For purpose mergers: A road map

For-Purpose Mergers: A Road Map

Mergers in the for-purpose sector are less common and more challenging than they should be.

There are many reasons for this: different market forces, different price signalling, different aspects of “founder syndrome” and different issues of “turf” all make mergers of for-purpose entities harder than for-profit mergers. A wider and more complex range of legal entity types does not help.

The drivers for merger in the for-purpose and for-profit sectors have much in common, however. In particular, both sectors share the obligation to undertake activities as efficiently and as cost effectively as possible so as to generate the greatest return, even if they measure “return” very differently.

As we emerge into a post COVID-19 environment, for-purpose organisations must be even more efficient and cost effective as they navigate increased needs for their services and competing demands upon their traditional funding sources, both government and philanthropic.

This short paper provides an initial road map for legal aspects of mergers (and other collaborative arrangements) of for-purpose organisations. Further papers over coming weeks will explore the stages of a successful merger in more detail and discuss how legal structuring and options may help overcome challenges along the journey.

Why Merge: Advancing Purpose

It is more important than ever for organisations of all types to look to the future and ask themselves some fundamental questions:

·      Are we serving our purpose as well as we can?

·      Are the challenges increasing?

·      Do we need more scale, more resources, more partners?

·      Do others serve the same purpose?

·      Are they doing it better than us?

·      Are we doing it better than them?

·      What’s our distinguishing feature?

·      Can we grow organically or do we need to take a bigger step?

·      What would a bigger step look like?

·      How do we build on what we do best, while benefiting from the experience of others?

Responses to these questions must accommodate many interests and many stakeholders. Satisfactory responses and a successful merger require an unwavering commitment to the advancement of purpose as the objective; that commitment will guide solutions to the inevitable challenges arising along the way.

How to Merge: Acquiring Capacity

If organic growth will not deliver what is needed, what are the options? There are many:

·      Shared services

·      Strategic alliances

·      Joint ventures

·      Partnerships

·      Mergers

These exist on a spectrum, from simply more cost-effective ways of buying what you need, through collaborative arrangements exploring or implementing initiatives or projects, to more formal relationships that might be very comprehensive while also limited in scope or duration. At the far end of the spectrum lies formal, legal merger, with two parties coming together as one, potentially in a new organisation.

At the simpler end of the spectrum, the arrangements are contractual, with “freedom of contract” conferring much flexibility to design an arrangement that is both specific to your needs but also cautious and modest as you test the waters, and relatively easy to step back from (if designed correctly at the start) if expectations are not achieved.

At the other end, the arrangements are structural, with changes in legal form, ownership, independence and identity. Consequently, they are harder to unwind, so should be embarked on more carefully. Even at the structural stage, however, there are solutions to address questions of independence and identity, either temporarily or for the longer term.

Many mergers start as relationships at the modest end of the spectrum. A merger is almost impossible to undo, particularly with for-purpose organisations, and obviously caution is needed to ensure alignment of values and purpose.

The pros and cons of each of the forms of collaboration along the spectrum will be explored in the next paper in this series.

How to Merge: Getting Ready

You have taken stock of values and purpose and decided you need to take a bigger step. You must then take stock of your organisation, and your prospective partner needs to do the same. This step takes time and resources, often at a point when there is no certainty that any concluded agreement might be reached, but it must be done. It is what in a commercial setting is often called “vendor due diligence”. Examine your organisation and make sure you know everything there is to know about yourself, so challenges and opportunities are identified by you before someone else finds them. The examination is different to the usual internal reviews as it has a different purpose. Leadership from the top is essential and the examination requires a degree of confidentiality so that misinformation does not leak out and concerns are not unnecessarily created.

Some of the key things you need to know include the following.

What is your legal form? Are you a company, a trust, an association, a co-operative or something else?

What are your purpose and objects as legally expressed. The relationship between your purpose and objects and those of any merger candidate will be critical.

Develop an “inventory” of your registrations and privileges, the extent of current compliance and any issues concerning transfer of registrations and privileges.

Similarly ensure you have a complete understanding of the tangibles and intangibles that make up your activities:

·      Grants, funding agreements, donations and  partnerships

·      Other contracts

·      People, including roles, entitlements, performance, opportunities, growth

·      Your board and senior leadership, including the skills matrix

·      Premises – freehold, leasehold, tenure

·      Intellectual property – trade marks and trade names, domains, social media presence, patents, copyright, software, data, information and knowhow

·      Equipment – owned and leased

·      Bank accounts and funding, including moneys on deposit and other investments

What is the impact of a proposed initiative on these assets, rights and obligations? Are there constraints upon transfer? Do your funding agreements have “change of control” clauses or might funders have other rights to terminate if they don’t like the initiative or your collaborators. Landlords? Regulators? Much will depend on the precise form of deal, which you don’t know at this stage but possible obstacles need to be identified so that structural solutions may be developed.

Finally, but often most importantly, consider what is planned for your identity, and how will that affect everything else?

How to Merge: Designing the Relationship

You know what you need to know about yourself. The next step is to share information on a confidential basis with a clear, written confidentiality agreement.

You can then plan on how to bring two organisations together. There is much more to this, of course, than the legal analysis, but the legal form of combination will influence other decisions and may create opportunities and solutions.

A key question is how to bring the two legal forms together. In an alliance, joint venture or partnership, the answer is easier and more flexible, as each party retains its own form and identity, and the new relationship arises under a contract between them. Even then, however, there may be legal questions as to whether a party has the legal power to do what is proposed. This is not usually a problem with companies, for whom the law has become increasingly generous over time as to the extent of powers. However, it remains something to which much closer attention must be paid when dealing with associations, trusts and other special purpose entities, as the donors to Celeste Barber’s Bushfire Appeal discovered recently: Re New South Wales Rural Fire Services & Brigades Donation Fund [2020] NSWSC 604.

When a merger is proposed, the question is usually whether one entity “takes over” another or whether a new entity subsumes the two existing ones. Language is important here, and the connotations of “take over” can and should be avoided, regardless of the legal form.

Many factors drive this choice, but legal and regulatory simplicity will be critical. A new entity would usually mean obtaining a completely new set of registrations and privileges, introducing some risk and time. Is it more efficient to leave one entity intact, and allow it to take in the people, contracts, assets and activities of the other? Sometimes that might create the same degree of regulatory risk as a new entity.

Perhaps separate entities could be maintained but with new ownership arrangements? Options include one entity owning the other or both being owned by a new holding entity. This might create opportunities for some independence and separate identity, but within the bounds of common ownership.

The question of bringing entities together will be addressed in a future paper.

Merger:  How to make it work

In most mergers, the hard work really starts once the “deal” is completed, in the legal sense. The activity, referred to in a commercial setting as “post-acquisition integration”, often takes longer, is more challenging and is more important to achieving the intended benefits of a merger, than almost anything else.

Like everything, post- acquisition integration depends on planning, and knowing everything there is to know about each other before the deal is consummated – no surprises! The work-arounds, or temporary solutions put in place to get a deal done, must now be addressed for the long term. The things that were “put off” must be dealt with.

The final paper in this series will address legal aspects of post-acquisition integration