1. 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

2. 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."

3. 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.

4. 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.

5. 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.

6. 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

7. 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.

8. 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.

9. 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

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

11. 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

12. Merger Options – New parent entityC 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

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

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

15. 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

16. 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;

17. 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.

18. 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

19. 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

20. 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

21. 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.

22. 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

23. 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

24. 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

25. 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?

26. 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

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