A decision to merge with or acquire another organisation is largely a question of undertaking ?due diligence?, so that issues can be dealt with before they become problems. Sean Egan identifies the key areas to be considered.
Organisations contemplating a merger or an acquisition face four major practical issues that need to be dealt with at the outset.
Objectives
Before starting the costly process of merging with or acquiring another organisation, you need to be absolutely clear what the objectives are in going through that process. I know this seems simplistic, but on a number of occasions I have seen proposed plans falter because the objectives of two organisations entering into a formal arrangement are not consistent with each other. This can lead to the frustrating situation that the organisations feel they had a deal at the outset but find that subsequently they need to renegotiate it. Bad feeling on both sides usually follows.
Governance and structure
At the earliest stage this needs to be discussed. The issue of board representation can be a difficult and thorny issue. In the case of one organisation being taken over by another, minority board representation will be seen as one of the key issues for the organisation being acquired and it may also seek safeguards as to how the acquiring organisation operates. In a full-blown merger the organisations need to agree the structure of the new organisation at the outset. There are two alternatives. The first is for a new organisation to be created and both existing organisations to be folded in. The second is for one organisation to acquire the other, subject to specific conditions. These conditions may include adopting a new constitution (i.e. reshaping the board and the membership), specific appointments to the board, agreement from the Charity Commission and obtaining funders? permissions. This second means of proceeding is simpler from a legal point of view, but it can foster the sense that one organisation is overwhelmingly dominant over the other, which on an emotional level can be unacceptable.
Name and branding
If there is going to be a change of name and branding, this needs to be agreed at the earliest stage. Arts organisations tend to be very attached to their names, as to a great extent they define their identities. Board members sometimes only realise the significance of a proposed restructuring when it becomes clear that the name will be lost. Having a new name, logo and brand should be seen as a positive statement to staff, funders and the public, and needs to be approached in that way. If there is to be a merger or acquisition where one organisation is maintaining its name then the disappearing organisation?s goodwill and value is effectively being written off.
Formulating a plan and making key appointments
Planning is the key. A framework needs to be in place so that issues can be dealt with in an effective way and the process keeps to an agreed schedule. Once a schedule has been circulated to the public and funders alike, it may well be critical to keep to it, as unexpected issues can be both costly and embarrassing. Organisations are often surprised at the sheer amount of work involved in a restructuring, whether as a merger or an acquisition. An already overloaded chief executive and staff will not have time to deal with all the issues: placing responsibility for the restructuring on them can lead to the process being handled badly, or mean that professional advisers are leaned on more heavily than is necessary. In this case the likely costs of the restructuring inevitably become much greater. I feel it is generally advisable for there to be a small committee charged with the task of managing the restructuring process, which should involve board representation from each organisation and nominated staff to feed back progress to the boards. When considering who will be on the board of the new organisation, it is helpful to identify who will be the chief executive. In this way continuity can be maintained and this will help with the selection of the team managing the process.
Contemplating restructuring?
Consider the following?
Constitution
? Check the constitutions of each organisation to ensure that the proposed merger or acquisition is permitted and whether any change to a constitution is required before proceeding.
? Agree a schedule and overall plan for the merger/acquisition. The boards of each organisation need to agree in principle to the proposal and it is sensible to identify a projected date of transfer.
Identifying assets
? Consider funding arrangements. Where there is a proposed merger/ acquisition, you may well need to discuss arrangements with existing funders to ensure that funding will continue and establish whether there are any additional conditions attached.
? Both organisations will need to review their assets in advance of any transfer. The assignment of leases can usually be made subject to the landlord?s consent, though it may be that the merged organisation will have different property requirements which need to be planned for in advance. Freehold and leases may be subject to mortgages in which case any transfer or assignment would generally need the consent of the mortgagee or chargee. Even if all assets are being acquired, there will usually need to be a list of all equipment and other items owned by the organisation being acquired or transferred. Part of the assets of the company will be Intellectual Property rights, such as trademarks, copyright works, software and other licences which will have to be transferred.
Staff audit
? The organisations need to consider in considerable detail the effect on staff that the proposed merger/acquisition is likely to have. Specialist advice should be sought to identify all employees? rights and ensure that the organisations are clear as to the impact of the restructuring on those employees. There will be redundancies or changes in job description, or it may be that the TUPE regulations [Transfer of Undertakings (Protection of Employment) Regulations 1981] will serve to transfer all staff into the new organisation without any change. This is a critical area and is particularly important where local authorities are transferring staff to independent organisations, which will need to offer similar pension rights.
Branding
? If the new organisation is to have a new name, issues such as domain names, logos and designs should be considered in advance to ensure that a co-ordinated public announcement can be made. As part of this process, any names and related rights that cease to be used ? domain names and trademarks for example ? need to be considered. It may be that the organisation will maintain the existing domain name with a re-router to the new domain name; and it is possible that some existing trademarks need to be maintained.
Official notification
? In the case of charities, the Charity Commission may need to be involved, as too may the Inland Revenue or Customs & Excise, or other regulators.
? Consider organisation memberships and registrations. These may be memberships of professional bodies and registrations such as for data protection purposes. For example, it should be checked whether the organisations? databases can simply be amalgamated. If not, then consent may have to be sought for the merged organisation to make use of the data.
? Arrangements with bankers should also be considered. Boards will need to discuss how back-outs would be dealt with, in particular overdrafts.
? Check insurance policies as to whether these can be transferred into the new organisation. Some policies may need to be cancelled and others extended.
Sean Egan is Head of the Arts & Media Department at Bates, Wells & Braithwaite Solicitors e: s.egan@bateswells.co.uk