Two heads are better than one, not because either is infallible, but because they are unlikely to go wrong in the same direction. – C.S. Lewis
The last edition of this newsletter discussed what appears to be an increasing trend of exempt organizations exploring mergers, as we have seen in our practice at Rembolt Ludtke. Comments received since that edition have affirmed others are observing this trend as well. Where two or more charities decide after informal conversations that merger is in the best interests of the organizations – for whatever reasons – the question shifts to how to merge.
As a preliminary note, this edition’s focus is solely on mergers between two nonprofit entities based on the requirements of the Nebraska Nonprofit Corporation Act, which generally codifies the Revised Model Nonprofit Corporation Act. There can be significant variances between states in their nonprofit laws, so take the steps outlined here as generally applicable but be certain to refer to your state’s nonprofit act. Finally, while nonprofit mergers with for profit entities may be allowed under a specific state’s law, such transactions typically require significant additional steps and are beyond the scope of this discussion.
Can You Merge?
The first question is whether applicable state law allows the nonprofits to merge and, if so, under what conditions. For instance, Nebraska law categorizes all nonprofit corporations as either public benefit, mutual benefit, or religious corporations. Depending on their classifications, the nonprofits may be able to merge without prior court approval or notice to the Attorney General but it should not be assumed.
Pursuant to Neb. Rev. Stat. § 21-19,119, public benefit or religious corporations may merge without prior court approval or notice to the Attorney General with a Nebraska public benefit or religious corporation, with a nonprofit corporation domiciled in another state that would qualify as a public benefit or religious corporation, or with a wholly owned subsidiary that will merge into the public benefit or religious corporation. Otherwise, a proposed merger is not allowed absent prior court approval, notice to the Attorney General, or both.
If nonprofit entities domiciled in two different states are engaged in merger discussions, the additional question is whether the laws of both states will allow them to merge with a foreign corporation. Nebraska law allows such mergers where the merger is permitted by the laws of the other jurisdiction and the merging entities comply with the laws of both jurisdictions.
You Need A Plan
While the nonprofits’ leaders, and perhaps even their boards, have likely had numerous discussions in coming to the conclusion that they should merge together, and perhaps even took votes to do so, those discussions and actions do not authorize a merger of public benefit or religious corporations under Nebraska law. Instead, a statutorily required plan of merger must be approved, the contents of which are mandated by state law. The requirement of a formal merger agreement is fairly consistent in surrounding states, although not all require specific provisions.
In Nebraska, the plan of merger must include the names of the entities, as well as the name of the surviving corporation after the merger; the terms and conditions of the merger; and how memberships, if any, will be handled during the merger. Amendments to the governing documents of the surviving corporation that will be enacted as part of the merger and other provisions related to the merger may also be set forth.
What constitutes “terms and conditions” of the merger will be determined by the parties. In general, it would be appropriate to set forth: which nonprofit is merging and which will be surviving; the name of the surviving corporation; the effective date of the merger; the governing documents following the merger; the directors and officers of the surviving corporation; the ongoing responsibilities of the merging corporation that the surviving corporation will assume; and the process for approval of the plan of merger.
The plan may also address the obligations of the parties between approval and the effective date of the merger, handing of specific assets, and any assets which will not be included in the merger, for instance, donor restricted gifts that specify they must be distributed to another organization if the entity is a party to a merger. Other terms could address how the merger will be publicly announced and when, the conduct of fundraising, and employment, staffing, and benefits issues.
Obtaining Approval
It is this plan of merger, then, that the nonprofits must approve to initiate the legal process. If the nonprofit does not have members, the plan must be approved by a majority of the directors then in office and the directors must be given specific notice that the plan of merger will be considered at the meeting.
If the nonprofit has members, then the board of directors and the members must both approve the plan of merger. If the members will vote on the plan of merger at a meeting, the members must be given specific notice that the plan of merger will be considered and be provided a copy or summary of the plan. Nebraska law requires that members approve a plan of merger by the lesser of two-thirds of the votes cast at a duly qualified meeting or a majority of the voting members. Furthermore, if any third party is required to approve amendments to the articles of incorporation or bylaws of a nonprofit corporation, that third party must also approve the plan of merger.
Approved! Now What?
Once the plan of merger is approved by all parties, they execute the plan to take all necessary actions leading up to the filing of the articles of merger. This will likely include discussions with supporters, public announcements, notices to third parties, employment and staffing discussions, fundraising transition, and delivery of services.
The merger legally occurs when articles of merger are filed with the Nebraska Secretary of State, the contents of which are specified in Neb. Rev. Stat. § 21-19,121. It is important to note that the articles are accompanied by the plan of merger, meaning the plan is a public document, just like articles of incorporation. If the plan of merger sets forth amendments to governing documents effective with the merger, then those amendments should be specified in the plan of merger and will take effect when the articles of merger are filed.
Merged! Now What?
When filed, the merging corporation ceases to exist and the surviving corporation is its legal successor. The title to real estate, motor vehicles, depository accounts, and other property is automatically vested in the surviving corporation, subject to any conditions that existed on those assets before the merger, and the liabilities and obligations of the merging corporation become those of the surviving corporation. Future bequests, pledges, gifts, and grants for the benefit of the entities prior to the merger remain valid, in effect, and payable to the surviving corporation after the merger unless they provide otherwise.
Don’t forget about the IRS. A final Form 990 will need to be filed for the merging corporation, which is an obligation of the surviving corporation.
Needless to say, there’s much to do when two organizations decide to merge. The requirement of a plan of merger in Nebraska, or similar formal agreements in other states, helps lay the groundwork for a merger to be successful and is worth the time and specificity required for those who need to consider approval to feel informed and confident in their decision.
If you were part of a nonprofit merger, what are your reflections on the merger process? What went well and what didn’t? What should have been discussed in more detail in the merger agreement? We welcome your comments.
As always, thanks for reading.
This newsletter is for general information purposes only and should not be construed as legal advice. Those requiring legal advice are encouraged to consult with their attorney.
