What Charity Boards Need to Know About Mergers, Acquisitions, and Legal Restructuring

Introduction

Not-for-profit organisations and charities in Australia are increasingly exploring mergers, acquisitions, and restructures as strategic avenues. These significant undertakings often arise from the need to navigate increasing compliance pressures, enhance operational efficiencies, or amplify their impact for the communities they serve.

Successfully managing a merger or acquisition is a complex endeavour for any not-for-profit charity. This guide provides essential legal information and key considerations to assist charity boards in understanding the intricacies of the mergers and acquisitions process, thereby enabling informed decision-making when contemplating a restructure.

Understanding Charity Mergers, Acquisition for Restructuring

Defining a Charity Merger, Acquisition & Restructure

A charity merger involves a formal contractual agreement where two or more not-for-profit organisations combine to form a single legal entity. This process is significant and generally difficult to reverse, so careful consideration by the charity board is essential.

The structure of a merger can vary depending on the preferences and existing legal structures of the organisations involved. Merging can take several forms:

• One organisation, or multiple organisations, may become part of an existing organisation, with the latter continuing its operations and the former entities winding up.
• Alternatively, two or more organisations can combine to create an entirely new not-for-profit entity, with the original organisations subsequently winding up and deregistering.

An acquisition, on the other hand, occurs when one charity (Organisation A) takes over the assets, contracts, and employment obligations of another charity (Organisation B). Following this transfer, Organisation B will typically wind up and cease to exist as a separate legal entity.

The specific approach to a merger or acquisition can be influenced by strategic considerations, such as brand strength, legal simplicity, or potential tax benefits.

Common Reasons Your Charity Might Consider a Merger or Restructure

Charity boards may contemplate a merger or restructure for a variety of compelling reasons, often aimed at enhancing their mission’s impact and operational sustainability. These decisions are typically driven by a desire to better serve beneficiaries and navigate an increasingly complex operational landscape for not-for-profit organisations.

Key motivations for a charity to consider such a significant step include:

• Benefiting Service Users: A primary driver is the belief that merging will lead to improved outcomes for the people or causes the charity supports.
• Shared Mission and Values: Charities with similar purposes, organisational cultures, and core values may find that combining forces allows for a more unified and effective approach.
• Similar Activities and Collaboration: If organisations are already conducting similar activities or have a history of working together, a formal merger can streamline these efforts.
• Resource and Funding Optimisation: Merging can enable the sharing of resources, including financial assets and infrastructure, and potentially strengthen the ability to secure funding by reducing competition for the same donor pool.

Additionally, mergers can provide several operational advantages:

• Increased Effectiveness: There’s often an expectation that a combined entity will be more effective and efficient in achieving its charitable objectives.
• Managing Risks: Some risks, particularly those associated with operating overseas or distributing resources directly to international beneficiaries, are becoming increasingly challenging for individual, especially smaller, charities to manage alone. A merger can provide greater capacity and expertise to handle such complexities, including compliance with Australian Charities and Not-for-profits Commission (ACNC)’s External Conduct Standards.
• Addressing Service Overlaps: In some communities, multiple charities may offer very similar services to meet comparable needs, leading to duplication. A restructure can consolidate these efforts, ensuring resources are used more strategically.
• Improving Community Development Skills: Sometimes, the challenges faced by a community stem from a shortage of local community development skills. Merging can bring together expertise to design and implement more effective and targeted programs to address significant social and economic disadvantage.

Evaluating the Benefits & Potential Drawbacks of Merging Your Charity

Advantages of a Charity Merger or Acquisition for Your Organisation

A merger or acquisition can offer significant advantages for a not-for-profit charity, enabling it to enhance its mission and operational effectiveness. One of the primary benefits is the potential for reduced administration expenses, achieved through several mechanisms:

• Economies of scale: Increased production or service delivery leads to lower average costs per unit. For instance, if your charity produces 1,000 food packs at $15 each, merging and pooling resources might allow you to produce 5,000 packs at a lower cost, perhaps by renegotiating supplier prices for larger quantities or by combining logistics for greater efficiency.
• Economies of scope: These refer to savings gained by producing multiple services or operating in more areas together rather than separately. Consider two charities assisting children with disabilities, one in Melbourne and one in Sydney; a merger could reduce combined marketing and advertising costs by leveraging shared strategies and branding across both locations.
• Synergies: The combined output of the merged charity exceeds the sum of what each could achieve independently. If Charity A serves 100 beneficiaries and Charity B serves 50, their combined efforts and pooled resources post-merger might allow them to reach 250 beneficiaries.

Merging with a larger organisation can also provide access to established tax concessions and deductible gift recipient (DGR) endorsement.

Beyond financial efficiencies, a charity merger or acquisition can lead to a reduction in competition, particularly when multiple organisations are vying for the same donor funds. This allows the newly formed entity to focus more resources on service delivery.

Other notable advantages include:

• Shared Knowledge and Expertise: Merging allows for the pooling of knowledge, skills, and managerial experience, leading to improved decision-making and innovation within the charity.
• Expanded Networks: Access to a larger network of contacts, including donors, volunteers, and community partners, can be gained through a merger.
• Enhanced Service Delivery: The ability to offer a broader range of services or cover a larger geographical area, potentially transitioning from a state to a national focus, is a significant benefit.
• Strengthened Governance: A merger can attract new board or committee members with diverse expertise, thereby increasing the charity’s viability and strategic direction.
• Improved Funding Prospects: A larger, more robust organisation often has a better ability to seek and secure funding from various sources.
• Increased Brand Strength and Influence: A merged charity may command a stronger brand presence and greater influence within its sector and the wider community.

Potential Disadvantages & Risks in a Charity Merger for Your Board to Consider

While a merger or acquisition can bring substantial benefits, it is essential for your board to carefully consider the potential disadvantages and risks involved.

The process itself can incur significant legal and accounting fees, and a considerable amount of management time will be dedicated to negotiations and planning. There is also the risk of losing the existing name and brand recognition that your charity has built over time, which could impact public perception and support.

Member engagement is another critical area of concern, as a merger can sometimes lead to disengagement or a loss in membership numbers if stakeholders do not feel aligned with the new entity. The integration process itself can be complex, potentially leading to unforeseen costs and delays in achieving the anticipated synergies.

Your board should also be aware of these potential challenges:

• Contractual Difficulties: There may be difficulties in transferring important contracts, such as funding agreements, subcontracting arrangements, or lease agreements, to the new or restructured charity.
• Loss of Control and Disputes: A merger can result in a perceived loss of control for the original entities and may increase the potential for management disputes within the newly formed organisation.
• Impact on Personnel: The merger process can significantly affect employees, volunteers, and members, potentially leading to staff reductions or resignations if individuals are not supportive of the changes or their roles are impacted.
• Cultural Incompatibility: Differences in organisational culture between the merging charities can create friction and hinder successful integration if not managed effectively.
• Funding and Tax Implications: There is a risk of losing existing funding arrangements if funders do not support the merger. Additionally, a merger could lead to the potential loss of existing tax endorsements and charitable registrations, which would affect funding and concessions, and may also impact the ability to offer salary packaging benefits.
• Post-Merger Administrative Burden: Numerous administrative steps are required after a merger is completed, which can be time-consuming and complex to manage.

Navigating the Charity Merger & Acquisition Process for Your Board

Common Merger Pathways for Your Charity

When your not-for-profit charity is considering a merger, understanding the available structural pathways is crucial for the board. A merger is a formal contractual agreement where two or more organisations combine to form a single legal entity, a process that is often complex and difficult to reverse.

There are two primary pathways for a charity merger:

• Formation of a new entity: Two or more organisations can combine to create an entirely new organisation. In this scenario, the existing charities transfer their assets, liabilities, employees, and operations to the newly formed entity. Subsequently, the original organisations are typically wound up and deregistered. This approach often involves creating a new name, brand, and potentially new operational strategies for the merged charity.
• Absorption by an existing entity: One organisation can become part of another existing organisation. Here, the absorbing charity takes on all the assets, liabilities, operations, and employees of the other organisation(s), which then wind up and deregister. The merged operations continue under the name and brand of the absorbing charity.

The choice of pathway for your charity can be influenced by several strategic considerations, such as brand strength, legal simplicity, and potential tax implications. It is important for the board to seek independent legal advice to determine the most appropriate structure for their specific merger or acquisition.

Due Diligence & Initial Steps for Your Charity Board

Before committing to a merger or acquisition, your charity board must undertake thorough due diligence and several initial steps. This preparatory phase is vital to understand the potential risks and benefits involved in combining with another not-for-profit organisation.

The initial steps in the mergers and acquisitions process typically involve:

• Preliminary discussions: The boards or committees of the respective organisations will hold initial meetings to explore the possibility of a merger. This is an opportunity to assess compatibility in terms of mission, values, and culture.
• Conducting due diligence: This is a critical step where each charity investigates the other. Key areas to examine include:
  • The legal structure of the potential partner organisation, and whether it is also a registered charity
  • Financial health, including any significant liabilities such as debts to the Australian Taxation Office (ATO) or involvement in litigation, which could be inherited by the merged entity
  • Operational aspects, contracts, and existing obligations
• Seeking legal and professional advice: It is essential to obtain independent legal, financial, and tax advice throughout the merger process. This will help in understanding the implications, drafting necessary documents, and ensuring compliance.
• Forming a joint committee: Consider establishing a committee with representatives from each organisation involved in the merger. This can help manage the process effectively and ensure clear communication between all parties.
• Board and member approval: Once due diligence is complete and the decision to proceed with the merger is made, each charity’s board or committee will typically make an official decision to seek approval from its members for the proposed merger, often through a formal resolution.

These initial actions lay the groundwork for a successful charity merger or acquisition, helping your board make informed decisions and navigate the complexities of the process.

Critical Legal & Regulatory Considerations for Your Charity Merger

Impact on Your Charity’s Legal Structure & ABN

A merger or acquisition can significantly alter your not-for-profit charity’s legal framework and its Australian Business Number (ABN). These changes require careful management to ensure ongoing compliance and operational continuity for the restructured entity.

The nature of the merger, such as whether a new entity is formed or one charity absorbs another, will dictate the specific actions needed regarding your ABN. When your charity undergoes a merger, several ABN-related actions might be necessary:

• You may need to contact the Australian Business Register (ABR) to cancel the ABN of any charity that ceases to exist
• If a new legal entity is established as part of the mergers and acquisitions process, an application for a new ABN will be required for this entity
• A change in your charity’s legal structure, even if it doesn’t involve forming an entirely new organisation, might also necessitate ABN modifications

It is important to understand that altering your charity’s ABN can have flow-on effects for its registration with the ACNC and its existing tax concessions. Therefore, seeking professional advice before making ABN changes is a prudent step.

The legal structure of your charity is also a critical consideration during a merger. If the merger results in a change to the legal structure:

• The ACNC must be notified. The method of notification depends on the specifics of the structural change
• For certain changes, such as an incorporated association becoming a company limited by guarantee, you may need to complete and submit Form 3B: Change Charity Details to the ACNC
• In other instances, particularly if the merger involves creating a new legal entity, the process will involve revoking the ACNC registration of the original charities and submitting a new application to register the merged charity

It is vital to ensure that your charity’s details on the ABR accurately reflect its new legal structure post-merger.

Adhering to Your Charity’s Governing Document & Notifying Regulators

Throughout the merger or acquisition process, your not-for-profit charity must meticulously follow the rules set out in its governing document, such as its constitution or rules. This document typically outlines the specific procedures required to undertake a significant change like a merger, which often includes the need for a special resolution passed by the charity’s members.

Both organisations involved in the merger must adhere to their respective governing documents and all applicable legislation.

Several regulatory bodies must be kept informed during and after a charity merger. Key notifications include:

• Australian Charities and Not-for-profits Commission: The ACNC needs to be updated about any changes to the charity’s details arising from the merger. This includes alterations to its name, legal structure, stated charitable purposes, governing document, or the details of its Responsible People. If a new ABN is obtained for the merged entity, this usually involves applying to register the new charity with the ACNC and potentially requesting the voluntary revocation of the previous charity’s registration.
• Incorporating regulator: If your charity is an incorporated entity (for example, an incorporated association or a company limited by guarantee), its incorporating regulator in the relevant state or territory will have its own set of requirements and processes for mergers. These must be followed carefully.
• Other regulators: Depending on the charity’s operations and circumstances, other regulatory bodies, such as the ATO, may also need to be notified of the merger and any resulting changes.

Compliance with these legal and regulatory obligations is essential for a smooth transition and the continued lawful operation of the merged charity.

Tax Concession Implications for Your Merged Charity

A merger or acquisition can have substantial implications for your not-for-profit charity’s entitlement to tax concessions. The impact often depends on how the merger affects the charity’s ABN and legal structure.

It is crucial for the board to understand and proactively manage these potential changes to safeguard the charity’s financial standing. The specific steps regarding tax concessions will vary:

• If your charity continues to operate under its existing ABN after the merger, the ATO will need to reassess its eligibility for any current tax concessions
• If your charity’s ABN is cancelled and a new ABN is obtained for the merged entity, or if an entirely new charity is formed, a new application for tax concessions must be submitted to the ATO. This application is often integrated with the ACNC registration process for the new entity

Failure to correctly navigate these requirements can lead to the potential loss of existing tax endorsements, such as DGR status or income tax exemptions, which could significantly impact the charity’s funding and operations.

Given the complexity, it is highly advisable to seek professional legal and tax advice to ensure the merged charity maintains or secures all appropriate tax concessions. This will help your organisation understand the specific requirements for its situation and manage the mergers and acquisitions process effectively.

Post-Merger Integration & Next Steps for Your Charity

Notifying Stakeholders & Managing Changes for Your Charity

After a merger or acquisition is finalised, effective communication with all stakeholders is essential for a smooth transition for your not-for-profit charity. It is important to inform various parties about the changes and the new operational landscape of the restructured entity. Keeping everyone informed helps manage expectations and maintain support during the post-merger period.

Your charity should plan to notify a comprehensive list of stakeholders about the merger. Key groups and entities to inform include:

• Members, volunteers, and employees: These individuals are integral to your charity’s operations and need to understand how the merger affects them and the organisation’s future.
• Clients and beneficiaries: Clearly communicate any changes to services or how they can continue to access support from the newly merged charity.
• Donors and funding bodies: Assure them of the continued mission and responsible use of funds, and update them on any new branding or contact information.
• Landlords, utility suppliers, and other contractual parties: Inform them of the merger to ensure continuity of services and to update contractual details as necessary. This includes lessors of equipment, properties, and vehicles.
• Banks and financial institutions: Update account details and inform them of any changes to signatories or financial management.
• Insurers and superannuation funds: Notify them of the changes to ensure appropriate coverage and compliance for the merged not-for-profit organisation.
• The local community and the public: Depending on the scale and impact of your charity, broader public communication may be necessary to maintain visibility and support.

Beyond notifications, managing practical changes is a key part of post-merger integration. Your charity will likely need to:

• Update its branding, including letterheads, logos, websites, and any printed promotional materials to reflect the new or continuing entity.
• Ensure all relevant government bodies, such as the ATO and the ACNC, are informed of the new entity’s name and ABN if applicable. Although primary notification of structural and ABN changes would have occurred during the merger process itself, ongoing updates may be required.

Winding Up & Deregistering Previous Charity Entities

A significant step in the mergers and acquisitions process, particularly when a new entity is formed or one charity is fully absorbed by another, involves formally concluding the existence of any not-for-profit organisations that will no longer operate. This process is known as winding up and deregistering. It is crucial that this is handled correctly to meet all legal and regulatory obligations.

The decision to wind up a charity typically occurs after all its assets, liabilities, employees, and operations have been successfully transferred to the new or continuing entity. The specific procedures for winding up will depend on the charity’s legal structure and the rules outlined in its governing document, as well as any requirements from its incorporating regulator.

Key considerations for winding up and deregistering previous charity entities include:

• Timing: If a new charity is being established as part of the merger, it should generally be established and registered before the old charities are wound up. This ensures a seamless transition of operations and responsibilities.
• Formal Process: The winding-up process often requires resolutions from members and notifications to relevant authorities, including the ACNC for the revocation of charity registration.
• Final Obligations: Before a charity can be deregistered, it must typically settle all outstanding debts and obligations and ensure any remaining assets are distributed according to its governing document and applicable laws, often to another charity with similar purposes.

Seeking professional legal advice is recommended to navigate the complexities of winding up and deregistering a charity to ensure all steps are correctly followed. This ensures that the previous entities are properly dissolved following the successful merger or acquisition.

Exploring Alternatives to a Full Charity Merger or Acquisition for Your Board

Understanding Collaborative Agreements & Joint Ventures for Your Charity

Charities seeking to collaborate without fully merging or acquiring another organisation have several flexible options available. These alternatives allow organisations to share resources while maintaining their separate legal identities.

Two primary collaborative approaches include:

• Memorandums of understanding (MOUs): Formal agreements that enable charities to share resources such as premises, staff, or assets while remaining legally separate
• Joint ventures: Arrangements where charities co-sponsor specific events or programs, working together on targeted initiatives

MOUs can significantly reduce duplication and improve efficiency without the complexities of a full merger. Meanwhile, joint ventures allow each charity to maintain its independent legal status while benefiting from shared expertise and resources.

For example, two charities might jointly run a community health program, pooling their skills and funding without merging their entire operations. These collaborative agreements can be tailored to meet the specific needs of the involved charities, offering a practical alternative to the full mergers and acquisitions process.

Considering a Separate Legal Entity for Joint Projects for Your Charity

Another effective alternative to a full merger is establishing a separate legal entity to manage joint projects or shared assets. This distinct entity can oversee specific initiatives while allowing the participating charities to preserve their individual identities.

Creating a new legal entity offers several advantages:

• Helps clarify responsibilities, governance, and financial management for joint activities
• Provides a clear structure for decision-making and accountability
• Allows for focused management of collaborative efforts

For instance, if several charities want to collectively manage a community centre or deliver a multi-agency program, creating a separate organisation can provide the necessary framework for effective collaboration.

This option requires careful planning and legal advice to ensure the new entity complies with regulatory requirements and aligns with the goals of the participating charities. It represents an effective way to achieve collaboration benefits without the permanence or complexity of a full merger or acquisition.

Conclusion

Successfully navigating a not-for-profit charity merger, acquisition, or restructure in Australia requires careful consideration of the motivations, potential benefits and drawbacks, and the detailed process, including due diligence and legal pathways. Understanding the critical legal, regulatory, and tax implications, alongside post-merger integration steps and available collaborative alternatives, is paramount for any charity board contemplating such a significant undertaking.

If your not-for-profit organisation or charity is considering a merger or acquisition and requires guidance through the intricate legal landscape, contact LawBridge today. Our expert lawyers offer specialised not-for-profit legal services tailored to the needs of your charity or NFP, helping you navigate these complexities with confidence and ensure a smooth transition for your mergers and acquisitions process.

Frequently Asked Questions About Charity Mergers & Restructures