Sean Egan answers some initial questions for arts organisations contemplating a merger, and to explain the legal implications of this.

In the wake of the Arts Council of England?s spending review and the move towards funding fewer organisations it may be that arts organisations should consider whether they ought to merge. For most, the answer will be no; for some, whether because they are in financial difficulty or because there is some strategic advantage to be obtained, this may be an avenue to pursue.

The notion of merger is accepted in the world of commerce as well as the charity sector. The merger of arts organisations who are charities is rare, largely I believe as the result of an organisation?s specific artistic remit. Where a charity wants to cease trading, for whatever reason, a merger can be a means of preserving the charity assets more efficiently than winding it up.

The respective boards do need to determine the objective of any merger, for instance whether there is a wish to effectively wind up one company by folding it into the other or whether it is seen as an enlargement of both organisations enhancing the identity of each. Any proposal needs to be based on the best possible information and a merger is highly unlikely to be viable unless both organisations know each other well. Assuming the boards on the whole feel there is potential for an arrangement then I would recommend the next step is to go through an evaluation procedure. This would usually involve an outside consultant and would look at a whole range of potential benefits and difficulties to evaluate whether the arrangement is worth pursuing and the assessment of relevant legal obligations and how these would be dealt with. To avoid undue disruption it is generally best for one director from each board to be nominated to take forward discussions rather than involve the chief executive or administrator whose workload is probably already excessive.

There are a number of more detailed considerations that you may wish to look at as part of this process. I would identify the following:-
1. There are two alternative legal mechanisms for any merger of companies whether or not they are charities. The first, and generally preferable, is for one organisation to be folded into another so that its assets and liabilities are assumed by the other organisation. The benefit of this is that it is simpler and cheaper. This does not mean that on any merger the constitution of the main organisation needs to stay the same or that the boards of the organisations cannot be combined into one larger board. The other arrangement, which is often politically more acceptable, is for a new organisation to be set up and both organisations fold themselves into the new one. The issue with this is that for charities merging this will require the new organisation to register as a charity with the accompanying delay and expense; a new company will need to be formed and there is generally more negotiation, and therefore the arrangement takes longer.

2. Both organisations need to look at their constitutions first. For charities in particular it may not be possible to transfer assets as intended. Any real property needs to be looked at and leases may need to be assigned and consent obtained from landlords sought. Similarly software licences may need to be re-registered or transferred with the licensor?s consent.

3. The key document in either type of merger is the transfer of assets. A key assessment as to whether these assets have any significant liabilities needs to be made and the trustees of the transferor will need to give some sort of warranties as to whether there is any litigation and whether there are any undisclosed liabilities. This is generally in return for an indemnity against future liabilities.

4. If the identity of the merged organisation is to be different i.e. one organisation is not just transferring assets without having any real impact on the operations in the organisation, then it is crucial at an early stage to settle the name and branding of the new organisation. This is an area that trustees, workers and supporters of organisations will feel passionate about and if not settled early on can be a major issue later.
There are alternatives to merger. It may be that the objectives of the organisation are equally served by more informal arrangements of co-operation. These could extend to a framework arrangement for co-productions where each party contributes to one or more shows or arrangements for sharing resources. For instance, where there was a failure to appoint an artistic director or administrator, services from appropriate individuals can at least in theory be provided by another organisation.

I do not under-estimate the instinctive resistance to mergers or these sorts of co-operative arrangements but they may provide a mechanism for enabling an organisation to overcome a difficult period or to acquire more financial stability and that can only be positive.

Sean Egan is head of Bates Wells and Braithwaite?s Arts and Media department
t: 020 7551 7796; e:

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