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Practical tips for effecting a successful merger

mergerThere are over 86,000 registered charities in Canada operating in a rapidly changing sector.  Difficulty fundraising, the desire to expand services, donor demand, and contingent government funding are just some of the factors prompting Canadian charities to consider a merger. While a merger is no doubt an intense administrative exercise, consolidating the efforts of two organizations, under the right circumstances, can maximize organizational output and streamline operations, translating into more beneficiaries being serviced and/or an increase in the services offered. In considering the commentary made at a conference by a number of recently merged charities, this article sets out the practical benefits and challenges of merging two charities and some post-merger considerations to effect a smooth transition.

Benefits

There are a variety of ways in which a merger benefits not only the merging entities, but ultimately their beneficiaries. Firstly, the most obvious benefit is the ability of one organization to leverage the advanced capabilities (i.e., fundraising, research, marketing, reach, etc.) of the other organization and customize such capabilities to appeal to their donors and beneficiaries.  Secondly, increasing the number of beneficiaries serviced by one organization can result in the merged entity being invited to stakeholder meetings and having a stronger voice within the sector. Further, governments may choose to consult directly with an entity that services or represents a larger sample of a particular community. In this way, the merged entity has a greater opportunity to advocate for change. Thirdly, since donors in some cases are proposing that charities work together, the merging of two organizations that engage in similar activities can signal to donors that the organizations are listening. Organizations that make donors feel involved gain access to low hanging fruit. Fourthly, a merger often gives organizations a fresh start, as each organization is forced to consider what is working (and should be retained) and what is not (and should be discarded/ceased). Structurally, the post-merger entity can be organized to accommodate the size and function of the organization (which in many cases needed to be considered by both organizations pre-merger). The centralization of various operational efforts can also create more efficient systems.

Additionally, mergers benefit funding agencies by reducing the number of applications that require processing, thereby reducing the administrative burden associated with same. The application process is simplified for applicants and fewer applications means that applications are processed faster by the funding agencies.

Challenges and how to manage them

The two most common ways in which to effect a merger of two charitable organizations is by way of amalgamation or asset transfer. Both of these options are not without their challenges.  Discussed below are ways in which these challenges can be mitigated.

1. Getting directors onside

A significant structural change such as a merger requires both board and member approval for each organization involved in the proposed merger. The first step – the requirement to get both boards onside the merger – can be difficult. In some cases, boards involved in a proposed merger may feel as though they are being asked to “let go” of an organization they are passionate about and may be concerned that the spirit, purpose and mission of their organization may be lost post-merger. This concern can be addressed from the outset if the parties enter into a Letter of Intent (“LOI”) to help guide the boards through the negotiation process. Proceeding under an LOI fosters teamwork between each board that will flow through to the merged entity. Importantly, if the boards have difficulty agreeing on the terms of an LOI, whether the proposed merger is truly ideal will be revealed before any further costs are incurred.  The ultimate costs of implementation can depend on how easily the parties can come to a consensus when discussing the details of the merger and the future governance structure. If there is agreement on such issues it will be a more straightforward transaction.

Important to include in the LOI is the extent to which each merging organization will be represented on the board of the merged entity. Generally, boards will be more receptive to a merger if they are ensured that there will be significant representation from both pre-merger boards on the board of the merged entity. While specific names need not be included, a proposed number of board members coming from each organization can be proposed. As a result, depending on the type of merger proposed, the parties may feel encouraged to work together to reach an agreement knowing that one organization will not simply consume the other. Other items to consider addressing in an LOI include, but are not limited to, the following:

  • What will be the future governance structure of the merged entity?
  • Who will bear the costs of the merger?
  • Will the merger be announced publicly?
  • What will impact the merger and result in a termination of the LOI?
  • For what purposes will the merged entity operate?
  • Will debts be carried over into the new entity or must certain debts be paid off in advance of the merger?
  • Will the new entity operate out of one, both or all pre-merger locations?
  • What is the deadline for due diligence review?
  • What will be the jurisdiction of the merged entity?

Further, once an LOI is signed, holding joint meetings of both boards to negotiate the terms of a merger agreement is generally advantageous as the organizations work together to come together. This helps to dispel an “us-versus-them” mentality.

2. Sifting through due diligence

An inefficient, frustrating and expensive merger is often the result of a significant data dump from both parties and an unstructured due diligence process. Before each organization starts trading information, it is important that each entity audits the state of its own governance and consider any complexities that it may bring to the merger. Each organization should, amongst other things:

  • ensure that its corporate and tax filings are up to date
  • ensure that its bylaws are current
  • ensure that it understands its membership structure (and who its members are)
  • ensure that its minute book is up to date
  • consider whether it has any externally restricted funds that will need to be maintained post-merger
  • consider the implications of an existing collective agreement, if any, on post-merger employees
  • consider the change of control provisions in various agreements (including financing arrangements, leases, and service contracts)

Once each organization is certain its own affairs are in order, each organization should develop a due diligence checklist of items required from the other party. Internally, each organization should engage in a thorough discussion and set reasonable requirements of the other party.  Importantly, to help focus those engaged in the due diligence review, a list of issues that would halt the merger should be developed.

An often overlooked item of review is the finance policies and accounting principles employed by each merging organization. If they are not already aligned, each merging entity should engage in a pre-merger discussion as to how to bring these policies and principles into alignment post-merger. This will be extremely important when the time comes to determine the budget for the post-merger entity.

Additionally, the following items should be considered during the due diligence process:

  • Do the purposes of each entity align?
  • Are there any GST/HST/Land Transfer Tax issues?
  • Are any regulatory approvals required?
  • Will the merger trigger a year-end for either organization?
  • Do any business name registrations need to be carried over to the new entity, renewed, etc.?

3. Mitigating stakeholder scrutiny

In some cases, stakeholders such as beneficiaries, employees, donors and even post-merger boards may want to see immediately the fruits of a merger. A failure to, for instance, see a significant uptick in donations or government grants or to see a reduction in expenses, may elicit undeserving criticism of the merger. Managing stakeholder expectations from the outset (i.e., pre-merger) can help to mitigate this type of post-merger scrutiny. Increased stakeholder engagement can be a great way for stakeholders to understand that a merger is, indeed, the best way to move forward and maximize each organization’s support to beneficiaries. Holding “town hall” meetings to answer stakeholder queries or address any concerns about the merger can bolster support for the merger either by demonstrating to stakeholders that the merger is a well-considered transaction or, in some cases, helping the merging organizations to identify operational or public relations issues they may not have foreseen. Stakeholder scrutiny may also be mitigated if stakeholders feel involved in the process. For instance, canvassing stakeholders, such as program beneficiaries and employees, for input on a new name for the merged entity can work to get such stakeholders excited about and engaged in the merger. Additionally, including employees from both organizations in joint corporate events and joint communications leading up to the merger can help to foster a sense of collegiality even before the merger date.

Post-merger considerations

There are a number of practical issues that must be considered post-merger. In some cases, organizations will need to determine how to operate in more than one location, how to integrate the organizational cultures, and how best to train team members on any new or adopted processes.  Additionally, like any relationship, there needs to be an element of trust. A merged organization can make the transition smoother by:

  • Disseminating questionnaires to employees in scheduled intervals post-merger to gauge what is working and what is not
  • Sharing profiles of various employees to ensure that everyone knows where to go for specific information
  • Distributing branded items and uniting team members using consistent messaging
  • Setting fair expectations and providing progress updates
  • Giving stakeholders an opportunity to be heard and ensuring that high level communication is flowing down the chain

Conclusion

Mergers are indeed happening in the sector. A merger can make united organizations a stronger advocate for their beneficiaries and provide their beneficiaries with a stronger voice.  Organizations operating in the same industries are fighting for the same funding and often have identical goals. Mergers can enable these organizations to streamline their efforts and increase their chances of accessing this funding. As long as fair expectations are set from the outset and there is a sense of communality rather than “otherness”, a merger can maximize the good works already being undertaken by charities in Canada.

By: Natasha Smith, Miller Thomson LLP

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In addition to our regular guest bloggers, Inside Internal Controls blog published by First Reference, provides occasional guest post opportunities from various subject matter experts on the topics of risk management and best practices in finance and accounting, information technology, environmental issues, corporate governance, sales/marketing and operations, not-for-profits and business related issues in Canada. If you are a subject matter expert and would like to become an occasional blogger, please contact Yosie Saint-Cyr at editor@firstreference.com. If you liked this post and would like to subscribe to Inside Internal Controls blog click here.
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