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Thinking about a charity collaboration or merger?

Posted on 29th September 2020 in Charities and Social Enterprise

Posted by

James Evans

Partner and Solicitor
Thinking about a charity collaboration or merger?

Charity trustees and senior management teams are needing to think imaginatively and boldly about how their charity will deliver for both their beneficiaries and service users as lockdown restrictions continue to impact their operational environment and ability to fundraise for the foreseeable future.

Considering the potential benefits of increased collaboration with other organisations, and reviewing the effectiveness of existing collaborations should be a key part of this exercise.

Trustees have always been under a duty to consider regularly whether collaborating with others would be a better way of achieving the charity’s purposes. Arguably the need for charities to consider the potential benefits of collaboration has never been greater given the current pressures on the sector.

 

Competition

These pressures arise not just as a result of the huge impact of the pandemic and lockdown restrictions on operations and fundraising, but also from competition for limited funding and contract opportunities from the steady flow of new charities which continue to be established.

The Charity Commission reported earlier this year that they received around 23 new charity registration applications a day in 2019/20, with the rate of successful registration at around 60%. Our own experience at Tozers LLP suggests there is still appetite on the part of the public to establish new charities, often reflecting a wish to assist individuals and communities impacted by the pandemic and lockdown.

In addition to completely new organisations, we are seeing an increasing trend of existing non-charitable social enterprises deciding to convert to charity status, or to establish a new charity to work alongside the existing organisation, where often the key driver is to enable the organisation to qualify for funding opportunities only available to charities.

 

Benefits

Effective collaborations can lead to significant benefits, such as enabling resources and overhead costs to be shared (for example shared employment of senior IT and digital expertise), enhancing expertise and skills, creating improved, more joined up services for beneficiaries and service users, and also the creation of additional funding and contracting opportunities.

 

Key observations from the legal viewpoint

Some of the key legal do’s and don’ts when considering collaboration include:

  1. Keep control – it is up to each organisation to decide how ‘deeply’ they wish to collaborate, the extent of any commitment and very importantly, which aspects of their operations they wish to keep outside of any collaboration.
  2. Reputation is key- doing your due diligence (financial, legal, governance, reputation/track record) on potential collaboration partners is important especially where the collaboration activity will create potential risks for your organisation.
  3. Think about structure early - there are a wide range of potential ways of structuring a collaboration, ranging from:
    • informal joint working arrangements which may not even be legally binding;
    • more formal, binding contractual arrangements;
    • joint ventures establishing a separate legal entity for the collaboration; and
    • full mergers, which themselves can be structured in a variety of ways.
    • Each collaboration structure has its own legal, financial and operational implications and early professional advice from lawyers and accountants can be very valuable in ensuring a collaboration is structured appropriately and avoids unwanted tax and VAT consequences.
  1. Maintain independence and guard against ‘mission drift’ at all times- it is vital that any proposed collaboration falls within your organisation’s charitable objects to avoid potential breach of trust implications for trustees. Collaborations need not and should not result in a loss of a charity’s independence unless a full merger is being contemplated, and the governance arrangements for any collaboration will need to reflect this.
  2. Collaboration doesn’t have to mean merger. We often hear commentary that ‘there are too many charities’ and whilst there will be cases where the interests of beneficiaries or service users will be better served by merger, it is not always the best solution. As noted above there is a wide range of collaboration structures which fall short of merger but can still create significant benefits and impact, and there is also a lot to be said for maintaining as much diversity and choice among sector organisations as possible.
  3. Establishing and building mutual trust and confidence is essential to an effective collaboration. It is often best to start small and build trust with new collaboration partner organisations before embarking on deeper collaborations.
  4. Document the arrangement properly- even the most informal collaborations should be documented to provide clarity as to the nature of the relationship being created. But for more formal collaborations a well drafted collaboration agreement will be vital to underpin the arrangement and protect your organisation. Such an agreement should deal with matters such as:
    • The expected commitment and contributions of each organisation;
    • How liabilities will be shared;
    • Governance and decision-making arrangements;
    • Confidentiality and data protection;
    • Intellectual property - both for any existing IP rights and any new IP created from the collaboration;
    • A procedure for dispute escalation and resolution;
    • How the arrangement can be brought to an end and the consequences of termination- having a clearly defined exit route is important in case the collaboration proves not to be as successful as the parties hoped.

 

How can Tozers help?

Our dedicated Charities and social enterprise team has significant experience of advising on the full range of collaborations, joint working arrangements and mergers. If you would like to explore collaboration in more detail or find out how we can help, please get in touch with James Evans or Amy Laver.

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