Uniting for impact: what trustees need to know

We regularly advise trustees of charities looking to reorganise and modernise their structures and also those exploring both joint working opportunities with other charities and also formal charity mergers.

Why would a charity reorganise their structure?

There are a range of practical and strategic reasons for charities considering these types of transactions:

Financial considerations

Sadly some charities may be under pressure or heading to insolvency with insufficient donor income and/or falling investment income all the while facing an exponential rise in beneficiary needs and demands. In those circumstances trustees may want to seek a safer harbour and join up with a more stable charitable partner with similar objects which results in a widened supporter base.

Efficiencies

Often there is a natural and organic desire amongst trustees to unlock efficiencies, spread administration and operational costs and risks and to generally reduce duplication of effort, especially where a merger involves several medium sized charities operating in the same field.

Donor pressure

Funders may also prefer dealing with larger organisations with greater scale to achieve their objectives or prefer to support more diverse or complex projects that a larger charity has greater experience or capacity to run.

Modernisation

Reorganisations and mergers can also result from a desire to modernise antiquated unincorporated charitable trusts with restrictive administrative provisions and seek a more familiar incorporated form of constitutional structure which also benefits from limited liability.

Reality

It may ultimately be that a charity is no longer fit for purpose or is not effective in achieving its objectives which results in a desire to exit the charitable sector entirely, passing the assets (and liabilities) of one charity to another with similar or wider objects which has a greater capacity to achieve the desired public benefit in advancing those objects.

Trustees must ultimately be satisfied that a merger is in the best interests of their charity and their current and future beneficiaries. This reasoning needs to be clear through the process and be properly documented in minutes and the related transfer documentation. There will be benefits on offer from merging and reorganising, but trustees must nevertheless be clear-eyed and consider the risks of taking such as step. We can help make sure that whatever you do, you consider all of your options and address all the relevant risks when deciding whether to merge or restructure your charity.

What is being transferred?

Effective due diligence is essential to ensure that charity trustees identify and understand a charity’s assets and liabilities and address any substantive risks that might impact on the merger or reorganisation. Key areas that need to be focused, and that we can support you analysing and managing, include:

• Financial liabilities, such as tax (HMRC, VAT), employee contracts, wages and liabilities, pensions, and any other debts and possible liabilities.
• Commercial contracts and funding agreements and any arrangements that might require third‑party consents.
• Regulatory, IP and Data management requirements.
• Property and asset ownership transfers, which include dealing with any special asset restrictions, permanent endowment or applicable special trusts that are relevant to your charity.
• Reputational or compliance risks.

Types of merger

The precise mechanics for a reorganisation or merger will depend heavily on the legal structure of the organisations involved. Whatever the structure, your charity must have the power and legal authority to transfer its assets to another:

• At one end of the spectrum, trustees of a simple grant making charity could simply be applying their whole trust fund as a large grant or donation to another charity once all liabilities have been identified and cleared. However, most charity’s affairs are more complicated than that. Therefore, the receiving charity may well need to accept all the assets and the liabilities of the closing charity as part of the transfer. Sometimes a new freestanding charity is created to accept the transfer of these assets and liabilities, which is useful where there are multiple charities that are deciding to wind up their operations. Other transactions might merit a different approach, with a charity taking legal control and trusteeship of one or more other charity, creating a group structure.  The precise mechanism needs to be measured and tailored to your charity’s specific circumstances and that of your merger partner.
• Charitable trusts may have express dissolution and merger clauses but older trusts might lack these, or hold permanent endowment that cannot be freely transferred and will pose further challenges that need to be considered and addressed.  Incorporated charities (whether Companies or Charitable Incorporated Organisations) will more likely contain express powers to merge or dissolve, but care needs to be taken to review and comply with those processes. Whatever route you choose, you must act within your powers to comply with your duties and obligations as charity trustees.
• Charity Commission involvement and consent may be required if a charity lacks the required powers or if the transaction involves potential conflicts of interest and loyalty that cannot be managed, connected parties, any degree of private benefit (often relevant via the transfer deed indemnities) or if there are more complicated forms of asset (designated land or types of permanent endowment) involved in the transaction. The Charity Commission will also need to be informed when the exercise has been completed, whether the changes to your charity are simply amending the constitution to facilitate the merger, or if your charity is the one being removed from the Register of Charities and closing accounts prepared and filed.
• Compatible charitable objects are crucial between merger partners: if not aligned, constitutional changes will need to be looked at, potentially requiring the involvement and consent of the Charity Commission.
• More unusual constitutional structures (such as Royal Charter charities) may also necessitate detailed engagement with the relevant regulators (Charity Commission and Privy Council) to achieve their agreement and to implement the proposed changes. Other regulators may need to be involved in the process depending on your charity’s structure and activities.
• Underwriting all of this is effective stakeholder engagement (with donors, supporters, volunteers and members) so that they are all aligned with the proposed transaction.

Whatever type of merger is adopted, retiring trustees will want to know that they have complied with all of their obligations and will therefore be freed from ongoing liability once the merger has been completed. This can only be achieved by trustees engaging fully and actively with the above process.

How we can help

If you would like to have an initial no-obligation discussion about your specific circumstances please do contact Harriet Page or Dominic Ribet in our charities team who will be happy to assist with your enquiry and confirm how we can best help your charity. We are also happy to work collaboratively with other professionals (trust accounts or other governance advisors) who may be involved with your charity to provide more discrete support with specific aspects of the administration of your charity where this is needed.