When is a Merger a Good Idea?
By: Eileen Morgan Johnson, Esq.
Q: Our association is on the downturn. We have tried several options, without much luck; meanwhile, other associations in our industry sector appear to be doing well. Is it time for us to consider a merger?
A: In the current economic climate, association boards should consider all of the tools available to them, including merging or working with other associations.
Associations can work together in several ways:
Merger. In a merger, two associations combine all of their assets, members, and programs. The result is either a new association that represents the best of each association, or one of the associations emerging as the surviving entity. A merger often involves lengthy negotiations unless one entity is clearly in an inferior bargaining position. The parties identify what programs and brand(s) will continue and decide how to combine membership lists and benefits. While mergers do have their costs, financial savings can be found once the merger is complete.
Affiliation. An association might decide to affiliate with a larger association in the same industry. By affiliating with a larger association, the smaller association and its members receive benefits and may be relieved of expenses they could not otherwise afford.
Federation. In a federation, a number of associations band together for a common purpose. They might be united under a new umbrella "parent" association with a formal governance structure. Each individual association maintains its own governance and participates in the governance of the umbrella association. Common purposes and goals are established, and common expenses are shared.
Collaboration. Two or more associations work together to share common activities and related expenses through a formal collaboration. They might not come from the same industry group. A common purpose could hold them together for an indefinite period of time. Actions are approved by consensus and expenses are shared.
Alliance. Two or more associations agree to share infrastructure such as accounting, human resources, purchasing, membership invoicing, or information systems and support. Membership benefits and programs are not shared, and each association maintains its own identity. The associations may be colocated in the same building or could be geographically dispersed.
Whatever option is considered, the first step is for the leadership of the associations to meet. They will often enter into a confidentiality and nondisclosure agreement (NDA) to protect the confidentiality of each association's financial information, business plans, membership lists, and other sensitive information. Once NDAs are signed, the parties exchange information to assist in evaluating appropriate action. If the parties decide not to pursue any of the above options, each destroys or returns any information received from the other at the end of the discussions.
The next step is often to form a working group of representatives from both associations to discuss mutual needs, resources, and potential relationship options. If action is recommended, a timetable might be established to identify the next steps and any governance or time constraints.
Depending on each association's articles of incorporation and bylaws and applicable state law, the board might have the authority to approve a merger or it might need to be presented to voting delegates. This can impose time constraints, because most associations' voting delegates are only together once a year and a special meeting could be cost prohibitive. The timing of the annual convention could cause the approval process to be rushed or delayed.
Options other than a merger might not require approval of the voting delegates. In cases where only the associations' boards are required to approve the action, care should be taken to inform members of the action and the reasons behind it.
It's also important to note that whenever two or more trade or professional associations discuss working together for any reason, they must consider whether their actions (or proposed actions) would violate federal antitrust laws. Any action that can be seen as restricting trade should be avoided. Legal counsel should be consulted.
Whether a merger, collaboration, or other arrangement makes the most sense for your association depends on the facts and circumstances of your association. Contracts, intellectual property, and corporate governance and antitrust laws are just some of the legal issues involved before the discussions even begin.Whatever course of action is chosen, legal counsel should be sought to assist in guiding your association leaders through the process.
Eileen Morgan Johnson, Esq., is counsel at Whiteford Taylor & Preston LLP, in Washington, DC. Email: firstname.lastname@example.org
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