulators.
