Mergers of Nonprofit Organizations in the Wake of COVID-19
The Crisis for Nonprofit Organizations
The COVID-19 crisis has crippled many organizations. As the coronavirus pandemic moves across communities, more and more nonprofit organizations are considering mergers as options to overcome challenges caused by COVID-19 and the economic downturn. While some federal relief has provided support to some nonprofit organizations, for many organizations it has not been enough.
Faced with the prospect of shutting or drastically reducing operations, nonprofits — particularly those that provide overlapping or complimentary services — may consider combining as a means to survive this turbulent moment.
Some Factors to Consider Before Merging with Another Nonprofit
There are several factors a nonprofit organization should consider prior to merging with another charitable organization. A nonprofit organization contemplating a merger should first review its Articles of Incorporation and Bylaws to determine any restrictions and who must approve the merger. The organization will want to consider if it has a cultural, mission, and operational fit that will engender success by the surviving organization. Part of the planning stage involves performing due diligence on the other party. Due diligence involves a review of the legal status and risk and financial situation of the potential merger partner.
Board Considerations for Mergers
The governing board will review the due diligence information, including the financial situation of the organizations, and merger agreement when considering final approval of the merger. If the organization has members, the board will then recommend the merger for approval by the membership.
Requirement to Notify the Attorney General’s Office of Nonprofit Merger
The Attorney General must receive 20-days’ prior notice before a nonprofit corporation consummates its merger with another corporation. For instance, a merger between two public benefit corporations requires this advance notice. These notice requirements apply to California public benefit corporations, mutual benefit corporations (if holding charitable assets), and religious corporations. Depending on the nature of the charitable assets, the Attorney General may request an independent appraisal or other evidence that the merger’s sale price and terms are fair to the corporation. When a public benefit corporation merges or converts into a business or mutual benefit corporation, the Attorney General requires that it first distribute all of its assets to another charity with the same or similar purposes.
Secretary of State Filings for Nonprofit Mergers
After securing the necessary approvals, to effect a merger involving a nonprofit corporation, generally there must be filed with the California Secretary of State a copy of the Agreement of Merger and officers' certificates for the surviving corporation and for each disappearing corporation.
Need More Information on Nonprofit Mergers? We can help!
If your organization is considering a merger and requires assistance, please contact nonprofit lawyer Jonathan Grissom. Mr. Grissom regularly assists nonprofit organizations with mergers and dissolutions. As a nonprofit attorney, he also also regularly assists charitable organizations with compliance and tax-exempt organizational and operational issues, including reinstatement of tax-exempt status. If you need assistance, please contact Jonathan Grissom today.