10: Charities and COVID-19: Considering mergers and collaborations FAQs

The Charity Commission’s guidance on collaborative working and mergers describes a ‘merger’ as  ‘the transfer or combination of the assets (and liabilities) of two or more separately registered charities’.  A merger can be effected by various methods, depending on the circumstances: creating a new charity into which the two merging charities transfer their operations; by one charity transferring its assets (and liabilities) to another and then (usually) dissolving; or by one charity becoming a subsidiary of another charity.

Some charities may not like the idea of losing control or being fully affiliated with another charity as a result of a merger – or may not feel they have found a suitable merger partner. They may choose to work collaboratively with another charity, both as separate entities and each furthering their charitable purposes.

Collaborations can involve sharing resources with another charity or working together in a group or coalition structure. Importantly, when working collaboratively the nature of the collaboration should be agreed in advance and formalised in suitable documentation, whether a memorandum of understanding, a contract or some form of service level agreement, so that the responsibilities and liabilities of each party are clear and any tax or other regulatory issues (such as employment, data protection or intellectual property) are addressed.

Pre-COVID, charities may have considered moving to working more collaboratively, if not merging, primarily due to the financial savings in sharing resources and the ability to provide more services to their beneficiaries. We explore these cost benefits later in these FAQs but post-COVID this is likely to be a driving force in charities considering merging or working collaboratively.

In the current uncertain climate, there are a number of reasons for which charities may choose to work collaboratively or merge with another charity.  What is crucial, however, is that the charity trustees are clear about why merger or joint working would be the best strategy for their charity to advance its charitable purposes and, as a result, what they would be looking for in a suitable partner.

• Financial difficulties – it is clear that COVID-19 and the lockdown has had a serious impact on the charity sector. Charities are facing enormous cash flow problems due to a slump in income and often an increase in demand. Ultimately some charities are facing closure. Working collaboratively and making savings, by way of sharing resources or merging, can provide a solution to charities facing financial troubles and may be an alternative, or additional option, to seeking financial help from other sources such as loans. However, if the trustees have genuine doubts as to whether the charity is a going concern, then they may also need insolvency advice;
• Strategic planning for growth – some charities may be in a position to plan a merger, where the combined resources of the merged charities would allow the newly merged charity to provide more services and reach more beneficiaries to better further its purposes. Similarly, collaborative working may allow a charity with limited resources to tap into the resources and network of its partner in order to further its activities; and
• Potentially more funding opportunities – where charities are working together, either by merging or by joint working, there may be more funding opportunities available to them. Donors may see the potential for more impact from their donation to a merged charity or a group of charities working together and may be more satisfied that the charity receiving the funding is in a stable position, both financially and operationally, to use the funding for its purposes.

However, while merging or collaborative working can bring benefits, it might not necessarily be the best option for your charity. The charity trustees should consider all relevant options, eg if cash flow is the problem to be addressed they should explore what funding may be available, including from the emergency financial measures that have been put in place in the pandemic – see our article on accessing cash and unlocking value from real property during the pandemic for more information here and our post on coronavirus-specific schemes here. It is also the case that merging or collaborative working is not always an easy option.

Choosing a partner to merge or to work in collaboration with is probably the biggest decision that a charity will have to take. We set out below some of the key questions and considerations that should be thought about at the outset as part of the initial planning process:

• Who would we want to work with? Are they known to us and do we already have an established trusted relationship?
• Is the potential partner in a stable financial position and what is their reputation like?
• Do our values, mission and charitable objects align with those of the potential partner?
• How would we envisage the relationship working? Is that how the potential partner also sees it?  What is our business plan?
• What about the impact on our stakeholders?
• There are also some key initial legal questions to consider – do we have power to do what is proposed?

The steps needed to achieve a merger will vary to an extent depending on which merger structure is being adopted (see above). The steps to achieve a merger would, broadly, involve:

• Due diligence exercise – this is important because each party needs to understand what they are taking on – assets and liabilities. It can also draw out issues which would need to be addressed before the merger proceeds, such as change of control provisions or liabilities crystallised on a change of control (eg potential pension liabilities), consents which may be needed and areas where further advice is needed, eg employment advice or if there is permanent endowment. There will also be practical questions to identify eg whether the computer infrastructure and security measures of the potential group are compatible to allow the charities to work together in the ways envisaged;
• Given the in-depth nature of the exercise, and the requirement for candour, a confidentiality agreement is often part of the process at this stage, especially as sometimes the due diligence exercise may lead to the parties deciding that they are not appropriate merger partners;
• Negotiations including the preparation of heads of terms outlining the nature of the merger; and
• Communication – the parties will need to agree how and when to communicate with stakeholders (which will need to be data protection compliant) and publicity for the merger.
• Legal Steps:
  • Is there power to merge?
  • Are the two charities’ objects compatible – if not, will one need to seek Charity Commission consent to revise theirs?
  • Is any other consent from, or other involvement of, the Charity Commission required? Are other regulators involved?
  • Are there any restricted funds or permanent endowment that need to be dealt with?
  • If setting up a new merged charity, agreeing the form and constitution of the new charity and making the registration application to the Charity Commission;
  • Arranging any consents and other pre-transfer requirements, including any employee consultation;
  • Where relevant, members’ decision(s) required for the merger;
  • Effecting the transfer whether to a newly merged charity or to another charity by way of a transfer agreement;
  • Where relevant, arranging the dissolution of the transferring charity; and
  • Dealing with administrative tasks such as notifying the Charity Commission, third parties, HMRC and updating stationery etc.
• Implementation of the merger – the physical transfer of assets and commencement of operations in the merged charity.

If you are wanting to work collaboratively with another charity, as mentioned in one of the FAQs above you will need to ensure that appropriate paperwork is in place to document the nature of the relationship.