-While nonprofits can legally merge, the process is different than the merger of a for-profit corporation; in fact, the merger requirements vary depending on the type of nonprofit that is intending to merge and these provisions are set forth in various sections of the California Corporations Code. To help make things less confusing, the nonprofit attorneys from San Luis Obispo’s Toews Law Group, Inc. have summarized the requirements for merging nonprofits in California.
The specific provisions in the California Corporations Code are: sections 6010 et seq. for public benefit corporations, sections 8010 et seq. for mutual benefit corporations, section 9640 for religious corporations; and sections 12530 et seq. for general cooperative corporations.
Reasons for merging nonprofits can include combining resources and expanding their mission, or as an option for a financially challenged nonprofit to continue its mission without dissolving or declaring bankruptcy.
When one nonprofit merges with another, the “dissolving nonprofit ceases to exist and all of its assets, debts, and other obligations are assumed by the surviving nonprofit. All bequests, grants, promises in a will, instruments of donation, subscriptions, dues, and transferred to the surviving entity. Exceptions may apply to commitments such as loans and government contracts.
It’s important to have the best legal guidance for thorough preparation, and compliance with the organizations’ bylaws and California Corporate Code, and that each step is completed accurately. The general steps are:
- Due diligence: Before starting the merger process, both boards of directors should thoroughly analyze the assets and liabilities to determine what can be transferred, how to best effectuate the merger, and if the merger makes sense in light of the circumstances of the both nonprofits. Certain assets may have additional steps required to effectuate a transfer to the surviving corporation. Real property, for example, may require permission from the lien holder, or a new loan may need to be negotiated with the surviving entity. Some endowments and grants may have been given based on specific performance criteria that the surviving entity may be unable to fulfill. Due diligence is a solid strategy to analyze assets and liabilities, and resolve issues before negotiating a merger. The merger process runs smoother, the surviving entity has a solid idea of its commitments, and the disappearing entity is better able to answer questions. Due diligence demonstrates good faith.
- Negotiate the agreement: The Boards of Directors and their legal representatives negotiate a merger agreement that includes the terms, amendments to articles of incorporation or bylaws, the name, place of incorporation and status of each entity, any new configuration to the Board of Directors, the manner of converting any memberships, and other important provisions that can best be determined by a thorough legal review by the San Luis Obispo attorneys for nonprofits.
- Approval by Boards of Directors: The Boards of Directors need to approve the merger. Depending on the bylaws, the membership of one, or both nonprofits, may also need to approve of the transaction.
- Notice to the Attorney General and Receipt of Approval: Provide the Attorney General with a copy of the agreement of merger. Approval from the AG is not required under certain circumstances, but must still be notified.
- Filing with the Secretary of State: After the notice to the AG is satisfied, file the merger agreement and officers’ certificates with the California Secretary of State.
- File taxes: The surviving entity assumes California tax liability of the disappearing entity, but the final IRS 990 return for the dissolving nonprofit must be filed four months and 15 days after the date of the merger.
As attorneys for nonprofits, the San Luis Obispo Toews Law Group, Inc. serves as counsel to dozens of nonprofit organizations ranging from family foundations to amateur sports leagues. The firm also advises businesses, service clubs and trade organizations about organizing charitable affiliates to carry out charitable activities, and advises charitable organizations about forming for-profit subsidiaries without jeopardizing tax exemptions. The firm provides counsel on all aspects of forming and operating nonprofits including developing a Board of Directors, setting up an executive committee, acknowledging donor contributions, and finding reasonable insurance.