Recently, the nonprofit sector has seen a drastic rise in the number of nonprofit mergers and reorganizations. The constant need to reduce costs, especially in the healthcare sector, seems to be the driving force behind the movement. When selecting a merger or reorganization structure, what considerations should be reviewed to ensure the structure is right for the participating nonprofits?
This series will provide a general overview of the various options nonprofits have when looking to undergo a merger or reorganization and will address the various considerations a nonprofit should consider before selecting a merger or reorganization structure.
In general, there are six merger/reorganization structures commonly used by nonprofits. We will discuss each structure and the advantages and disadvantages of each option. This week, we will cover structure #1: the statutory merger.
A statutory merger is what most readers probably think of when they think of a merger. Statutory mergers are set forth by statute (hence the name) and provide a streamlined merger process. During a statutory merger, the target nonprofit dissolves "into" the surviving nonprofit.
The target nonprofit's assets (including most, if not all, of the target nonprofit's contracts and licenses) are automatically transferred to the surviving nonprofit by operation of law. The surviving nonprofit also assumes the target nonprofit's liabilities.
The advantage of a statutory merger is that it is simple. The transfers occur automatically by operation of law upon filing a certificate of merger. Once the certificate of merger is filed, the target nonprofit ceases to exist. The disadvantage of a statutory merger is that the surviving nonprofit assumes all of the target nonprofit's liabilities, both known and unknown. Unknown liabilities can be a great cause of concern for the surviving nonprofit, especially if the target nonprofit engaged in high-risk activities such as child care, elder care or healthcare. Therefore, it is important that the surviving nonprofit has sufficient insurance coverage.
The remaining structures provide alternative ways of protecting against known and unknown liabilities. Check back soon for the next installment of this series, which will cover transfers of assets.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
