Introduction
There are a multitude of reasons why a not-for-profit company might benefit from merging, consolidating, or undergoing a similar but less formal combination. The links provided throughout this introduction will help you navigate to each relevant section of the page. To learn more about why an organization would consider one of these options, please see Why Merge or Consolidate? If you find one or more of these reasons fits the circumstances of your organization, Where Every Organization Should Begin When Considering a Merger offers some suggestions on how you might go about discerning whether internal factors would allow such a transaction to be successful.
A single group cannot decide to merge or consolidate with another. There needs to be at least two organizations willing to engage in such a transaction. If and when you conclude that some sort of combination would benefit your not-for-profit, you will need to identify another organization that shares a similar mission. Please see Finding Another Organization with which to Merge for guidance on how you might begin seeking out another entity. Once you have found an appropriate entity, you must communicate your intentions with its board and their stakeholders – Fully Engaging with Other Organization and Other Stakeholders takes you through important steps and provides some important considerations. If the chosen entity is amicable, the next step involves negotiating and planning the transaction. Plan of Merger or Consolidation discusses some of the different forms a transaction can produce and which might be most beneficial in a particular situation. Even if both boards reach agreement and wish to proceed, there are certain circumstances which will trigger a requirement for state government approval to ensure that the resources of both not-for-profits will continue to be used for the purposes for which they were organized. Approval by the Attorney General to New York State Supreme Court discusses when such approval is necessary, when it is granted, and from whom it may be obtained. Once permission is granted (if it is necessary), the plan can then begin to take effect. The Integration of the Organizations section offers some suggestions and factors to consider in order to execute the transaction in the most effective and efficient way possible.
Regrettably, not all not-for-profits are successful. For example, an organization in severe financial distress may not further its mission through combining resources with another, but instead must close its doors. Other times, it may have accomplished its mission. In any case, there are certain circumstances under which it is either necessary or is more prudent to terminate the organization. Dissolution/Disposition of Assets discusses when this option is desirable, and how it might be accomplished to ensure that the not-for-profit’s resources are distributed to best serve the mission for which it was initially formed.
Why Merge or Consolidate?
There are numerous reasons why not-for-profits will consider a merger or consolidation. One reason is that competing organizations with similar missions may separately have higher administrative expenses, a smaller donor pool, and diminished success in reaching their desired objectives. For example, there could be two not-for-profits with similar purposes competing for the same funding and to provide the same service, like multiple homeless shelters all competing for the same government grants. In that scenario, the homeless shelters will have to appeal to the same donors and apply for the same government grants, which can distract from the ultimate mission and purpose, to house the homeless. Along those same lines, some government agencies, legislators, donors, volunteers, or members may prefer one organization as advocate, grantee, or dues recipient. In order for both shelters to benefit, they would have to merge because the government will only make grants to one of the two organizations.
Another example could be a not-for-profit that wants to branch out into a new geographic location like a food pantry that has users traveling many miles to take advantage of services. While the mission of the food pantry is not necessarily accomplished, the pantry is in a position to expand its service offering and wants to do so in a new geographic location. Instead of starting with no ties in a new area, the pantry could merge with a second pantry in the other area that is not running as efficiently. This way the two pantries can benefit from the relationship with one another where the first one that is seeking to expand can provide expertise on how to properly run a food pantry and the other can provide its volunteers and commercial space. Here there would be a mutually beneficial relationship where the pantries will better achieve their purposes by reason of a merger.
A third reason could be that an after-school program’s leader and founder is stepping down. The program has been unsuccessful in finding a replacement and without one, the program will have to shut down. To avoid this, the program could merge with another after-school program that has a well-defined leadership structure that is capable of overseeing both operations. The program without a leader gets to continue operating and the program with the leader now gains all of the assets and existing services the other program had.
Fourth, not-for-profits frequently limit the geographic scope of their charitable activities. In such cases, donors who might otherwise contribute may not due to the limited geographic scope of the organization’s reach. Such an entity may merge or consolidate with a larger not-for-profit to reach that base, and also expand its own impact to a larger area than its initial community.
Fifth, some not-for-profits get their operating budgets through legislative advocacy. When multiple not-for-profits merge or consolidate and act collectively to cover a broader geographic area, the collective voice may be stronger and the resultant not-for-profit would have a greater chance of being included in the legislative budget. This is another reason that multiple not-for-profits may consider merging or consolidating.
Each of these examples appears to be a win-win situation, but as the reader will find out, sometimes it is not as simple as identifying an issue and solving it through a merger without any difficulty. Each merger is unique and the reasons for doing so extend beyond the examples listed above. This guide will provide some overarching considerations for not-for-profits to take into account regardless of the reason for the merger.
The interview with Lindsay Kijewski of SeaChange Capital Partners provides information for those not-for-profits considering a merger or consideration. She discusses both good and bad reasons to consider a merger.
SeaChange Capital Partners helps not-for-profits navigate complex challenges by offering grants, loans, consulting, referrals, and the expertise that SeaChange has gained from helping other not-for-profits.
Lindsay Kijewski at SeaChange Capital states that the reasons not-for-profits undergo these organizational changes can be broken into three categories: financial, programmatic, and organizational capacity. Financial would involve achieving economies of scale, stabilizing financial position, or potentially advancing fundraising opportunities. Programmatic motivations encompass growing or enhancing programs, expanding into new service areas, or entering a new geographic area. Organizational capacity would include succession planning, the departure of a key staff member, having to share staff members, not having enough commercial space or underutilizing commercial space, and other organizational challenges that can be unique to not-for-profits. Minute 2 of the Lindsay Kijewski interview delves into this issue more fully.
Lindsay also cautioned that not all challenges may be solved by a merger or consolidation. Although there may be cost savings and improved fundraising capacity, that is not always the case because each not-for-profit merger and consolidation is unique. A merger will not be a good idea when both organizations are in a state of financial distress and would not be able to recover from the costs associated with a merger or consolidation. It also is not advisable when there is distrust between the organizations. Minute 8 of the Lindsay Kijewski interview provides some key points to consider about the challenges that not-for-profits can face in undergoing these organizational changes. Minute 18 will also discuss when this type of organizational change is a bad idea.
The interview with Joseph Casion of Harter Secrest & Emery LLP delves into mergers in the specific context of financial distress of one of the merging not-for-profits and its options beyond a formal merger or consolidation.
Among the other experienced practitioners interviewed was Joseph Casion, Esq. Mr. Casion is an attorney at Harter, Secrest, & Emery, LLP who specializes in representing not-for-profits. According to Mr. Casion, the principal reason that not-for-profits enter into a merger or consolidation is financial distress followed by a change in leadership. With respect to the former, a struggling organization may be afforded stability by the larger or more secure organization. This has become even more common since the COVID-19 pandemic and the consequent economic downturn—this is especially so for not-for-profits who receive funding from government sources to conduct activities, such as healthcare or educational organizations. Change in leadership, such as the resignation or death of the founder can also prompt the decision to merge or consolidate, though this reason is cited more frequently in smaller outfits. Another benefit that can be derived from mergers or consolidations is the increase in efficiency that often comes from economies of scale. A major disadvantage of a merger or consolidation can be the loss of identity of the organization following the organizational change. Sometimes the name of an organization can have a valuable reputation in the community, and this value can be lost where the not-for-profit with goodwill does not survive the merger.
There are two primary areas in which organizations considering merging or consolidating will be best served by an attorney, as opposed to trying to go it alone. First, is navigating the statutory rules and procedures for obtaining approval of the plan of merger or consolidation from the Attorney General or New York State Supreme Court. It is crucial that not-for-profits comply with the strict regulations in this area, and an experienced attorney can help prevent a lot of issues from becoming a problem later. Here, retaining an attorney to be proactive can prevent complications from arising and becoming potentially more expensive than an initial consultation. The second involves dealing with opposition to a merger from third parties such as banks, creditors, funders, etc., who could potentially block the combination.
Obviously, many not-for-profits have limited resources, and may not be able to afford a lawyer for anything but bare necessities. According to Mr. Casion, there are a few things that not-for-profits can do to either receive financial assistance or keep their legal fees down in the merger process. First, not-for-profits can identify the desired type of business relationship and negotiate the important terms of the agreement. Second, from a financial standpoint, funders such as United Way often provide assistance for entities looking to combine. Additionally, lawyers can provide a checklist of required documents and tasks that not-for-profits can do on their own, rather than paying an attorney to do so. Having an idea of what the merger process will look like and what will be required of the not-for-profits can help ease the burden. This necessitates preparation by all parties and research into not-for-profit mergers and consolidations.
Joseph Casion Interview (the entire interview is available here)
The interview with Justin Reuter, CEO of the Boys and Girls Club of the Capital Area, provides insight into a successful merger between two neighboring chapters of the Boys and Girls Clubs of America.
Justin Reuter was the CEO of the Boys and Girls Club of Albany, which merged with the Boys and Girls Club of Troy. The resultant not-for-profit became known as the Boys and Girls Club of the Capital Area. Following the merger, Justin was the CEO of the new not-for-profit.
His recount of the experience is a great example of when a merger is a way to increase capacity and implement new programs. The Albany section of the not-for-profit was to receive a grant provided that it would serve dinner to the children. The Albany section had never served food, but the Troy section had. Merging the two in order to implement this program in a bigger area and receive the grant was an effective way to help both organizations reach their goals. (minutes 1:00-3:00, Justin Reuter interview)
This interview provides great insight into what a merger can look like from upper-level management of a not-for-profit. See the full interview in the following link: Justin Reuter interview.
Where Every Organization Should Begin When Considering a Merger
To start, each organization to the merger should consider its own goals, purpose, vision for the future, and the reason the charity is considering a merger in the first place independently. If the purpose of the charity has ultimately been achieved, the best course of action may not be a merger at all, and instead it may be in the charity’s best interest to dissolve. The dissolution process is beyond the scope of this guide, but it is another consideration for charities experiencing difficulties. It is discussed briefly below in the Dissolution/Disposition of Assets section. The information about goals, purpose, and vision should help guide your organization in its search for other charities to merge with. If the goals and vision do not line up, then that match may not garner the results either charity is looking for. An example could be two homeless shelters, one that seeks to help mothers with children and another that seeks to help domestic violence victims. Although both charities envision helping those who have difficulties with housing, who the charity seeks to provide services to could be a point of contention later on and the merger would not help either organization. This is why it is important to consider your own goals first and let that determine whether a merger is in your best interest and whether another constituent corporation can help your organization meet its goals.
Keeping in mind the reason your organization is considering a merger is also important. If your organization needs an influx of cash and limited access to capital is the reason for the merger, then merging with another organization which is also experiencing financial difficulty may not solve that issue. A charity may be considering a merger because its leadership is stepping down. Merging with another not-for-profit that is also without a CEO will only result in two charities that have no leadership structure. The reason for the merger will help your organization determine what it is looking for in the organization and whether it can solve the issues that led your organization to consider a merger in the first place.
With the above information it is now possible to think about what the dealbreakers will be. This can be certain programs that must survive the combination or whether the resultant organization will have to have members. What is important to each organization will vary but it is paramount to determine what your organization cannot do without.
This step occurs before reaching out to other organizations and does not involve input from another organization that may seek to merge with yours. This way your organization is able to ensure the vision is truly your own and will not be influenced by the desire to just get the deal done.
Finding Another Organization With Which To Merge
Once your organization has determined that a merger or consolidation is in its best interest, the challenge will then turn to finding another charity that would also benefit from a merger. It is important to point out that this guide only covers mergers between two New York not-for-profit corporations. While charities can merge with for-profits or not-for-profits in other states, that process and those considerations are beyond the purview of this guide.
While an organizational change may look good on paper, there are still reasons a combination will fail. Here are some important points to consider prior to agreeing to a merger or consolidation:
- Have a conversation about the mission, goals, vision for the future, and reason for the merger that were discussed in the previous step. If the visions of the constituent organizations are divergent, it is better to acknowledge that early on because that can likely be a dealbreaker. If the organizations have different ideas about what the organization will look like post-merger, there is a high likelihood there will be deadlock and internal conflict that will spell difficulty upon resuming operations as an integrated entity. It is also important to consider the way the organization envisions achieving those goals (e.g., programs and who will benefit from the services of the merged not-for-profit). One organization may have programs that it believes defines its organization and, if those cease to exist, the not-for-profit will also cease to exist (having this program continue post-merger could be one of your dealbreakers from the previous step). Discussing the vision and strategy together will allow your organization to determine if the merged or consolidated not-for-profit that will result will truly meet the strategic goals and fit into what your corporation believes should be the future of the organization post-merger.
- Identify the workplace culture of each organization to determine if a combination will be seamless or if the differing cultures will serve as an obstacle. Many not-for-profits that are merging or consolidating will have employees that will continue to be employed by the organization post-merger. Leadership may also continue to have an active role and if the likelihood for disagreements outweighs any benefits rendered by the merger, the merger will not be a success. If the cultures of the organization and the other organization will not mesh well, it is likely that constant conflict will ensue and will distract from the mission of the combined organization.
- Both organizations must spend the time to consider the practical implications of the combination together. This includes such things as redundancies in employment and how to decide which employees get to remain, the administrative difficulties, being realistic about what will truly survive combination, difficulties with IT systems and technology integration, and which senior staff members will continue in those prominent roles. As far as administrative difficulties this can include existing contracts, government contracts that are a major source of funding, whether donors who donate to both charities will continue to donate the same amounts to the merged not-for-profit, whether long-term leases can be broken without debilitating consequences, and avoiding the assumption that there will certainly be cost savings right away because there are surely going to be unforeseen challenges. These difficulties are easy to overlook but can derail a merger or consolidation.
Although it may feel like the process is dragging on, it is important to discuss everything that might be important to your organization. Not every merger will be perfect and that is why continued negotiations and discussions are needed to bring everything to the table. This process is extremely important because it can save lots of headaches down the road. Walking away from a deal now is much better than going through with a merger that is disadvantageous to your organization.
Matters that might seem irrelevant to a merger or other transaction, such as corporate culture, employee benefits … et cetera take on immense importance when the deal is consummated – Ms. Kijewski discusses this, among other considerations, such as loss of identity and costs.
Lindsay Kijewski recommends considering the costs associated with the organizational change because they can be particularly burdensome even though they are one-time costs. Minute 14 of the Lindsay Kijewski video develops these considerations more fully. There may be organizations out there that would be willing to make grants to offset the costs of the merger. It is worth exploring these opportunities to see if your merger would qualify.
Lindsay also mentioned outsized impact where one organization to the merger is much bigger than the other. When that is the case, if you are the smaller organization, you could lose your identity and be completely consumed by the larger organization. (Minute 10.) This would make it important to consider the size of your organization and the size of the organization you are merging with to avoid losing the identity of your organization post-merger. All of this should come out during negotiations. Having discussions early on about having a physical office, how involved donors will be, and how often the organization meets to go over the direction are all important considerations that are easy to overlook when negotiating a merger. (Minute 12.)
See the Venable LLP: Nonprofit Mergers and Acquisitions: Is Now the time for Your Organization? YouTube Video (Accesibile transcript of nonprofit mergers and acquisitions video here (PDF)) and Lindsay Kijewski, SeaChange Capital interview are some additional sources that discuss important considerations and the merger or consolidation process. The full interview can be found at the link provided.
Fully Engaging With Other Organizations and Other Stakeholders
The initial negotiations and brainstorming is usually done by the directors of each organization and once each organization becomes more serious about the combination it is time to do a deeper dive into what the combination will look like and get input from stakeholders.
If the organization has not already retained the services of legal counsel, it is imperative to do so now because sensitive information will be exchanged. It is recommended that each not-for-profit sign a non-disclosure agreement and letter of intent. The non-disclosure agreement is important because each organization will be conducting its own due diligence which requires sensitive information like donor lists and financials and also proprietary information about programs and other activities the organization conducts. The letter of intent is meant to hold the parties to negotiate in good faith. What you do not want is all your hard work and time to be used to benefit the other organization if it merges with a different not-for-profit. Ask your counsel about these documents and their effects. Having legal counsel for help in this process is imperative to protecting the information of the organization.
Due Diligence: Exchanging sensitive and proprietary information is necessary for each board to perform its due diligence. The goal is to ensure the contemplated transaction is in the not-for-profit’s best interest and is a cardinal requirement for any director to fulfill their fiduciary duties.
The next step will be to perform your due diligence with all of the information received from the other organization. Due diligence just means combing through all of the information provided by the other organization for potential red flags. What is troublesome can vary so it is important to consider everything and take your time with this process. The help of counsel and other experienced practitioners on topics like financials is highly recommended. Some of the information that will be exchanged and should be discussed can include:
- Financial information (determine the financial condition of the organization and see if there are restricted funds that must be used for a particular purpose)
- Committee and board minutes (look through these carefully because that is where big problems with the organization are discussed)
- Organizational charts (leadership structure)
- Employee compensation structures
- Current lawsuits and liabilities (particularly important to thoroughly research because these liabilities will burden the merged organization—a merger does not erase a constituent’s liabilities)
- Discuss expectations about timeline and each organization’s tolerance for a long process
For example, a possible strategy would be to appoint an integration committee comprised of members from each constituent corporation’s board. These members would research and discuss different areas like finances, bylaws and programs, and report back to their respective boards. This can allow for problems to be solved before the final merger agreement and allow the boards to make informed decisions about the merger.
Return to Negotiation: It is time to return to the negotiation table to iron out details to facilitate the most beneficial agreement possible with the knowledge obtained through due diligence.
After performing due diligence, it is time to resume negotiations with the other organization. It is advisable to create a term sheet to have a written record of what your organization sees as the deal. Having and sharing this term sheet can help to cut down on miscommunication and ensure each party knows where the other is at. Miscommunications now can spell big problems later. Talk to the other organization about what you found when going over the previously outlined information exchanged during the due diligence process.
Your organization should also be prepared to provide context and additional details about what the other organization found while performing its own due diligence on your organization. Building trust is important, so being upfront about what the other organization finds is likely a good idea.
Obtaining Stakeholder Input: Stakeholders are key to a not-for-profit organization – keeping them apprised of the situation is important, especially in membership corporations.
Going to stakeholders is a sensitive topic because some of these stakeholders will be employees who may lose their jobs. Members may also have reservations about a merger or consolidation. Whether the organization prefers an open line of communication or would prefer to go public only when the combination is closer to coming into fruition is a matter of personal preference. The only statutory requirement is that if the not-for-profit is a membership organization, the members will have to approve the plan of merger.
Taking Advantage of Positive Press: Interview with Justin Reuter, CEO of Boys and Girls Club of the Capital Area, who was involved in the successful merger of formerly separate Boys and Girls Clubs in the Capital Region. He offers his perspective on how he engaged stakeholders, and when and how he decided to go public.
Justin speaks to all of the advantages positive press and engaging with stakeholders can provide. The Boys and Girls Clubs were in a good position because they were not laying any workers off, instead there was going to be greater upward mobility for existing employees. Justin was also able to take the merger and get investors excited about being able to donate to one not-for-profit that serves a large portion of the Capital Region. The other important stakeholders were the beneficiaries. The organizations needed to explain to parents that the programs that they came to rely upon were still going to exist. (Minutes 16:30-19:00, Justin Reuter interview.)
The negotiation was long and the collective boards created an integration committee to figure out the logistics of the merger and present to the full board. (Minutes 2:00-3:00, Justin Reuter interview.) This is another option for not-for-profits that want to communicate with one another and have a certain group of people take the lead on communicating with the other organization.
The merger undergone by the Boys and Girls Club is a great example of how involving stakeholders in the discussion can be beneficial. The determination of who to speak to and who to include in the conversations is tricky and that decision should be made with great care because not everyone will understand or be excited about the merger.
Plan of Merger or Consolidation
As you move from Shared services to Joint Venture to Formal merger/consolidation to Dissolution/asset distribution, the less control you have over your own "destiny."
- Shared services (Most control)
- Joint venture
- Formal merger/consolidation
- Dissolution/asset distribution (Least control)
The plan of merger or consolidation is adopted by each constituent corporation separately. This means it is approved by the board of directors and members of a membership organization. However, it is worth noting that a formal merger or consolidation may not necessarily be the best course of action in every situation. Other less formal arrangements exist—an organization is not limited to formalities of a merger or consolidation as laid out in Article 9 of the N-PCL. Mr. Casion of Harter Secrest & Emery proposes a spectrum—on the far left is the beginning of shared services, possibly in the form of a joint venture. Joint ventures may be desirable because they do not require organizations to comply with the formal process set out by not-for-profit merger statutes or to gain approval from the Attorney General or New York State Supreme Court. A little further to the right on the spectrum, one would find a partnership agreement. In some instances, these arrangements can address the same core issues that would cause a not-for-profit to consider merging or consolidating, but, like joint ventures, they do not require approval from a court or attorney general—they are entirely private agreements. These private agreements are often good places to start because they provide the organizations with the opportunity to see how they work together before going through the more complex process of a formal transaction requiring state involvement. The next step along the spectrum is a formal merger or consolidation, as laid out in this guide. Finally, on the far right of the spectrum is dissolution and asset disposition. The further right a not-for-profit finds itself on this spectrum, the more it cedes control of its destiny. An experienced not-for-profit lawyer can help organizations considering any of these transactions select the best option and navigate the process, along with any other contingencies that may arise. The full interview with Joseph Casion is available at the following link: Joseph Casion Interview.
In the case where a formal merger or consolidation is appropriate, important considerations are as follows:
Every plan of merger must contain certain key provisions.
The plan of merger should set forth the following:
- The name of each constituent corporation and the name of the surviving corporation. If any constituent corporation was formed under a different name, the name under which it was formed.
- For each constituent corporation, a description of the membership and holders of any certificates evidencing capital contributions or subventions, including their number, classification and voting rights, if any. If there are none, a statement to that effect.
- The terms and conditions of the proposed merger, including the manner and basis of converting membership or other interest in each constituent corporation into membership or other interest in the surviving corporation, or the cash or other consideration to be paid in exchange for membership or other interest in each constituent corporation.
- In the case of a merger, a statement of any amendments or changes that the merger will effect in the certificate of incorporation of the surviving corporation.
- In the case of a consolidation, all statements required to be included in a certificate of incorporation for a corporation formed under the N-PCL, except statements of facts not available at the time the plan of consolidation is adopted.
Mergers must be approved by both boards of directors, and if applicable, members must be given the opportunity to vote.
The plan of merger must be approved by the board of each constituent corporation. If a constituent corporation has members with voting rights, the plan of merger must also be approved by the members.
For any constituent corporation that has members, notice of a meeting at which a vote on the merger shall take place must be given to each member, whether or not entitled to vote, with a copy of the plan of merger or an outline of the plan. The plan of merger must be approved by a two-thirds vote of the members at a meeting where a quorum is present, provided that the “yes” votes are at least equal to the quorum.
If any constituent corporation has no members entitled to vote, a plan of merger is approved when it is adopted by the board of such corporation.
Keep in mind that in the case of a merger, only one corporation will continue to exist. If the surviving corporation needs to undergo changes, that will have to take place via an amendment to the bylaws or the articles of incorporation. The amendment to the articles of incorporation will require a filing of the amended articles with the Department of State.
In the case of a consolidation, neither of the constituent corporations will continue and a new not-for-profit will be formed instead. This requires all of the same filings that were necessary when each constituent corporation was formed initially. The articles of incorporation will have to be completely drafted and filed.
Approval by the Attorney General or New York State Supreme Court
If the surviving or consolidated corporation is going to continue to operate as charitable under Article 9 of the N-PCL, there is a statutory requirement that the merger or consolidation be approved by the Charities Bureau of the New York Attorney General or by a New York State Supreme Court. If the organization wishes to get court approval, the application for approval must still be submitted to the Attorney General. This is because the Attorney General is a statutory party to any proceeding seeking court approval of a merger or consolidation.
Whether the petition seeks approval of a merger from the Court on notice to the Attorney General, or from the Attorney General alone, the Charities Bureau in New York City or Albany or the appropriate regional office of the Attorney General reviews the papers to make sure that statutory requirements are met, all necessary documents are included as exhibits to the application, and that any questions raised by the Attorney General's office have been answered. The Charities Bureau Guide linked below lists which counties are served by which Charities Bureau Office or Regional Office.
Where court approval is sought, the procedure preferred by the Charities Bureau and most courts is for the petitioner to submit the draft petition and exhibits, including the proposed plan of merger and proposed certificate of merger, to the Charities Bureau or the appropriate regional office for review in advance of filing with the Court. This enables the Attorney General to review the papers to ensure that all statutory requirements are met, all necessary documents are included as exhibits, and any questions of the Attorney General are answered before the application is submitted to the Court. Substantively, the Attorney General’s review assists the Court to determine whether all statutory requirements have been met and whether the interests of the constituent corporations and the public interest will not be adversely affected by the merger.
If a not-for-profit conducts activities that require licensing, additional approvals may be required from those licensing bodies. This differs so assistance from legal counsel is highly encouraged in navigating the required approvals.
The Attorney General requires the following specific documents to grant approval.
The documentation that should be submitted includes:
- Proposed plan of merger;
- Proposed certificate of merger;
- Draft verified petition;
- Proposed court order approving merger;
- Certificates of incorporation, bylaws, and other governing documents for each constituent corporation and the surviving corporation;
- Minutes of board of directors, committee and membership meetings, with secretary’s certificates, relating to the merger;
- A list of names and addresses of directors of each constituent corporation, any anticipated changes in membership or directors, any pre-merger changes to governance;
- Any letter of intent or other agreement in connection with the merger;
- IRS Form 990 and audited financial statements for the past three years for each constituent corporation;
- IRS Form 1023 and tax exemption determination letters for all constituent corporations and the surviving corporation;
- Names, certificates of incorporation, and other governing instruments of any subsidiaries, affiliates, and supporting organizations, including a statement of whether they are holding restricted funds;
- A list of endowments or other restricted funds of each constituent corporation;
- A list of all government agencies whose consent is required and copies of consent; and
- All Hart-Scott-Rodino filings made with federal antitrust authorities.
The Proposed Certificate of Merger requires specific items as well.
The proposed certificate of merger has its own requirements and should include:
- Name of each corporation and, if changed, the name at formation. Also included should be the name of the surviving corporation, or name or method for determining the name of the consolidated corporation;
- Description of the membership and certificate holders of capital contributions or subventions;
- In a merger, a statement of any amendments to the certificate of incorporation of the surviving corporation or for a consolidation, all necessary statements for a new certificate of incorporation;
- Effective date of the consolidation or merger if different from filing date;
- In the case of a consolidation, any other statements required in a certificate of incorporation for a corporation formed under the Not-for-Profit Corporation Law but not covered above;
- Date when each corporation’s certificate of incorporation was filed by the Department of State or, if a special law creation, the chapter number and year of passage of such law; and
- Manner for authorizing a consolidation or merger within each constituent corporation.
There are certain circumstances which will trigger Attorney General denial of a merger, and others where it will refer it to the Courts to decide.
The Attorney General may not always approve the merger or consolidation. In such cases, it will instead refer the merger or consolidation plan to the appropriate New York State Supreme Court for consideration. The Attorney General lists some reasons why it would determine that judicial review would be more appropriate than that of the Attorney General. Some reasons, among others, would be:
- There is opposition to or complaints about the merger by members of a constituent corporation or members of the public;
- The Attorney General does not object to the merger but, in her discretion, determines that court review is appropriate because, for example, the merger will have a significant impact on the public or, the merger raises conflicts of interests;
- The Attorney General does not object to the merger, but, in her discretion, determines that court approval is necessary because assets of a merging corporation are held for a specific purpose requiring court approval pursuant to N-PCL § 907-a(c);
- The Attorney General has objections to the merger which have not been resolved after discussion and, if the petitioner wishes to proceed, court review is necessary; and
- If one of the constituent corporations is insolvent, unless the creditors put in writing they will take less than 100 cents on the dollar. See N-PCL § 907-a(b) for further information about insolvency and giving notice to creditors.
Among the factors that the Attorney General will consider in determining whether the interests of the constituent corporations or the public interest will be adversely affected are the following:
- Whether the existing New York corporation is in compliance with New York statutes and regulations;
- Whether the existing foreign corporation is in compliance with applicable New York statutes and regulations;
- Whether there is a pending federal or state inquiry or investigation into the conduct of either corporation, or of its officers, directors, donors, members or key persons;
- Whether there is any order, judgment, settlement, or agreement that requires the foreign corporation to engage in, or prohibits it from conducting, activity affecting the surviving corporation’s ability to fulfill its purposes;
- Whether either corporation has made a false or incomplete filing with the Office of Attorney General or any other state or federal agency;
- Whether either corporation is insolvent or unable to pay its current obligations;
- Whether either corporation has filed for bankruptcy;
- Whether the New York corporation has significant charitable assets currently subject to the oversight of the Attorney General pursuant to the Estates, Powers, and Trusts Law, or any other statute;
- Whether the New York Corporation has significant institutional funds or restricted assets subject to the New York Prudent Management of Institutional Funds Act (N-PCL Article 5-A);
- Whether the charitable purposes of the New York Corporation, as articulated in its certificate of incorporation, by-laws, or Forms IRS 990 are substantially connected to New York State, a region in New York State, or a local community in New York State;
- Whether the certificate of incorporation of the New York Corporation is subject to the Approvals, Notices, and/or Consents set forth in N-PCL Section 404;
- Whether the foreign corporation is incorporated in a jurisdiction which is unlikely to permit application by the New York Attorney General of the provisions of Article 13 of the N-PCL to the surviving corporation;
- Whether the foreign corporation is incorporated in a jurisdiction lacking an effective not-for-profit corporation law or regulatory scheme, including lacking the standards for governance set forth in Article 7 of the N-PCL, the standards for disclosure and reporting set forth in the Executive Law, or provisions allowing for dissolution by the Attorney General similar to the provisions of Article 11 of the N-PCL; and
- Whether there is an objection to the merger by creditors, members, directors, or beneficiaries.
Approval Process Through the Eyes of the Approver: An interview with Nathan Courtney, an assistant attorney general, describes in greater depth the process and reasoning behind approval or denial of a plan of merger.
Nathan Courtney of the Charities Bureau advises that these transactions are generally approved. (Minute 2 of the Nathan Courtney interview.) The main reason a merger or consolidation will not be approved right away is because there will be documentation missing. (Minute 3 of the Nathan Courtney interview.) If a transaction is not approved right away, the Charities Bureau will provide an opportunity to cure the defect and resubmit for approval. (Minute 4 of the Nathan Courtney interview.) Mr. Courtney echoed the reasons listed above as to when it would be advisable to seek New York Supreme Court approval as opposed to Attorney General approval. (Minutes 6-7 of the Nathan Courtney interview.)
Once all of the necessary approvals are given, the certificate of merger is filed with the Department of State. If the certificate has been approved by the Attorney General, the Attorney General's written approval must be attached to the certificate. If the Supreme Court has approved the certificate, a certified copy of the court's order must be attached to the certificate. Included in the Attorney General’s guide to mergers and consolidations are some sample filings and other helpful material when going through the Attorney General approval process. Nathan Courtney, Assistant Attorney General—Charities Bureau interview. The full interview can be found at the preceding link. Guide to Mergers and Consolidations of Not-for-Profit Corporations (PDF). This is a link to the source mentioned in the Nathan Courtney interview. It is the guide prepared by the Charities Bureau that provides helpful information about mergers and consolidations generally and the approval process. Be sure to consult this document before any filings with the Charities Bureau.
Third-party imposed restrictions on funds, and use of assets for a purpose different than that for which the organization is operated always requires court approval.
From time to time, a not-for-profit corporation’s stated purpose may become impracticable, wasteful, or inefficient to carry out and/or may have restricted funds. A merger or consolidation provides an opportunity to revise and update said purpose(s). However, unlike the plan of merger, which can be approved by the Attorney General or New York State Supreme Court, when a charitable purpose becomes impossible/impracticable, the court alone must approve change of purpose. See EPTL § 8-1.1(c)(1) for additional information on restricted funds.
In cases, however, where the restricted gift is less than $100,000, donated more than twenty years before, and the new purpose is consistent with that of the donor’s initial gift, the not-for-profit may be able to release the funds ninety days after notice has been given to the Attorney General’s office and the donor, if available, without court approval. See NPCL § 555 for additional information.
Integration of the Organizations
This step involves putting the plan into action. Now it is time to integrate the organizations and work toward achieving the goals of the surviving corporation or the consolidated corporation. In some respects, this is one of the most important parts because this is when the work toward achieving the surviving or consolidated organization begins.
Tough conversations will have to be had because there may be employee lay-offs, donors may not understand what this new organization is and who they are donating to, and senior management of each of the constituent organizations may need to take on a lesser role.
Minimizing the Burden of Post-Merger Integration: Interview with Justin Reuter, CEO of Boys and Girls Club of the Capital Area. He discusses different methods of integrating the two corporations and offers suggestions on how to accomplish the combination as painlessly as possible.
It is important to consider the cultures that are merging and give that time to work itself. At the Boys and Girls Club of the Capital Area there was a laid back culture at one organization and another that was much more process oriented. (Minutes 4:30-6:00, interview with Justin Reuter interview.)
How these cultures will mesh to form the new organization is an important consideration for the ongoing success of the merged not-for-profit.
There are also practical considerations that can be planned to minimize the burden. There will need to be new email addresses, business cards, and other items bearing the name of the new organization. It can benefit the organization to have dummy systems planned out for when the final approval is granted by the Attorney General or State Supreme Court so that everything can be put into action as soon as possible. (Minute 12, Justin Reuter interview.)
Dissolution/Disposition of Assets
Unfortunately, dissolution is occasionally the only option for a challenged not-for-profit, such as when there are no nearby organizations with sufficiently similar missions, no such organization is willing to merge or consolidate, or one of the constituent corporations is insolvent. It is important then, that a good dissolution plan is in place. Stated simply, the best dissolution plan is one with a multitude of options. Some articles of organization, for example, identify only one successor. Not only can this complicate a merger or consolidation, but it may also lead to a forced dissolution when it is not otherwise necessary. While the articles require an identified successor, it is not necessary or desirable to be specific. It is perfectly acceptable to simply state something like “as the court or attorney general may determine...” Another common clause to avoid is the promise to subordinate to certificate. A good dissolution plan is flexible—such a plan will not delay a merger, and even if it becomes necessary to distribute assets to best fulfill the organization's mission, whether that be among multiple organizations, back to donors, a single organization, or any combination thereof. The entire interview is available here to discuss the issue of dissolution further: Joseph Casion Interview. The Charities Bureau also provides guidance on not-for-profit voluntary dissolutions. There are two guides, one for voluntary dissolutions with assets (PDF) and one for voluntary dissolutions when the not-for-profit does not have assets (PDF). Both guides distributed by the Charities Bureau are linked in the preceding sentence.