Charity mergers – what’s our view?

It's often claimed that there are too many charities all doing the same thing – and sometimes that there are too many charities full stop. These days, anyone thinking of setting up a new charity will be encouraged by the Charity Commission's online guidance to find out first if any existing charities are already doing what it is proposed their new charity will do. If there are, the guidance suggests, working together with that charity or charities might be more effective than setting up a new charity that does the same thing.

As practitioners, we continue to advise far more frequently on charity formations than we do mergers, so the Commission's message might not be getting through. This is partly because it doesn't have the resources to focus on mergers, however much it might be in favour of them, and so the impetus for one is unlikely to come from the Commission - usually it will come from within one or more of the charities involved. However, given that there are as many arguments in favour of it as there are against, deciding whether or not to merge is not always easy.

Why might charities merge?

There are likely to be several related drivers in any given case, but perhaps the most obvious reason to merge is having charitable objectives which complement or overlap with those of another charity. Age UK, for example, was formed from the merger of Help the Aged and Age Concern in 2009. Prior to the merger, both charities were concerned with the needs and interests of older people but, while Age Concern had a campaigning focus, Help the Aged helped disadvantaged older people out of poverty, isolation and neglect. By bringing their respective activities under one roof, the charities felt that they could provide a more comprehensive offering for their target beneficiaries, doing more than either charity could have done alone and doing it better. The merger wasn't intended to be merely a cost-saving exercise.

Other charities will merge because of increasing competition for funds, which can be a particular difficulty if too many charities are fishing in the same pool for donations. Confusion between multiple charities is a problem that often arises in connection with charitable gifts in wills, which are sometimes left to a wrongly identified charity or a charity that never existed. A small charity might find it difficult to compete with a larger, better-known charity with more resources to spend on its fundraising efforts. By the same token, a smaller, less-efficient charity might be taking resources away from a larger charity that is better placed to make a difference for the target beneficiary group. And sometimes, pressure from funding bodies can give smaller charities little choice but to merge into larger ones simply to qualify for funding.

It is often argued that, by merging, charities can cut back on duplication of effort and make better use of resources as a result. In other words, if charities were to pool their resources, they could focus on those activities that have the biggest impact, which would lead to better outcomes for beneficiaries and the public. For example, Cancer Research UK was formed in 2002 by the merger of The Cancer Research Campaign and the Imperial Cancer Research Fund. Both charities had annual incomes in excess of £100million but – as standalone entities – they were struggling to buy the expensive facilities and high-tech equipment that their research work demanded. Combining enabled them to do this, which they hoped would increase the speed by which discoveries in the lab translated to patient benefits.

And what about charities that deliver public services? Many such charities rely on a small number of publicly funded contracts – Kids Company, you may recall, really only had a single source of income and was forced to close when it was cut off. By merging, charities can sometimes protect themselves from exposure to financial risk and, indeed, mid-sized public service charities may have to merge with a larger charity simply to survive – particularly given growing uncertainties around public funding and the ever-changing regulatory environment.

But underpinning all these reasons is the trustees' duty to do what will best further the charity's purposes. Whatever trustees decide to do, they must be doing it because they think it will have the greatest possible impact on the charity's beneficiaries and so, if they are considering a merger, trustees must only go ahead with it if they are satisfied that it will enable the charity to make more of a difference than it already makes.

What's involved?

Taking the Charity Commission's definition, a merger means two or more charities coming together to form one organisation and, essentially, this can happen in one of three ways. The trustees of the merging bodies can:

• set up and register a completely new organisation into which they then transfer the assets and undertakings of their respective charities;

• transfer the assets of one charity into the other - akin to an "asset purchase" in the corporate world (and, in our experience, the way that charities most often merge – usually with the smaller charity being subsumed by the larger one); or

• make one charity the sole member of the other(s), thereby establishing a parent/subsidiary relationship – akin to a "share purchase" in the corporate world, but not strictly a merger, as the charities involved continue to have their own identities, even though the parent takes on control of the subsidiaries.

In the first two cases, the transferor charities can usually be dissolved post-merger, although there are reasons why they might be kept in existence for a time.

But before proceeding with any of the options, the trustees of each charity involved should check that they have the requisite legal authority. Does their governing document permit them to transfer the charity's assets to another body, for example, and will they have power to dissolve the old charity once the merger is complete? Do the charities have sufficiently similar purposes? The purposes do not need to be identical but they should be compatible. Areas of divergence will need additional thought - particularly if one charity has objects that are broader than those of the other, as the assets of the more restricted charity may need to be ringfenced for its narrower purposes post-merger. In some cases, it is desirable or necessary to seek the Commission's consent to an alignment of the two sets of purposes before starting the process.

There does not necessarily have to be a similarity between the charities' respective structures – particularly with the parent/subsidiary option - but there may be more to think about where, for example, a charitable trust is merging with a charitable company, or where a charity with a large voting membership is merging with a charity whose trustees are its only members.

The process will also involve identifying and establishing the nature of all assets being transferred from one charity to another, both tangible and intangible. Does one of the charities have any property that is held as permanent endowment, in restricted funds or on other special trusts that might prevent it from being mixed together with the assets of another? And what about employees? If there are any, the TUPE regulations will be a factor, as the identity of the employer might change as a result of the merger.

Mergers have the potential to expose charities to a variety of risks, including additional liabilities, all of which need to be identified as part of a due diligence exercise before any binding arrangements are entered into. The level of scrutiny to be applied will depend on the size and nature of the proposal but, in large charity mergers, there can be a lot to consider and it is often sensible for trustees to seek legal and other professional input into the process.

Due diligence can involve a lot of leg work for the trustees and senior management team and the information gathered can – and sometimes does – lead to a planned merger being called off. Better that, though, than being saddled with a liability once withdrawal is no longer an option.

Bars to merger

Once the due diligence exercise has been carried out to everyone's satisfaction, the legal mechanics of a merger – the process of documenting the merger and bringing it into effect – are not necessarily complicated. But a concern that the process will be unwieldy is not usually what discourages charities from merging.

Some simply find it difficult to identify the "right" partner to merge with Charity A may have decided that a merger with Charity B will help it to improve its service delivery but Charity B may not agree or may have different aspirations. And how do the trustees of Charity A really determine whether or not Charity B would be a "good" charity partner? How do you measure a "good" charity? Its income? Its impact? Impact can be less easy to quantify. And even if Charity B passes muster, both boards will need to be convinced that, post-merger, the new organisation will be greater than the sum of its parts.

Uniqueness can also be a bar to merging. Charities that operate in a particular geographical area, for example, may see little need to merge while they are financially sound. And although merger may help charities that adopt particularly innovative methods or provide niche services to save costs, it might stifle innovation or limit the range of services provided.

As we've suggested above, trying to merge charities with different structures can sometimes be difficult. A charity with a large voting membership may have a problem persuading all of its members that merging is the right thing to do – particularly if members feel that they will be given less of a voice in the new world order. Matters may be delayed or even halted if the trustees' power to proceed is dependent on member consent.

There may also be worries that what is being billed as a "merger" is actually a "takeover", depending what is being proposed with regard to the newly merged charity – will it have a completely new name, for example, or is Charity A's name being phased out in favour of Charity B's? Will Charity A's identity disappear, along with all memory of the good work it did? Will its fundraising be affected? What if its supporter base identifies more with its brand than its activities per se? Should the charity stay as it is until it can merge in a way that doesn't involve being subsumed? Well, the answer to that last question is no – not if being taken over would actually bolster the good work Charity A carries out. As we've already mentioned, the trustees' duty is to do whatever will best further the charity's purposes, which is not the same as ensuring the charity's survival.

Sometimes, the outcome of the trustees' due diligence exercise can result in a proposed merger not proceeding. They might, for example, discover their proposed partner has a large pension scheme deficit or some other large liability with the potential to increase, rather than decrease, post-merger. And, depending on the circumstances, the very act of merging might cause a pensions deficit to crystallise, which is unlikely to be desirable.

Then, there are the personnel matters, which could affect trustees, staff and volunteers. Will the trustees all have a role in the post-merger charity? Who will be chief executive? Will anyone be made redundant? If the charity's founder still plays a role, will he or she feel sidelined? All these things will need to be discussed, and this may involve difficult conversations. The role that the chief executive plays in the merger will vary. He or she may play a vital role – if, for example, he or she instigated the merger – but the trustees must remain in control of the overall process. If the merger will result in an outcome in which there is no future role for the chief executive or another member of the senior management team, the trustees will need to drive the merger proactively and be particularly sensitive when it comes to discussions with staff and other stakeholders.

Finally, as is so often the case, there is the "human element". Whatever the make-up of the team in the newly merged charity, will everyone gel? Will there be personality or culture clashes? Will staff from the respective organisations integrate successfully? This is potentially a problem where longstanding colleagues or other key individuals have not made it through the merger process.

What are the alternatives?

Whether or not it is appropriate for charities to merge will depend on the circumstances. In many cases, there will be good reasons to merge but sometimes it will simply be a question of culture, or "fit".

Of course, mergers are not the only way that charities can work together and, increasingly, we are advising charities on methods of collaborative working that enable them to fulfil their purposes more effectively while remaining separate organisations. This can involve:

• outsourcing functions, such as finance, information systems support or payroll, to another charity that is better placed to carry them out;

• sharing resources, such as training or transport;

• co-locating and sharing accommodation and premises;

• working arrangement that increase access and participation;

• joint projects or programmes for aspects of service delivery or campaigning.

And, more and more, charities with common goals are entering into service level agreements with each other, and even formal partnerships such as joint ventures through which to operate one or more projects. A merger or partnership of some kind may or may not be right for your charity but, given the current climate, it may be worth exploring the options.