Due diligence for mergersDelyth Davies, AssociateWednesday 16th May 2012
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
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
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
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) NewCoIssue a questionnaire to Issue a questionnaire to Charity A + Charity B smaller organisation
Trustees of all charities must complywith their legal duty to act prudentlywhen 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
In more detail ……………………..Different types of due diligence• Financial• Legal
FinancialAccountantsFocus on areas of charity’s affairs that are materialto Charity A/NewCo’s decision so that the Trusteescan assess the financial risks and opportunities ofthe mergerFinancial 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
Legal Due diligence Questionnaire• Constitution• Funding• Property• Employees• Material Agreements
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?
FundingHow 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?
PropertyWhere 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?
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
Material AgreementsEvery charity has a clutch of agreements that arematerial 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?
The Due Diligence Report• Full due diligence report• Key issues only
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?