14 September 2011
In the current economic climate there is an increasing focus within the charity sector on the issue of collaborative working between charities. Collaborative working can range from a simple sharing of ideas or resources to more elaborate and complex arrangements such as joint ventures, mergers or take-overs. In these latter instances, professional advice would be needed. The key factor behind these collaborative arrangements is to ensure that the charity’s beneficiaries are provided with the best effective service not just in the short term but also in the future.
Some charities may decide that mergers with other charities may best meet their existing and future beneficiaries’ needs.
The Charity Commission state their role is not to pull charities towards mergers as they recognise that each charity is diverse and has its own role to fulfill in society. However if charities do choose to merge, the Charity Commission will help to facilitate the legal and constitutional aspects of a merger. Charity Commission Publication CC34 - ‘Collaborative Working and Mergers’ provides full details of how to do this.
The Charity Commission now keeps a public register of mergers. Registering is compulsory where a vesting declaration is used. Otherwise it is voluntary. The register is useful to ensure legacies and donations received by charities that have merged can be passed on to the new merged charity.
Many funding bodies are even looking for collaboration amongst charities as a means of achieving economies and some grant makers are offering financial support to assist research into mergers in certain areas where there are perceived to be too many similar charities.
As a result collaborative working and mergers are issues that are likely to be on the agenda for many charities.
There are many reasons behind the impetus to merge or to work collaboratively, one being to provide an enhanced service delivery to the users of the charities services.
There are many advantages and disadvantages of mergers and collaborations and a summary of the main ones are highlighted in the appendix.
The Charity Commission is keen to encourage collaborative working and mergers within the charity sector to the extent that they increase efficiency. However it recognises that it is also important that there is no loss of diversity nor of the flexibility of charities to adapt to changing circumstances and needs.
The Charity Commission has published toolkits for charities staff and Trustees that takes them through the process of collaboration or merger from start to finish. These are:
• Making Mergers Work: Helping you succeed and
• Choosing to Collaborate: Helping you succeed.
These are available from the Charity Commission website.
As far as collaborative working is concerned Trustees should be seeking to identify potential benefits that might be generated for their organisation and its beneficiaries. They should conduct regular strategic reviews of the charity's position and of possible collaborative arrangements. To this end charity Trustees should familiarise themselves with the factors that are critical to the success of such arrangements.
These factors include ensuring that the collaboration values the independence of each party and that the participants have compatible aims, activities and organisational structures.
The nature and extent of the collaboration will determine what is required in terms of a legal agreement. At the very least, there must be a clear understanding and definition of the responsibilities and commitments of each party as well as of the limits to which one party can make commitments that bind the other. Collaborative agreements can vary in type. Examples are contracts, service led agreements or memorandums of understanding.
Legal agreements should be proportionate to the levels of risk and complexity involved. It should always be remembered that a charity's assets, employees, volunteers and reputation could be put at risk.
Care is needed to ensure that any agreement does not place restrictions on the Trustees' ability to act in the best interests of their charity. In addition, the agreement should ensure that the charity's assets will only be used for purposes which are entirely consistent with its charitable objectives. This is particularly important in instances where assets are to be transferred overseas.
In most agreements it would be normal to expect a termination clause. The absence of such a clause may prove to be unduly restrictive if the collaboration is deemed to be unsuccessful and disputes may be time-consuming and expensive.
Many of these factors are also important when considering mergers and again Trustees should be alive to the possible benefits that might accrue from a merger. In addition, as this is a much more significant step, it is even more important that the Trustees are aware of the factors that are critical to ensuring the success of any merger. These factors can be broadly categorised as the "Five C's".
clarity of vision
Both parties to any merger need to have a clear vision of what they are seeking to achieve. A hazy idea of goals is not enough. Trustees must be very specific in defining what they want to get out of any project.
It is helpful to address at the start major issues such as:
• the structure of the new charity's Trustee body
• the name and brand of the new organisation
• the role and position of the chief executive
culture
This is perhaps the most important factor to any merger. The Charity Commission indicates that its casework shows that differences in culture and working practices can often cause a merger to fail. However an organisation's culture is difficult to define in practice. It will encompass such matters as objectives, methods of achieving objectives, organisational structure and relationships with the outside world.
Surveyed charities identified cultural integration as a critical factor but it was only achieved where each party was fully aware of the ethos of the organisations involved. This highlights the next key ingredient to a successful merger.
communication
Good communication is vital from the start of the merger process. There must be clear statements of intent and of desired outcomes. The needs of all stakeholders must be borne in mind, including those of beneficiaries, staff, volunteers, members and the public at large.
A proposed merger can give rise to a great deal of uncertainty amongst staff. Knowledge that the organisation for which they work is undergoing significant change can trigger a search for alternative employment. Trustees therefore need to give much thought to the staffing levels required in the new organisation and careful management will be necessary if morale is not to suffer. Furthermore, employment law is extremely complex and in all but the simplest situations, legal advice should be sought.
constitutional arrangements
Careful consideration should be given to the constitutional arrangements that will best facilitate the operation of the new charity over the long term. In addition, it will be necessary to check that each party has the power within its existing constitution to enable the merger to take place. If not, Charity Commission assistance will be needed.
cost control
It is permissible for charity monies to be used to fund the costs of a merger. However, costs should be budgeted for and kept under regular review.
In addition to the legal, professional and other direct costs involved there will inevitably be less tangible costs. Most mergers will be demanding in terms of the time and energy of Trustees and management. Short-term disruption and stress are probably unavoidable.
This means that speed will be of the essence. Trustees must endeavour to maintain momentum and a timetable should be drawn up at the beginning of the process and adhered to as far as is practicable. However the need for proper planning is also critical. A balance between these two, often conflicting, needs will have to be established.
One of the costs incurred will be in conducting appropriate research and background checks on the party to a merger. A brief consideration of the extent to which this process, known as "due diligence", is applicable is set out below.
Due diligence is a key element to Trustees' management of risk. To protect their own charity's interests they must ensure that there are no unforeseen liabilities or commitments for which they will become responsible as a result of the merger. Although a full blown due diligence review, such as would be used in a commercial environment, is not normally called for in a merger between charities, there should be some form of review process. The extent of this will be dependent upon the size and complexity of the merger.
Subject matter for the review may include:
• ensuring that there are no uninsured liabilities
• the implications of the Transfer of Undertakings (Protection of Employment) Regulations (known as "TUPE Regulations")
• tax and VAT implications
• intellectual property rights
In response to changing and increasing demands many charities are going to be forced into looking towards collaborative working and mergers. The environment in which a charity works and the needs of beneficiaries will be key elements in determining how Trustees should react. In selecting what, if any, action they should take they will need to consider:
• what is your charity seeking to achieve?
• what are the specific needs of the activities it undertakes?
• for service providers, what are your aims for the volume, range and geographical coverage of services?
• how much time, money and effort are you prepared to invest?
• what risks are you prepared to take?
The appendix sets out a summary of the principal advantages and disadvantages of both collaborative working and mergers.
A summary of the advantages and disadvantages of collaborative working and mergers
mergers - the advantages
• economies of scale - a primary attraction for merger will be the likely cost savings that will accrue to a larger organisation
• avoidance of duplication of provision
• ease of attracting funding and/or staff - the perception of an organisation as large and vibrant may assist it in its search for staff and/or funding
• increased opportunities - partners, such as Local Authorities, may be more ready to enter a contractual arrangement with a larger organization
• cross-fertilisation of ideas - the best practice from each of the merged entities can be adopted
• reduced dependence on a particular source of funds.
mergers - the disadvantages
• legal - the restraints of constitutions or other legal factors can sometimes be a barrier
• costs can be heavy - inevitably there will be a cost involved in any merger. There will not only be legal and professional fees but also time and effort will undoubtedly be required from Trustees and management. Disruption and stress will be unavoidable, at least in the short term
• staff uncertainty - the knowledge that the organisation that they work for is undergoing significant change will almost certainly be unsettling for employees and may well result in a search for an alternative job
• reversing the decision is difficult - the costs of extricating a charity from an unsatisfactory merger are prohibitive.
collaborative working - the advantages
• autonomy can be retained - thus uniqueness and ethos can be protected
• disruption is minimised
• staff may perceive it as less threatening
• flexibility can be maximised - by maintaining independence the ability to adapt to changing circumstances can be retained
• many of the advantages of merger can still accrue - for example economies of scale, cross-fertilisation of ideas and enhanced ability to attract staff might still be achieved to some extent.
collaborative working - the disadvantages
• the problems of small size tend to remain
• time - although less time-consuming than a merger, establishing collaborative links can still require a good deal of time and effort
• over-reliance on others - may be a danger that specifically needs guarding against.
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