Charities & Not-for-Profits Mergers and Acquisitions: Precedents and Practicalities Robert Campbell CA ,CPA , MAICD Registered Auditor, Registered Tax Agent Australian Audit Pty Ltd Perth September 2017

Charities & Not-for-Profits: Mergers – Example Merger – two organisations become one From the West Australian 8 March 2015 “Youth groups join services together” “Two Broome-based youth organisations will amalgamate this year to strengthen their position as service providers in the community. Burdekin Youth in Action and Broome Youth Support Group will merge to become the Broome Youth and Families Hub. …….. “The amalgamation ensures that we retain local expertise and build our resilience against the changing funding environment, and is a means of keeping services available to the Broome community."

Charities & Not-for-Profits: Acquisition Charity A takes over the contracts previously delivered by Charity B Charity A agrees to take over the employment obligations in relation to certain staff Charity A says it will do so if it receives $ XXX,000 to cover the financial risk and employee liabilities transferred to Charity A Charity B donates/ pays funds to Charity A Charity B winds up and distributes its surplus property to other charities In this case A has been paid by B to take over the programs and staff. This is an acquisition as the two entities are not becoming one.

Another example of Acquisition College A is in financial difficulty but is a registered school College A has net liabilities of $300,000 College B agrees to takeover College A and pays $300,000 to allow the continuity of the registered school site. College B has acquired College A. College B would reflect $300,000 as Goodwill in its financial accounts.

Common Scenarios For Exploring a Merger A financial crisis or the belief that a crisis is nearing; The departure of an executive director; A proactive move to reduce competition; A growth strategy arising from a strategic plan; A struggle to recruit or retain staff or board talent; The suggestion of a funder interested in consolidation in the field; A request to merge from another organization.

Good reasons to Merge To save overheads To achieve economies of scale & improve levels of service A failing charity needs to be rescued in order to maintain services To raise their public profile and increase influence. Stronger board of directors and better future board recruitment Stronger strategic positioning with clients, funders, competitors and policymakers Stronger management staff and better positioning for executive recruitment

Myths About Charities Mergers Mergers save money by reducing administrative costs. There are too many charities and not-for-profits. A merger combines two equal parties. The Merger Agreement must resolve all the questions. The merged organisation will be stronger than the sum of the two pre-merger organisations.

Alternatives to merger Informal arrangements such as joint committees, information sharing, advice and support networks Sharing of resources under a formal agreement such as sharing premises, assets or staff, outsourcing arrangements, jointly arranged events and joint bids for funding Setting up a separate legal entity to undertake a joint project, for example a joint venture company set up to own and manage a shared asset Federations where similar charities join together to co-operate closely whilst remaining legally independent Closing or Winding up.

Particular Control Problems for Associations The Associations Act 1987 & the proposed new Act requires a minimum of six members The constitution may be modified to admit corporate members Where control is through the membership rather than the constitution And where all the entities are Associations There will need to be a mix of individuals and /or corporate members of either the parent or the subsidiary Much easier to use organisations incorporated as Companies under the Corporations Act 2001 to simplify control

Merger Options – Transfer of responsibilities & surplus assets Before After A winds up A B B

Merger Options – Becoming a Subsidiary Before After B Controls A if A is a company, B becomes the sole member of A If A is an Association ,the directors of B become the directors and members of A Or constitutionally the Directors of B appoint the Directors of A A B B A

Merger Options – New parent entity C A B If entities are Associations, then the Control of the Parent C & the subsidiaries A & B is complex with interlocking personal and corporate members. If C is a company then the members of C are A & B with agreed voting rights

Merger options - New entity and Entities “A” and “B” cease to exist Before After A & B wind up A B B

The Merger process Feasibility study Memorandum of understanding Due diligence Proceeding to merger Post merger

Feasibility study Cultural fit – Why does a merger with this organisation make business and ‘mission’ sense? Legal issues Which merger option is suitable Benefits and risks An initial view prior to due diligence Costs of merger

Memorandum of understanding - key points (a) the merger option chosen (b) how to decide to proceed with the merger or not; (c) confidentiality – on any information collected (d) the rights of each to conduct due diligence; (e) how long the entities have to reach agreement on the merger agreement if they agree to merge;

Memorandum of understanding – contd. (f) rights of access to the other’s staff, records, documents etc; (g) who in each entity will be the main contact person; (h) each responsible for its own costs in conducting the due diligence (i) each entity can walk away from the discussions at any time (before any merger agreement is signed); and (j) each entity will deal exclusively with the other throughout the MOU period.

Due diligence Background and governance Management and people Financial information – Accounting policies , Audit Management Letters Assets – actual and contingent Liabilities - actual and contingent Income Sources , current contracts Expenses & Contractual commitments Bequests and endowments: continuity Post-merger issues : Risks to Funding , tax concessions, DGR registration

Key points to resolve in merger negotiations Timeline: Mission and vision of the merged organisation or group Board (s) of Directors & Executive leadership: Budgets post merger Organization name: Corporate structure: Programs & Locations Employees

Employees – Fair Work Act implications transfer of business? A Transfer of business may exist where amongst other considerations Employees transfer into a new organisation or Where one entity having a controlling interest in the other. Then The Relevant industrial instrument comes with the transferring employees Creating possible inequities between staff doing same or similar work

Employees: entitlements on a transfer of business Generally, service with old employer counts as service with new The old employer may be under an obligation to pay the affected employees their accrued entitlements (such as annual leave or redundancy) before transfer, If the employee has already received entitlements based on service from the old employer, that service is not counted again in determining entitlements with the new employer.

Employees: employment records on a transfer of business The Fair Work Regulations 2009 The old employer is required to transfer the employment record for each transferring employee at the time the connection between the two employers occurs to be kept by the new employer for seven years

ACNC Act 2012 You cannot merge a charity with an organisation that is not a registered charity or is a for-profit business this may breach the ACNC Act and the ACNC governance standards for charities The Parent must be a registered charity

ACNC ACT 2012 Notifying the ACNC : When you merge your charity, : name legal structure charitable purposes governing documents responsible persons, and address for service. May be a re assessment of charity registrations By ACNC And eligibility of tax concessions & DGR entitlements By ATO

Summary - Key Questions about a merger Is merger really in the best interests of the people being served? Why? Is there a better way of achieving the desired end result? Can the merger partners really work effectively together? What will key stakeholders such as beneficiaries, funders, employees and volunteers think? What will be the costs of merger and how do these compare with the expected savings?

Summary - Key Questions about a merger How much time and effort is this going to take? What is the impact of this on service delivery? Are there any risks with the merger partner? If member consent is required – how are we going to obtain this? What if it all goes wrong? Directors need to weigh both sides and regularly review their position

Acknowledgements Miles & Oakley Lawyers : “ Merger Toolkit :A practical legal guide for charities and not-for-profits “ Sayer Vincent : Chartered Accountants: “Mergers made simple”