Strategic and Legal Considerations of Non-Profit Integrations

Asset - Strategic and Legal Considerations of Non-Profit Integrations

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The proliferation of nonprofit organizations in up-to-date years, combined with the current economic climate, has impacted many charities and resulted in the elimination of vital programs or the closure of operations. Specifically, the current tough economic times have come after years of continued increase in the whole of nonprofit organizations in the United States - agreeing to the Urban fabricate and the National center for Charitable Statistics, as of 2006 there were over 2.3 million 501(c)(3) nonprofit organizations in the United States (this whole is up over 36 percent from the data available in 1996).

Like for behalf organizations and individuals, however, nonprofits must also adapt their functioning and thought-processes to survive in these hard economic times. In a December 2009 article, the enumerate of Philanthropy (citing a up-to-date Bridgespan Group article surveying approximately one hundred nonprofit leaders) noted that "54 percent of respondents are scaling back or eliminating some programs to free resources for other programs, up slightly from a year ago...[and that] [n]early two-thirds of the respondents (63 percent) said they were engaging staff members to retain core programs." (Ben Gose, As the Economy's Pain Continues, More Charities Abolish Programs, The enumerate Of Philanthropy, Dec. 10, 2009)

While many organizations have decided to cut back on programming, there is another viable selection for charities to continue to serve their constituents while meeting the bottom line - merger or integration. Once mainly opinion of as transactions reserved for the for behalf community, mergers and acquisitions in the nonprofit industry are not only possible, but can be a vital element of survival. In fact, another up-to-date research article conducted by The Bridgespan Group champions the possibility of nonprofit integrations not only as a means of survival in a tough economic climate, but also as a strategic tool for success. In its report, The Bridgespan Group cited a up-to-date poll of nonprofit executive directors that found that nonprofit leaders consider "mergers and acquisitions (M&A) reactively, a way to shore up finances, to make their organizations appear more engaging to funders or to address a succession vacuum [but that the time] is also ripe for leaders of wholesome organizations to consider M&A proactively - as a way to advance effectiveness, spread best practices, advance reach and - yes -t o do all of this more cost-effectively, manufacture best use of scarce resources." (Alexander Cortex, William bring up and Katie Smith Milway, "Nonprofit M&A: More Than a Tool for Tough Times," The Bridgespan Group, February 2009). As such, although this article discusses the benefits of mergers in light of this difficult economy, organizations can all the time consider integration as a critical tool for success.

One of the first prominent precursors to inspecting a merger is the assosication understanding and appreciating that no man is an island, and in order to best the continent, you have to build bridges. This may sound obvious; however, many small nonprofits are certainly tiny by core groups of leaders who are passionate about their cause and the constituency they serve. While this zeal and diligence can be a true asset to a charity, it can also be a hindrance as it can potentially limit the perspective of organizational leadership. This phenomena is sometimes referred to as "founder's syndrome," which Wikipedia defines as "a label commonly used to refer to a pattern of behavior on the part of the founder(s) of an assosication that, over time, becomes maladaptive to the successful accomplishment of the organizational mission." Accordingly, a prominent hurdle for small organizations interested in integration is overcoming the dominant voice of leadership with tunnel vision. Once this is accomplished, the assosication is better-suited to approach possible relationships with an open-mind.

Another prominent consideration for nonprofit mergers is the culture and environment within each assosication as well as the governance buildings associated therewith. Although two organizations may serve nearly selfsame purposes, they can diverge on many governance issues, such as whole of board seats, board selection process, board carrying out evaluations and relationships with staff. For example, an assosication with sub-par board participation and low meeting attendance will likely have a remarkably distinct administration style from an assosication with fifty active and engaged board members. This changeable will not only work on the corporate governance of the respective organizations, but will also have an impact on the functioning of underlying staff and programs. Similarly, the organizations must value and consider their respective corporate image, core values, work environment and leadership style in deciphering the feasibility of integrating the cultures of the two organizations.

Aside from the above internal factors, agenda services, facilities and tool are also vital components to the permissible estimation of a merger. Examples of these variables consist of the whole of individuals served by the program, the geographic coverage and "client" demographic, the utilization of technology, "competitors" in the market, service locations, real property arrangements, major tool inventory, maintenance contracts and technology systems. Moreover, one of the remaining major factors that organizations should consider in light of a possible merger is human resources, together with paid staff and volunteers. The subparts to this component consist of salaries, benefits, charge reimbursement, expert development, liability insurance, carrying out evaluation, volunteer agenda buildings and training/orientation, recruitment and evaluation/recognition.

Once the assosication has thought about these core issues, the remaining legal considerations with regard to a merger or integration are governed by applicable state and federal law. Depending upon the buildings of the transaction, i.e. A true merger versus an outsourcing of administration re-composition of the board of directors or asset transfer, the organizations will likely be required to obtain positive governmental approvals before consummating the transaction. Further, in a true merger, it is advisable that the organizations engage in in-depth due diligence enough to satisfy themselves that they are aware of the other's status (and in the case of the surviving corporation, that it is fully apprised of the assets and liabilities it is assuming straight through said merger).

In California, specifically, in order to engage in a statutory merger, the Attorney normal must be notified and positive filings must be completed with the Secretary of State as supplementary set forth in Sections 6010, et. Seq. Of the California Corporations Code. Under these sections, the legislature has set forth varied logistical requirements that must be met in order for an assosication to engage in such a transaction. Specifically, without first obtaining written consent from the California Attorney General, a communal advantage corporation (which is generally how most non-religious 501(c)(3) organizations are organized in the State of California) is only permitted to merge with another communal advantage or religious corporation with exact dedication of assets language in its charter. Cal. Corp. Code §6010(a). Further, the Attorney normal must be furnished with a copy of the proposed deal of merger, which must consist of specified terms and conditions, together with but not tiny to the normal terms thereof, the amendments, if any, to the articles of incorporation and bylaws of the surviving corporation, and a detailed article of how memberships will be transferred from the disappearing corporation to the surviving entity. Cal. Corp. Code §6010(b); Cal. Corp. Code §6011. There are also many other provisions that should be clearly and accurately set forth in an deal of merger between two organization, which consist of but are certainly not tiny to the rehabilitation of employees of the disappearing corporation (i.e. Will they be hired on by the surviving corporation, and if so, what happens to accrued benefits, vacation, etc.), warranties and representations with regard to the accuracy and completeness of documents in case,granted by each respective assosication while the due diligence process (for positive reasons, this warranty will help protect an assosication that is relying on documents in case,granted to it by the other, such as financial statements and each year reports), and the obligations of the parties after the "closing" of the merger transaction. The merger deal must then be approved by the board of each assosication (as well as the members, if applicable) and the surviving corporation is required to file a copy of the deal with an officer's certificate.

As referenced above, with merger transactions, the whole of due diligence that is advisable to perform is increased, namely because the surviving corporation is not only acquiring the assets of the other organization, but also assuming its liabilities. It is well-established that "[w]hen a merger of nonprofit communal advantage corporations becomes effective, 'the cut off existences of the disappearing parties to the merger cease and the surviving party to the merger shall succeed, without other transfer, to all the rights and property of each of the disappearing parties to the merger and shall be field to all the debts and liabilities of each..." Catholic Healthcare West v. California guarnatee warrant Associated, 178 Cal.App.4th 15, 28 (2009) (citing Cal. Corp. Code §6020(a)). As such, documents and information that should be reviewed and analyzed in a merger transaction consist of organizational documents (e.g. Articles of incorporation, bylaws, minutes, permits and list of current board members and terms), financials (e.g. Balance sheets, budgetary projections, each year reports, copies of letters from auditors and list of accounts receivable and payable), tax matters (e.g. Forms 990 and 199, Attorney normal registrations and renewals, copy of Irs Form 1023 and copy of Irs estimation letter), donor and grant information (e.g. List of restricted donations and grants, list of pending grant applications, copies of donor materials and list of expert fundraisers), laborer matters e.g. (list of all employees, documents relating to benefits, copies of personnel policies and handbooks and organizational chart), company contracts and commitments (e.g. Copies of all material contracts such as leases, joint ventures, purchase agreements and tool and merchandise contracts), guarnatee (e.g. List of all guarnatee policies with a article of risks, coverage limits and premiums and copy of directors and officers indemnity/liability guarnatee coverage), litigation (e.g. Listing of all pending and possible litigation and contractual disputes and any memoranda of counsel with respect to pending or threatened litigation) and other information or details relating to any and all actual or possible liabilities of the dissolving entity. (Please note that this is meant to be exemplary of the documents that organizations should be reviewing and is by no means exhaustive)

In other types of integration transactions, such as an asset transfer, the assuming corporation can pick and choose the assets it is acquiring, while limiting exposure by selecting not to assume any liabilities. That being said, however, even in this type of transaction, the transferring assosication is required to give written consideration to the Attorney normal at least twenty days before it "sells, leases, conveys, exchanges, transfers or otherwise disposes of all or substantially all of its assets unless the transaction is in the regular policy of activities or unless the Attorney normal has given the corporation a written waiver of this section as to the proposed transaction." Cal. Corp. Code §5913.

As such, care must be taken in such a transaction to ensure that each assosication has a competent and knowledgeable tax and legal advisor available to rejoinder questions and contribute advice with regard to the buildings of the transaction and due diligence strategy and guidance, as well as counsel with regard to the establishment of the critical documents and filings with applicable state agencies.

As can be seen, although there are clearly many variables complicated in a successful merger or integration, the possible benefits can be invaluable to nonprofit organizations. Not only can entities perform economies of scale while expanding their donor bases and geographic reach, but more importantly, perhaps, they can improve the potential and efficiency of programming while also tapping into the skills and talents of a greater pool of possible board members.

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