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Is your not-for-profit (NFP) contemplating a merger? This is part four of a five-part article series that will offer some practical guidance to your board or merger advisory committee. Subscribe to receive the remaining articles in the series.

Due diligence is the process of obtaining and reviewing information in order to critically evaluate a potential merger partner. The primary purpose of due diligence is to assist the board to identify potential risks and issues that could impact a merger, ensuring that the board can make an informed decision regarding whether or not to proceed with the merger. Due diligence also assists to inform the choice of merger type (discussed in article 2) and identify issues that may need to be prioritised and addressed as soon as practicable following any merger.

The due diligence process should include:

  • defining the scope and objectives of the due diligence process (this is dependent on the size and complexity of each organisation and the proposed merger type).
  • preparing a comprehensive due diligence checklist outlining the documentation and information that is required from the prospective merger partner.
  • establishing a data room for the due diligence materials that can be accessed by the due diligence team.
  • agreeing on a project plan with agreed timeframes for the process to help the parties stay on track.
  • coordinating efforts among the board, executive team, legal advisors (particularly those with expertise in dealing with NFPs), accountants, and other consultants to efficiently review the documents and information disclosed.
  • assessing potential risks, including legal, operational, strategic, and reputational risks, to evaluate the feasibility and benefits of the merger. These risks should be assessed in the light of each organisation’s risk appetite and the identified objectives for the merger.

The culmination of the due diligence process is a report that is provided to the board in order to inform and support its decision regarding whether or not to proceed with a merger agreement.

Some of the key considerations that should be taken into account in the due diligence review include:

Financial viability

A detailed analysis of the financial health of the prospective partner should be carried out to determine its ongoing financial viability. A review of donor and grant history as well as projected grant income will help inform the analysis. This work is often carried out as a discrete component of the due diligence process by a financial advisor who is experienced in working with not-for-profit organisations.

Assets and liabilities

A complete list of assets (tangible assets and intangible assets – intellectual property and goodwill) and liabilities (security interests registered on the Personal Property Securities Register and mortgages recorded on any certificates of title) should be reviewed, including conducting appropriate searches.

Historical liabilities

These are the liabilities that will be transferred from the one entity to another (usually the acquiring NFP or the new merged NFP). Historical liabilities can create significant risks for NFPs in a merger. This is because child abuse liabilities in particular: do not have a limitation period; may be uninsured; and depending on the merger type and jurisdiction, may transfer between entities in a merger. It is important to assess the risk of historical liabilities – this will include reviewing the claims history of the organisation and enquiring about known historical issues. Part five of our article series will address historical liabilities in more detail.

Employees

If a merger will result in one or more NFPs closing, it will be necessary to provide for the transition of employees to the acquiring NFP (and for the redundancy of any employees who will not be retained). Ideally terms of employment will be substantially the same as or better than the employee’s current terms of employment. A substantial difference in the employee benefits between the two merging organisations may result in unanticipated costs if parity requires an increase for a number of employees. The acquiring NFP will also need to confirm the current status of leave entitlements, fringe benefits tax exempt benefits (relevant for Public Benevolent Institutions and Health Promotion Charities) and superannuation guarantee contributions. Other employment risks that should be considered in the due diligence process. These include (without limitation) the possibility of a wage underpayment (liability for which may be able to be traced to any parent entity) and any unresolved workplace disputes.

Contracts

A comprehensive contracts register that tracks key information (including the name of the contract, whole-of-life costs, the supplier, the contract manager, the commencement and termination date and performance and payment milestones) should be prepared. A review of all contracts should be carried out to identify material risks and ascertain whether the contract can be novated or assigned (if appropriate).

Insurance

Insurance documents will need to be reviewed to confirm that the prospective merger partner is appropriately insured.

Privacy

The prospective merger partner’s privacy policy should be reviewed to confirm it allows for any disclosure of personal information, health information or sensitive information that is anticipated as part of the merger process. Any risk of significant non-compliance with privacy obligations should be also identified and assessed.

Technology and systems

The anticipated efficiencies of a merger may be significantly impacted by an inability to integrate systems and data. An expert IT consultant can assist to review technology systems and data sets to determine how different technology systems might interact post-merger and give a considered assessment of the potential cost and complexity of systems integration.

Reviewing the due diligence report

Once the due diligence report has been prepared and submitted to the board, the acquiring NFP will need to determine whether or not to proceed with a merger agreement. This involves returning to any non-negotiables and merger principles established up front (discussed in article 3) as well as assessing identified risks in the context of the organisation’s risk appetite. It may also involve a review of cultural alignment – have any cultural red flags been identified in terms of the merger partner’s transparency and conduct during the due diligence process? Depending on the nature of the risks identified, it may be possible to choose a merger type and/or include conditions in the merger agreement that will assist to mitigate the risks.

How can we help

Depending on the complexity of the merger, the due diligence process can be daunting and time-consuming. The Charity and Not-for-profit Law team at Moores can help with developing a fit-for-purpose due diligence strategy or assisting with the due diligence process.

Contact us

Please contact us for more detailed and tailored help.

Subscribe to our email updates and receive our articles directly in your inbox.

Disclaimer: This article provides general information only and is not intended to constitute legal advice. You should seek legal advice regarding the application of the law to you or your organisation.

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Is your not-for-profit (NFP) contemplating a merger? This is part two of a five-part article series that will offer some practical guidance to your board or merger advisory committee. Subscribe to receive the remaining articles in the series.

There are a range of available NFP merger types depending on the legal structure of the organisations that propose to merge. Determining which of these available merger types is most appropriate requires an assessment of what is important to your NFP, including control, structural simplicity and containment of risk. Identifying the preferred merger type early on will:

  • inform the drafting of the pre-merger agreement;
  • help determine the focus and scope of the due diligence process;
  • enable the parties to determine what stakeholder decisions will be required to enable the merger to proceed;
  • inform each board’s risk assessment (as part of the decision regarding whether or not to proceed with the merger); and
  • if the parties decide to proceed, inform the drafting of the merger agreement.

The five most common merger types are summarised below, together with their pros and cons. Note that, depending on the structure of the merging organisations, some merger types may not be possible.

1. Transfer from NFP B to NFP A

Under this model, NFP B transfers its assets and operations to NFP A. NFP B ceases to exist. This option may be appropriate if NFP A has multiple assets and complex operations and is considering merging with NFP B which has less assets and simple operations.

Pros

  • One surviving NFP which provides for less administrative burden.
  • Unknown liabilities of NFP B may be quarantined in NFP B on closure.
  • Appropriate for all kinds of legal structures provided purposes are aligned.

Cons

  • It may be harder to claim bequests to NFP B post merger.
  • Need to provide for redundancy or transition of NFP B employees.
  • Both NFPs must have aligned purposes and the winding up clause of NFP B must permit the transfer to NFP A.
  • Will need to novate or assign all NFP B contracts to NFP A (including funding agreements) or terminate contracts.
  • All assets and operations of NFP B must be manually transferred to NFP A.
  • May be perception of NFP B as “lesser” merger partner.
  • Closure will require approval of the NFP B members.

2. NFP A becomes parent of NFP B

Under this model, NFP A becomes the parent of NFP B (by becoming the sole member of NFP B) and NFP A has control of NFP B. Both organisations survive and NFP B’s assets and operations remain in NFP B. This merger type may be appropriate if it is necessary to maintain separation, possibly because the two NFP’s purposes are not aligned or NFP B has known liabilities which need to be contained.


This may be an appropriate “transitional” step where NFP A controls NFP B for a period while transferring NFP B’s assets and operations into NFP A (before ultimately closing NFP B).

Pros

  • Maintaining separate incorporation quarantines risk and liability (to an extent).
  • Easier to claim bequests to NFP B.
  • NFP A and B do not need to have aligned purposes.
  • Can be a transitional step towards a single merged entity.
  • No need to novate or assign NFP A and NFP B contracts to NFP C (including funding agreements). May need to notify of change in control.

Cons

  • Ongoing requirement to manage conflicts of interest and related party transactions between the two NFPs.
  • Ongoing administrative burden – maintaining two NFPs is less efficient than maintaining one.
  • Only appropriate where NFP B can have a single member (e.g. if NFP B is a CLG or another kind of structure that can have a sole member)
  • Requires NFP B members to resign.

3. Establish NFP C and close NFP A and NFP B

Under this model, NFP C is created as a new entity. Both NFP A and NFP B transfer their assets and operations to NFP C before they both cease to exist. This merger type may be appropriate if both NFP A and B want a fresh start on an equal playing field.

Pros

  • NFP C can be established without disruption to NFP A and B.
  • A sense of “equality” – both NFP A and B merge into a new entity.
  • NFP C’s governing body and governing document will be agreed between the two NFPs.
  • Unknown liabilities of NFP A and NFP B may be quarantined in NFP A and NFP B respectively on closure.

Cons

  • It may be harder to claim bequests to NFP A or NFP B post-merger.
  • Need to provide for redundancy or transition of NFP A and NFP B employees.
  • NFP A and NFP B must have aligned purposes and the winding up clauses of NFP A and NFP B must permit the transfer to NFP C.
  • Will need to novate or assign all NFP A and NFP B contracts to NFP C (including funding agreements) or terminate contracts.
  • All assets and operations of NFP A and NFP B must be manually transferred to NFP C.
  • Closure will require approval of the NFP A and NFP B members.

4. New parent for NFP A and NFP B

Under this model, NFP C is created (a new entity). NFP C is usually the parent (sole member of NFPs A & B) and NFP C would have control over both NFP A and NFP B. The outcome is that all three organisations remain in existence. This merger type may be appropriate if it is necessary to maintain separation (possibly because the two NFP’s purposes are not aligned, NFP A or NFP B have known liabilities which need to be contained or the complexity of their different operations means separate incorporation is preferable).

Pros

  • A sense of “equality” – both NFPs become subsidiaries of NFP C.
  • Maintaining separate incorporation quarantines risk and liability (to an extent).
  • Easier to claim bequests to NFP A and NFP B as the beneficiary remains incorporated.
  • Ability to have different charitable purposes and flexible operations.
  • No need to novate or assign NFP A and NFP B contracts to NFP C (including funding agreements). May need to notify of change in control.
  • More options in relation to where assets are held.

Cons

  • Maintaining three entities may be administratively burdensome.
  • Ongoing requirements to manage conflicts of interest and related party transactions between the three NFPs.
  • Multiple governing documents and policies to understand and comply with.
  • Requires NFP A and NFP B members to resign.

5. Amalgamate NFP A and NFP B to form NFP AB

Under this model, NFP A and NFP B (incorporated associations in the same State and Territory except the Northern Territory) amalgamate to become a new NFP AB. The effect of amalgamation is that NFP A and NFP B cease to exist. NFP AB will assume all assets and liabilities of NFPs A and B and ordinarily, there is no need for assignment or novation of contracts.

Pros

  • A sense of “equality” – both NFPs merge to form one amalgamated NFP AB.
  • One surviving NFP AB which provides for less administrative burden.
  • Both NFPs have continuity of legal identity, so it is easier to claim bequests.
  • No need to transfer assets and operations.
  • No need to novate or assign NFP A and NFP B contracts to NFP AB (including funding agreements). May need to notify of change in control.

Cons

  • The NFPs must have aligned purpose(s) (at least under current law).
  • Any liabilities of either NFP will be retained.
  • Only available to two incorporated associations in the same State or Territory (except the Northern Territory – statutory transfer process instead).
  • Requires approval of NFP A and B members.

How we can help

Choosing the appropriate merger type is essential. The Charity and Not-for-profit Law team at Moores can help you understand the available merger types available to your merging organisations including the pros and cons of each option.

Contact us

Please contact us for more detailed and tailored help.

Subscribe to our email updates and receive our articles directly in your inbox.

Disclaimer: This article provides general information only and is not intended to constitute legal advice. You should seek legal advice regarding the application of the law to you or your organisation.

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Moores Practice Leader, Rebecca Lambert-Smith and Associate Yoni Ungar, sit down in a Moores Q&A to discuss the new reforms to the Australian government’s Deductible Gift Recipient (DGR) registers.

These new reforms will ease the administrative burdens for cultural, environmental, harm prevention and overseas aid charities, however most organisations will not benefit from these reforms until they make key changes to their governing documents. If your organisation may be able to take advantage of the flexibility these new reforms provide, we have detailed some of the key information you need to know.

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Tag: charity

Long-awaited reforms to the Australian government’s Deductible Gift Recipient (DGR) registers have now come into effect, easing administrative burdens for cultural, environmental, harm prevention and overseas aid charities. However, most organisations will not benefit from these reforms until they make key changes to their governing documents.

Why were the reforms introduced?

As flagged in our article last year, in early 2023 the Australian Government introduced reforms to ease the administration of four categories of DGR. These four DGR categories were administered by the following Australian Government departments:

  • Register of Cultural Organisations – Department of Infrastructure, Transport, Regional Development, Communications and the Arts
  • Register of Environmental Organisations – Department of Climate Change, Energy, the Environment and Water
  • Register of Harm Prevention Charities – Department of Social Services
  • Overseas Aid Gift Deductibility Scheme – Department of Foreign Affairs and Trade

On establishment, new organisations had to apply to the relevant department for DGR endorsement and obtain the written approval of two Ministers – a process which often took years to finalise. These organisations were then subject to ongoing administrative and reporting requirements, including submitting annual audited accounts to the relevant department, providing statistical information about donations and operating a public fund.

What has changed?

A streamlined endorsement process
From 1 January 2024, these four registers were abolished. These DGR categories are now administered by the Australian Taxation Office (ATO). The ATO is now assessing applications for DGR endorsement, with processing times reduced to months or even weeks. Charities whose applications were not finalised before 1 January 2024 have been notified that the ATO will complete the assessment of their applications. All new applications must be made directly to the ATO.

Reduced reporting requirements
Established organisations no longer need to provide additional statistical returns and audited accounts to the ATO. Instead, it is sufficient to comply with their Australian Charities and Not-for-profits Commission reporting requirements.

Simpler administration
Importantly, organisations in these DGR categories will no longer be required by legislation to operate a public fund to receive all DGR gifts (and income generated from those gifts). Instead they may be able to operate a simpler gift fund (discussed further below).

Reduced membership for environmental organisations
Finally, the requirement for an environmental organisation to have membership consisting of either at least 50 individual members or only body corporate members has been abolished. This means that environmental organisations that have a body corporate sole member could consider seeking to adopt an alternative, simpler governance model (where the board and members are the same individuals). New environmental organisations can also be established with this simpler model.

Receipts
Organisations were previously required to issue receipts for gifts and deductible contributions in the name of their public fund. From 1 January 2024, all receipts must be issued in the name of the organisation.

What is the difference between a public fund and a gift fund?

Public funds must comply with certain ATO requirements, including having a separate bank account and being operated by a management committee. The management committee must constitute at least three people, a majority of whom must satisfy the ATO’s responsible person test (as set out in paragraph 21 of Tax Ruling TR 95/27) – being individuals with a degree of responsibility to the community, typically with a professional occupation. For many organisations, this means that the public fund cannot be operated directly by the organisation’s board, but requires a separate management committee. Further, some organisations find it challenging to recruit sufficient individuals to the management committee that meet the responsible person test.

Gift funds don’t need their own committee of management or their own bank account. Instead, the organisation operating the gift fund needs to have clear accounting practices in place to track the funds and ensure that they are used appropriately. This can significantly streamline the organisation’s administration.

Can we now convert our public fund into a gift fund?

Despite the reforms, organisations still need to follow the requirements set out in their governing documents (their Constitution or Rules) if those requirements are compatible with the new laws. In particular, any public fund clause in an organisation’s governing document must be amended and replaced with a gift fund clause before the organisation can cease to comply with the public fund management committee requirement.

How we can help

If you’ve been planning on setting up a cultural, environmental, harm prevention or overseas aid charity, the process is now significantly more streamlined. We can help you get established. 

If you operate an existing cultural, environmental, harm prevention or overseas aid charity, we can help you understand the implications of these changes, as well as amend your governing document to take advantage of the new flexibility in relation to gift funds.

Contact our Charity and Not-for-profit law team for more information on how we can help your organisation.

Contact us

Please contact us for more detailed and tailored help.

Subscribe to our email updates and receive our articles directly in your inbox.

Disclaimer: This article provides general information only and is not intended to constitute legal advice. You should seek legal advice regarding the application of the law to you or your organisation.