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Smaller Charities: Mergers and Amalgamations

Charity mergers were at a record low in 2022/2023, with just 48 mergers recorded and a total of 96 organisations involved, according to data collected by the charity consultancy firm, Eastside People, who also found that, in contrast, there’s been a 70% increase in charities enquiring about, and expressing an interest in, merging.

Faced with a cost-of-living crisis and a rising societal demand for services, amalgamating with another organisation could be in many smaller charities’ best interests, but they may have concerns about the complexities involved in merging and require advice on complying with the various requirements and restrictions. This article intends to demystify some of the legal and regulatory requirements surrounding mergers.

The basics of mergers

Essentially, a merger refers to two (or more) separate charities combining. This power needs to be contained within the governing documents of the relevant entities and care needs to be taken to ensure their respective purposes are compatible.

The best way to structure any merger will be fact-dependent and should be decided on a case-by-case basis. In brief, charities can choose to either:

  1. Combine with an existing charity – here, one charity receives all the assets and liabilities of the other charity, essentially by way of a takeover; or
  2. Set up a new charity – each merging charity will transfer all their property and liabilities to a new charity, forming a single entity. This will be the preferred option if there is reluctance for any merger to be perceived as a takeover.

What are the potential benefits of merging?

Mergers could offer many smaller charities a financially viable solution in the face of a difficult economic climate. The possible benefits include maximising efficiency, avoiding duplication, and heightening the profile of the merged charity and the wider cause. Larger pools of resources could also correlate with an increase in sources of income and better provision of services.

What are the possible risk areas?

Despite the potential benefits, there can also be various costs, risks, and barriers associated with mergers. Financially, charities should consider the resulting impact on their income, particularly in terms of legacy income. Not all legacies will take effect if the named charity has been wound up, although if a merger is entered on the Charity Commission’s register of mergers, then gifts will - in most cases - automatically be transferred.

For a merger to be registered, charities should ensure that all their assets have been transferred and the existing charity will cease to exist as a result of the transfer. If a pre-merger vesting declaration is used to transfer a charity’s assets, there is a legal obligation to register the merger. 

It should be noted that there are a few exceptional situations in which a gift will not pass to the merged charity, despite registration. By way of example, this includes when the transferring charity retains permanent endowment and so remains in existence, or when it is intended that the gift is held by the merged charity as permanent endowment subject to the same terms as the transferring charity’s permanent endowment.

A decision on whether the Register of Mergers will provide sufficient protection should be considered on a case-by-case basis.  Some charities may wish to retain a ‘shell charity’ to sweep up legacies, although it may not be needed, and there are financial costs and the administrative burden to consider.  

A merger may also have VAT or pension implications and, depending on the terms on which they were granted, could result in debts or grants becoming repayable owing to the change in structure. 

Trustees will also need to ensure overall compliance with charity law and their legal duties i.e. to act in the charity’s best interests, to manage the charity’s resources responsibly and to act with reasonable care and skill.  

What legal and regulatory considerations should be taken into account?  

There are various legal and regulatory considerations that charity trustees should take into account when deciding whether to proceed with a merger, including: 

  • What due diligence should be undertaken? This will be necessary to investigate the suitability of the potential merger partner, including their financial position, their culture and purpose, and any risks involved. 
  • Is merging the best option in the circumstances? Consideration should be had as to whether the merger will deliver benefits that each entity would not be able to achieve by other methods.
  • Is Charity Commission authority necessary to proceed, and do any other organisations need to be approached? This will be fact-dependent and could include HM Revenue & Customs, Companies House or the Land Registry, depending on the assets being transferred.
  • How should the merged charity be structured? This could be by way of a charitable trust, a Charitable Incorporated Organisation, or a company. There are different processes to follow depending on the structure of the existing and new charity.
  • Is it a legal requirement and/or beneficial that the merger be registered on the Charity Commission’s register of mergers? Merging charities should consider the effect of registration on any legacies and whether there is any benefit to retaining a shell charity for a period.

How we can help

If you are considering a charity merger and would like further information or advice, please get in touch with our specialist team