Charities - Collaborate or Merge?
Merger or other forms of collaborative working can make better use of charitable funds and property and provide better services for beneficiaries. For example if two charities in the same area are doing similar work and competing for funding, a merger may be the best way to secure funding and provide a united voice.1
This article provides a broad outline on the issues involved in Collaboration by Charities and also those involved in merging two Charities.
Charitable status of an organisation is dependent on the organisation having charitable purposes for the public benefit. Charitable purposes are well defined by the Charities Act 2009.2
Objects and Powers
Charities must operate within their legal powers, as set out in their Memorandum and Articles and must also comply with the laws and regulatory requirements to which they are subject, including Tax law, Charities law and the 2014 Companies Act (where a company limited by guarantee).
Efficiency and Transparency
Charities whilst they are not for profit, they must comply with the law, be transparent and efficient. Donors will demand compliance with law transparency and efficiency. The Charities Commission in England say the ultimate aim of any Charity must be the provision of the very best services for those who benefit from its work and one way that this can be achieved is by joint working.
Existing Charity already established
When considering the establishment of a Charity, the promoters should always consider, is the charitable purpose already being carried out by an existing Charity. If so, the promoters should consider challenging their energy and resources to the already established Charity and not incur the cost and ongoing maintenance and compliance costs to the donors, associated with setting up and running their own Charity.
For existing Charities, they always need to consider whether their services or products can be delivered more efficiently with less cost or whether can they improve their services, by using their invaluable experience of beneficiaries views and needs to, in the case for example of public services, to inform, influence the design and delivery of public services.
Collaboration can consist of sharing administration, or sharing resources, joint campaigning and or joint service delivery. The arrangements can be for as short a period or as long a period as the two Charities may agree or as authorised by the regulatory authorities.
The collaboration will need to further each Charity’s objects, and the use of resources involved in the collaboration must be appropriate. Each party will need to assess the other from a donor perspective, risk and reputation perspective, and to this extent, it is no different to two companies with well known brands collaborating with each other or entering into a joint venture with each other.
Collaboration can increase public trust in both Charities and it may assist in fundraising. It may also allow each Charity to guage and assess the joint working before embarking on a full merger.
In any agreement to collaborate, issues to be considered for inclusion in the agreement are the specific objectives, regulatory approvals or clearances required, co-ordinators, the duration, the tasks and obligations of each Charity, compliance with law, how decisions are made, the contributions from each Charity, the staffing to be made available by each party, ownership of work jointly created, disputes, risk management, review and evaluation, and termination.
Merger of Charities
Collaborative working can sometimes lead to a full Merger. Any Merger in an Irish context will require approval of the Charities Regulatory Authority (CRA) and the Revenue Commissioners at the very least. Additionally where the merging entities are companies limited by guarantee (which is normally the case) then the merger provisions of the Companies Act 2014 will have to be complied with.
In order to consider merging, the Objects of each Charity must be similar, the Memorandum of each must allow the type of Merger envisaged, sufficient in each case to satisfy the Revenue and the CRA. Charities can merge by, one taking over the other’s work and assets, form a new Charity to take over the work and assets of the Charities involved or one Charity take over the management of another but keep it as a separate entity within a newly created Group. Due diligence in the case of a Merger is no different to that involving private companies, except that the degree of due diligence is much reduced due to the charitable status afforded to Charities under Irish Tax law.
Because Charities membership is comprised of individuals who in many cases have given years of service on a voluntary basis in doing work for the particular Charity (corporate membership of a Charity is possible now with the Companies Act 2009 and subject to Revenue and CRA consent), each Charity will need to ensure that the members of each Charity are in agreement to the Merger to the extent required by their constitutional documents and Company law. Additionally and most importantly, Charities will need to be sure that donors, particularly corporate donors will continue funding the merged entity.
In order to decide whether two or more Charities should be merged, the Board of Directors of each Charity must consider the balance between the advantages and disadvantages of doing such. The long-term benefits of the Merger must outweigh the risks.
The following are some of the advantages and disadvantages which must be considered when contemplating a Merger:3
- Increased Efficiency Mergers enable charities to reduce the duplication between separate organisations with similar objectives. This reduction in competition allows charities to have a greater presence in the public domain and enhances their opportunities to receive funding.
- Increased Scale The combination of resources allows projects of a greater scale to be pursued instead of multiple organisations pursuing the same goals on a minute level. This increases the impact and the benefits derived from projects.
- Increased Funding Opportunities By pooling the separate Charities’ assets together greater sponsorship and funding opportunities arise.
- Overcoming Economic Uncertainty Charitable mergers assist in the sustainability of Charities helping them survive the somewhat turbulent economic climate.
- Reduced Overheads Merging enables costs to be reduced. For example administrative and advertising costs are positively affected with individual running costs being minimised.
- Impact on the Organisation Mergers tend to result in a reduction of staff. Despite having similar values and objects different charitable organisations may have different cultures which can prove problematic. For example different roles may be required of employees, different working hours may be imposed and different fundraising events requested.
- Costs The merger process comes at a cost for charities. Potential costs include due diligence exercise costs, professional fees, relocation expenses and restructuring costs. The integration of staff and systems may also require financial resources being employed.
- Loss of Identity When Charities merge their individual branding may be lost. The public profile and goodwill associated with a charity may become depleted and funders may be lost as a result.
If the advantages outweigh the potential disadvantages, then merging may be worthwhile. The Boards must be conscious that charities face a number of obstacles in the pursuit of a successful merger.
In Ireland the CRA and the Revenue assesses the merger of Charities on a case by case basis. Competition law clearance is unlikely to apply, but it must be considered.
Overall, the merging of Charities in Ireland is relatively uncommon. However, Charities should be open to the possibility of merging particularly in instances where the advantages associated with merging outweigh the disadvantages. The potential stability afforded by merging is undoubtedly influential in this process and Charities should give real consideration to the prospect in order to ensure longevity and success.
© Andrew Clarke, McKeever Solicitors, 31st July 2016
Please note this article is not a substitute for legal advice and should not be taken as legal advice. If you have any queries in connection with the entry by your Charity into Collaboration with another Charity or Merger with another Charity please contact Andrew Clarke, Associate, McKeever Solicitors, IFSC, Dublin 1.
1 Gov.uk: guidance. How to merge or link charities
2 Charitable purpose means in an Irish context
a) the prevention or relief of poverty or economic hardship b) the advancement of education c) the advancement of religion d) any other purpose that is of benefit to the community. Benefit to the community includes, a) the advancement of community welfare including the relief of those in need by reasons of youth age, ill health or disability, b) the advancement of community development, including rural or urban regeneration c) the promotion of health, including the prevention or relief of sickness, disease or human suffering and d) the integration of those who are disadvantaged and the promotion of their full participation in society.
3 Source: Charities Commission England