On Tuesday, April 28, at 9 am PDT / 12 pm EDT, I’ll be on Facebook Live with Nadya K. Shmavonian (Partner, SeaChange Capital Partners.) and host Andy Davis (Associate Vice President of Member Education & Outreach, BoardSource) to discuss dissolution and mergers of nonprofits resulting the COVID-19 crisis.
We’ll be responding to questions from attendees, but I believe we may cover some discussion on any of the following topics:
Dissolutions
In March, a CNN article expressed that “Covid-19 is poised to become an extinction-level event for America’s nonprofits.” Sadly, as our society and norms are evolving with the pandemic, many charities are finding themselves unable to hold fundraising events, meet in person with major donors and prospects, deliver services requiring physical presence, and perform many other earned income activities. The article further noted: “Unless government, funders and nonprofit leaders take immediate and decisive action, many nonprofits around the nation may just disappear over the next few months leaving those they serve and employ in disastrous circumstances.”
Dissolution is and will be an option for many charities during the COVID-19 era. Many organizations and consultants have published resources to help charities manage through and beyond the immediate crisis, and a great many will, but a large number will not. Their leaders will determine that they no longer have all the resources necessary to advance their missions effectively and efficiently. And if they lack the capacity for a successful turnaround or if they determine another organization is better positioned to advance their common mission, these leaders may make the decision to dissolve and, to the extent possible, grant their remaining assets to another organization.
Considerations and Issues:
- Governance and fiduciary duties (focus on mission and values)
- Financial position and burn rate
- Legal obligations, including contractual and grant obligations
- State and federal filing obligations
- Employment-related obligations
- Sale/transfer of assets
- Bankruptcy
- Insurance (e.g., D&O coverage beyond the dissolution)
- Document retention and destruction (statute of limitations)
- Legacy
- Dissolution vs. alternative options (including a merger)
- Dissolution plan
- Communication with stakeholders (including internal recognition of impact, accomplishments of the organization, and advocacy messages to advance the mission)
- Dissolution filings
- Final transfer of remaining assets
- Final filings
Resources:
- Dissolving a Nonprofit Corporation (National Council of Nonprofits)
- Nonprofit Dissolution: What to Do When Closing the Doors (Nonprofit Quarterly)
- Termination of an Exempt Organization (IRS)
- Dissolution and Transfer of Remaining Assets: An Alternative to Merger
Mergers and Asset Transfers
For some charities, difficult periods of distress may also create opportunities to merge with another charity. During other periods, the general rule may be that it’s best for a charity to consider a merger when it’s not in a position of weakness so it can use some leverage to protect its core values, goals, programs, and employees post-merger. However, if a charity’s alternative to a merger is dissolution or bankruptcy, the discontinuation of all of its programs and services, and termination of all of its employees, a merger may be a preferable option. Still, this should be done in advance of a charity’s insolvency and boards should ensure these opportunities are explored well in advance if insolvency is a threat.
In many cases, particularly with respect to a highly distressed charity, a merger may not be an available option. However, a charity may still have highly attractive programs and/or other assets that can be preserved and built upon by another charity. Such other charity may not be interested in a merger, but it may be motivated to acquire such programs and assets (including certain personnel).
Considerations and Issues:
- Governance and fiduciary duties (focus on mission and values)
- Benefits, detriments, opportunities, and risks
- Existing relationships
- Stakeholder receptivity and education
- Discussion with other charity
- Culture fit
- Planning
- Due diligence – your charity and the other charity
- Assets – financial and otherwise (e.g., relationships with donors and other organizations, key licenses)
- Liabilities and threats – financial and otherwise (e.g., employment-related, litigation-related, public relations-related)
- Obligations – contracts, grants, other
- Opportunities – efficiencies, expansion, improvements in services
- Other legal issues (e.g., mission-consistency, multi-jurisdiction registrations, filings, transfer taxes, fraudulent transfers)
- Decision on the form of collaboration
- Process (Merger)
- Approvals
- Merger agreement
- Filings to effect the merger
- Final filings of disappearing corporation
- Communications – internal and external
Resources: