Breaking down the legalities and mechanics of mergers, acquisitions, and strategic alliances.
Q: We are considering an affiliation, combination, or possible merger with another organization. What are our options?
A: The selection of an appropriate structure is dependent on identifying the goals of the transaction and potential ramifications for both groups, but there are several options to choose from.
|More on Joint Ventures|
|Concerned about the legal implications of a possible joint venture? Read "Reporting Joint Ventures on the Form 990" and "Joint Ventures May Pose New Antitrust Risks," articles from earlier this year in Associations Now.|
Organizations can integrate their programs, functions, and membership by merging. When two entities merge, one entity legally becomes part of the surviving entity and effectively dissolves. The surviving entity takes title to all assets and assumes all liabilities of the nonsurviving entity.
Benefits. By merging, associations may combine assets, eliminate redundant administrative processes and costs, and provide broader resources to members. Members who participated in the formerly separate associations may pay reduced dues and fees and have fewer demands on their volunteer time by joining a combined organization.
Mechanics. To merge, each organization must follow the procedures mandated under the nonprofit corporation law of its state of incorporation, as well as any specific procedures in its governing documents. While state nonprofit corporation statutes differ, the laws governing mergers typically set forth certain core procedures. The board of directors of each precursor organization must develop and approve a plan of merger according to the legal requirements; the plan must also be submitted to the voting members, if any, of each organization for approval.
Conditions for member approval vary by state, but statutes generally require a vote of two thirds to effectuate the planned merger—a number that can be difficult to reach for practical and political reasons.
Acquisition of Assets
Another legal mechanism is the dissolution and distribution of assets of a target association. While the dissolving entity must adhere to specific statutory procedures, dissolution is easier on the acquiring entity ("successor" entity) than a merger.
Benefits. An asset transfer may be strategically preferable for combining organizations when one is smaller than the other or the successor entity is only acquiring discrete programs or assets of the dissolving entity. The successor organization is also typically shielded from its predecessor's debts and liabilities, though an asset transfer always poses some risk, particularly if adequate provision has not been made for preexisting liabilities.
Mechanics. Like a merger, an asset transfer must follow the applicable state nonprofit corporation laws and each entity's governing documents. Member approval for such a transaction is typically unnecessary unless the organization's bylaws require otherwise. The process is more complicated, however, for the dissolving entity. In most instances, the nonprofit corporation statute of the dissolving entity's state of incorporation requires approval by both the board and any members having voting rights.
Other Strategic Alliances
Organizations may also consider more temporary strategic alliances that allow both entities to test the arrangement before entering into anything permanent.
Joint venture. In a joint venture, two or more associations lend efforts, assets, and expertise to carry out a common purpose. The associations involved may develop a new entity (such as a limited liability company or partnership) to carry out the endeavor, such as a joint tradeshow.
A well-structured joint venture is codified in a written agreement that details the precise obligations and allocation of risk between the associations involved. Joint ventures can be permanent, set to expire on a given date or after the accomplishment of a certain goal, or structured with an increasingly overlapping set of commitments and an eye toward an eventual merger. Although the bylaws of an organization might specify otherwise, joint ventures do not usually require membership approval.
In the event that a joint venture would involve a taxable entity or an organization that is exempt under a different section of the tax code, additional precautions may be needed to protect your organization from incurring taxable income or jeopardizing its exempt status.
Joint membership programs. Joint membership programs typically allow individuals to join two associations for a reduced fee, allow members of one organization to become more familiar with another, and are usually conducted in the context of other joint programs and activities. These programs are designed to bring associations together, often as a precursor to a more formal alliance, but the entities can also modify the arrangement or disengage altogether if circumstances or expectations change.
Lisa M. Hix is an attorney with Venable LLP and a member of ASAE's Washington, DC, Legal Symposium Planning Committee. Email: [email protected]