Merging two 'not-for-profit' enterprises

Mergers or amalgamations of two or more 'not-for-profit' enterprises can be stressful and can quickly involve a complex set of transactions. This article dicusses highlights some of the differences between the process of amalgamating two entities, and common pitfalls to avoid.

Looking for legal advice on merging two 'not-for-profit' enterprises? Let us guide you with our expert advice. Mergers or amalgamations of two or more 'not-for-profit' enterprises can be stressful and can quickly involve a complex set of transactions. It is always advised that should you be in this position, you immediately consult a legal practitioner for advice about how to proceed.

This article will discuss some basics about mergers of 'not-for -profits', some differences between the process of amalgamating two entities, and some potential pitfalls which can be avoided.

How does merging two 'not-for-profits' operate?

Unlike when two or more 'for profit' entities formally 'amalgamate', whereby the State Regulator takes control of the process, a merger of two 'not-for-profit' enterprises is far more customisable. This can be of great benefit to both entities. A merger is usually based on contractual arrangements between the two enterprises whereby the documentation will outline the new structure of the enterprise and any transfer of assets. Subject to agreement, one of two things can then generally occur. Either both former entities will merge into one completely new entity, after which both of the former entities are wound up. Alternatively, one entity could merge into the other existing entity, after which the former entity can be wound up.

These issues can quickly become complex and quite technical. Therefore, you should always obtain legal advice before entering into such arrangements in order to protect your interests.

Why do 'not-for-profits' enter into mergers?

Mergers occur on a regular basis across Australia. It is no different when a merger involves two 'not-for-profit' entities. The reasons vary greatly as to why a merger should occur. A primary reason is that both entities believe that their mission statements align with each other. Therefore, by combining all their available resources, they may be better able to fulfil that statement in a more effective, efficient manner. This could enable faster growth in their relevant sector.

What steps should 'not-for-profits' take before entering into any merger?

Apart from seeking independent legal advice, there are a number of steps you can take prior to beginning talks surrounding any possible merger. This is called undertaking due diligence.

Due diligence is a process which promotes disclosure between the entities, including their current financial resources, human resources, any outstanding liabilities and any other potential issue that may be unique to one particular entity. By investigating any potential issues before entering into any negotiations, it may save you considerable time and money into the future.

Also, any party seeking to potentially enter into a merger should also be fully aware of any existing legal structure of the other entity. This may vary depending on whether the other party is another 'not-for-profit' or a registered charity under the Australian Charities and Not-for-Profit Commission (ACNC). This is another issue that you must discuss with your legal practitioner before commencing negotiations.

What are the potential disadvantages of a merger?

From an entity perspective, the main disadvantage is that employees may in fact lose their jobs if their position is either no longer available or another individual from the other merging entity is given their position. Despite this potentially occurring more with 'for profit' enterprises, it is still a potential downside in any merger. Hence, if you are going to merge 'not-for-profits', you must be aware of this risk of having disgruntled employees. However, if this results in a larger share of the market where you can have greater social impact, then it may still be worth merging.

If your 'not-for-profit' entity is contemplating merging with another entity, Sharrock Pitman Legal can diligently assist you in ensuring that your interests and positions are advanced. Call Sharrock Pitman Legal today on 1300 205 506 or complete the form below.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

Liability limited by a scheme approved under Professional Standards Legislation.

For further information contact  
Mitchell Zadow

Mitchell is the Managing Principal of our law practice.

He is an Accredited Specialist in Commercial Law (accredited by the Law Institute of Victoria). He also deals with areas of Employment Law, Wills & Estate Planning and Probate. For further information, contact Mitchell on his direct line (03) 8561 3318.

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