Keep it legal: Mergers

It is not uncommon for charities with similar objectives to get together for specific projects. But successful partnerships can be taken a stage further when two charities merge.

All kinds of charities, from national institutions to small community organisations wishing to consolidate funds and reduce overheads, have experienced the benefits of merger.

A number of issues are relevant to all mergers, regardless of the size of the charities. These relate primarily to constitutional issues, due diligence and regulatory consents. Charities must first consider whether or not the purposes of the organisations are compatible. If they are not, this could indicate that the merger will fail to fulfil the purposes of one or both of the charities and raise questions about the operational direction of the merged body.

It may be that certain matters, such as aligning purposes, can be carried out as part of the merger process. Conditions attached to any funds need to be reviewed to ensure the merger is compatible with any restricted funds held.

As well as confirming constitutional requirements, the parties must carry out appropriate due diligence. The identification of assets and liabilities is critical. Trustees transferring assets in an amalgamation need to avoid any transfers that could breach their duties regarding the application of those assets. Similarly, trustees receiving assets have to assure themselves that they are comfortable with any attached liabilities. The early identification of, for example, contractual liabilities or potential employment issues is key to preventing latent liabilities being unearthed at a later and inopportune time. Charities should also be aware that the process of amalgamation may be seen by funders and suppliers as an opportunity to reconsider or renegotiate current arrangements.

Because a merger involves the movement of charitable assets, regulatory consents are required. The consent of the Charity Commission or its Scottish equivalent the OSCR may not be enough. Constitutions and legislation may require external consents. In the education sector, for example, funding councils and the Privy Council may have to agree to the proposed amalgamation. All regulators must be made aware of developments to ensure a smooth and timely unveiling of the new organisation.

- Alan Eccles is a solicitor at Maclay Murray & Spens LLP.

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