Caution when Merging

Date: September 18, 2014
Author: Robert Pautienus

Caution when MergingIn recent years I have seen an increase in mergers between nonprofits, including between churches, charitable organizations and educational institutions. There are a number of reasons why nonprofits merge, including the consolidation of a shared mission or purpose, combining financial resources and reducing cost, volunteers and leadership, to infuse new life and vigor into an organization, or to increase spheres of influence and opportunities.Caution when Merging

Regardless of the reason, in every merger there are numerous issues that have to be addressed, but I want to focus in this post on the legal steps in the transaction. In many ways, the merger of two or more nonprofits is more difficult than merging for-profit businesses. In a nonprofit merger, both the Tennessee Secretary of State and the Tennessee Attorney General are involved and any failure to follow the correct procedure can have significant legal consequences.

The first step in the legal process is the development of a Plan of Merger. T.C.A. §48-61-101 of the Tennessee Nonprofit Corporations Act, sets out the necessary requirements of the Plan of Merger. In summary the Plan of Merger, needs to (1) identify which corporation will "survive" the merger (when the two combine, one is technically merged into the other corporation) and (2) the terms and conditions of the merger including what will happen with any membership interest in the nonprofits, as well the assets and liabilities of the organization. T.C.A. §48-61-103 sets out the requirements of how the Plan of Merger needs to be approved by the nonprofits. If either nonprofit has legal members, then the members need to approve the Plan of Merger. This step, particularly with churches, needs to be handled correctly, with the proper legal notice of the meeting to vote on the Plan of Merger.

Once the Plan of Merger is negotiated and approved by the nonprofits, the next step requires the nonprofits to file a response to a Request for Information Form with the Tennessee Attorney General, Public Interest Division. The response needs to be filed at least forty five (45) days before the anticipated merger date. The Request for Information Form is a detailed packet (22 pages) and requires significant disclosures about the two organizations being merged. The requested information includes the names of all director, officers and employees involved in the transaction, the date and content of each and every meeting between the parties involving the merger, copies of any press, media or announcements concerning the merger, and full financial records of both nonprofits for the previous three fiscal years (which includes identifying the 5 highest paid employees in both organizations). Both organizations should know what will be required to respond to the Request for Information Form before the merger negotiations begin, so that the information and documents can be collected during the process. Once the Request for Information Form is filed, the Tennessee Attorney General will either approve or disapprove of the merger. As a side note, incorporated churches are required to file the same response to the Request for Information Form. It is my legal opinion that the requirement for churches to file is unconstitutional. However, I am not aware of any merger between incorporated churches that has been denied by the Tennessee Attorney General, and thus to date, the issue has never been litigated in Tennessee.

If the merger is approved by the Tennessee Attorney General, then the next step is to file the Articles of Mergerwith the Tennessee Secretary of State. The Articles of Merger includes a copy of the approved Plan of Merger. If the Tennessee Secretary of State approves the merger, then the "non-surviving" nonprofit must file a final Affidavit with the Tennessee Attorney General verifying that the merger was completed.

The merger process has numerous steps and requires extensive documentations. It is important that organizations considering a merger understand the filings and plan the process accordingly. At Fidelis Law we regularly represent and work with churches and nonprofit organizations. If you would like more information on merging churches or nonprofit organization, please call or email us at Fidelis Law.