Twilight Seminar presentation by Aaron Dahl, Senior Associate, McCullough Robertson. 

Last month, the Hill Rogers Twilight Seminars focused on the Not-for-Profit sector. As part of this we were fortunate enough to be joined by Aaron Dahl, a Senior Associate at the leading independent law firm, McCullough Robertson. Calling upon his considerable experience in the NFP sector, Aaron’s presentation explored some of the legal challenges faced by NFPs in pursuing consolidation or merger transactions.

Understanding the trend

Aaron began by quoting Charles Darwin in explaining the conditions that have led to an increasing shift towards NFP merger activity in recent years:

“It’s not the strongest of the species that survives, nor the most intelligent, rather the one that is most adaptable to change.”

The changes facing NFPs are undoubtedly many. Aaron identified numerous contributing factors for the reshaping of organisations within the NFP sector. These included the ‘Marketisation’ of social services, the escalating demands and costs associated with compliance and Government-driven rationalisation whereby scale and the pooling of knowledge is favoured over a larger number of smaller, disparate operators. Community expectations are also having a heavy influence on the NFP landscape, lead by changing demographics together with shifting attitudes towards governance and service delivery.

The challenges of consolidation

When managed effectively, mergers within the NFP sector can deliver real financial, operational and community benefits. However as Aaron explained there are many pitfalls, legal and otherwise, that must first be negotiated in order for this to occur.

Perhaps unsurprisingly, one of the most fundamental issues is philosophical. Specifically, how can you find consistency and common ground between the missions and charitable objectives of the merging organisations? This is far from easy. However like any form of successful union or marriage, it is absolutely imperative for there to be any hope of long-term success. It also has legal ramifications, as highlighted in the Australian Charities & Not-for-Profit Commission Governance Standard 1:

“Charities must…work towards their charitable purpose. They must be able to demonstrate this….”

This means all key decisions – including any consolidation transactions – must be made with the organisation’s charitable objectives in mind. Or put another way, any merger or consolidation transaction must promote and further the organisation’s charitable objectives as contained in its governing documents. Failure to adequately demonstrate this could lead to significant governance issues for the NFP and its senior management in the future.

Structuring the transaction

In the next part of his presentation, Aaron went on to outline the different ways a merger or consolidation can be achieved between NFP organisations. These ranged from ‘Asset Transfer’, ‘Acquisition’ and ‘Top Hat’ models, to several ‘Joint Venture’ structures. There is no right or wrong. Each model brings its own advantages and disadvantages when it comes to organisational governance and day-to-day operations. The key, as always, is being able to identify and then implement the most relevant and sustainable structure for your specific merger transaction.

Stakeholder engagement

Regardless of which model is most appropriate, Aaron ended by reinforcing the critical need to ensure key stakeholder engagement throughout the transaction process. Specifically, he stressed the need to engage early, often and always with a consistent and coherent message. He also pointed to the tremendous importance of anticipating the likely impacts on everyone from members, donors, employees and volunteers to clients, corporate supporters, Government and Directors. Key questions to ask include:

  • Who are the key stakeholders?
  • How, from a legal perspective, could they impact on the transaction?
  • How will they be impacted by the transaction itself?

Ultimately, the better you’re able to answer these questions, the more effective and seamless your merger transaction will likely be. Knowledge and preparation almost always proves central to success.

Hill Rogers has a wealth of experience assisting Not-for-Profit organisations. You can find our more about our services here.