The principles of due diligence - its purpose, how it is carried out and the aspects you can complete yourselves.

1. Due diligence for mergers
Delyth Davies, Associate
Wednesday 16th May 2012

2. Due diligence
• A term used to describe the steps organisations
take to assure themselves that a merger is in
their best interests
• The investigation of another charity in advance of
completion of a merger
• Result of a due diligence exercise is a charity
having full knowledge of the organisation they
are seeking to merge with

3. Purpose of due diligence
• Information gathering
• Assess the risks and rewards of a proposed
merger
• Determine any consents that may be needed for
the merger to proceed

4. How’s it done?
• No pre-set or prescribed way for carrying out due
diligence
• Geldards approach……..
• Tailored questionnaire
• Proportionate to the size and nature of the
merger

5. Who does it? (and who picks up the tab)
Depends on the structure of the merger
• Dominant Charity to “take over” a smaller Charity?
• Two Charities to transfer all of undertaking to a
newly formed organisation (“NewCo”)?
Dominant Charity (A) NewCo
Issue a questionnaire to Issue a questionnaire to
Charity A + Charity B
smaller organisation

6. Trustees of all charities must comply
with their legal duty to act prudently
when deciding to merge
• Due diligence fees are a proper use of charity
funds
• To be forecast at the outset and regularly
reviewed
• To be proportionate to the risks involved

7. In more detail ……………………..
Different types of due diligence
• Financial
• Legal

8. Financial
Accountants
Focus on areas of charity’s affairs that are material
to Charity A/NewCo’s decision so that the Trustees
can assess the financial risks and opportunities of
the merger
Financial due diligence may also help assess:
• Potential synergies of the merger
• The best structure for the merger
• The impact of the merger on Charity A

9. Legal Due diligence Questionnaire
• Constitution
• Funding
• Property
• Employees
• Material Agreements

10. Constitution
• Is the charity being run in accordance with its
constitution?
• Is the written constitution in the form that all
Trustees and members think it is? Does anything
need to be corrected pre-merger?
• How closely will the constitution of NewCo
reflect the current constitution?

11. Funding
How does the charity receive its funding?
• Grant Funding
• review of grant documents
• must the grant be used for a special purpose?
• are there are claw-back provisions?
• is the grant transferable?
• Legacies
• can the legacies be transferred to Charity
A/NewCo?

12. Property
Where does the charity operate from?
• Freehold or Leasehold
• Freehold
• Will the property be transferred to Charity A/NewCo?
• Leasehold
• Need to consider the lease in detail
• Landlord consent – is this required?
• Assignment
• Will Charity A/NewCo need all of the property? Are
there pre-merger steps to be undertaken to resolve
property issues?

13. Employees
• How many employees will be employed by Charity
A/NewCo?
• Are respective terms and conditions of employees
compatible with each other?
• Transfer of Undertakings (Protection of
Employment) Regulations 2006

14. Material Agreements
Every charity has a clutch of agreements that are
material to the success of its efficient operation:
• Leases for important equipment
• Partnership Agreements
• Can these be transferred to Charity A/NewCo?
• What are the financial penalties in transferring or
terminating?
• Can the third party terminate the agreement
automatically?

15. The Due Diligence Report
• Full due diligence report
• Key issues only

16. Next Steps
• Pre merger re-organisation of one or both
charities?
• Consider the merger structure
• Be realistic in timetabling if third party consents
are required
• Delay proposed completion date?

17. Case Study

18. Key Points

19. Thank You

20. Contact Details
Delyth Davies
DD : 029 2038 6542
delyth.davies@geldards.com