This article discusses the "nuts and bolts" for merging two California nonprofit public benefit corporations. Typical reasons for merging nonprofits can include combining resources and expanding their mission, or as an option for a financially challenged nonprofit to continue its mission without dissolving or declaring bankruptcy.
When one nonprofit merges with another, the disappearing nonprofit ceases to exist and all of its assets, liabilities and other obligations are assumed by the surviving nonprofit. All bequests, grants, promises in a will, instruments of donation, subscriptions and dues are transferred to the surviving entity. Exceptions may apply to commitments such as loans and government contracts.
The process for merging nonprofit corporations is different than the merger of a for-profit corporation. One key distinction is the role played by the California attorney general's office. In fact, the specific merger requirements vary depending on the type of nonprofit that is intending to merge, and these provisions are set forth in various sections of the California Corporations Code (Sections 6010 et seq. (public benefit corporations); Sections 8010 et seq. (mutual benefit corporations); Sections 9640 et seq. (religious corporations); and Sections 12530 et seq (general cooperative corporations)). Generally, the process of merging two public benefit corporations is set forth as follows.
As with the merger of ordinary corporations, the first step to merging nonprofit corporations is for both parties to conduct thorough due diligence. This process allows the board of directors of both parties to meet their fiduciary duties and determine whether the merger is in the best interest of both parties. During the due diligence process, the parties will analyze the other corporation's structure, history, assets and liabilities. The due diligence process allows the parties to determine what can be transferred to the surviving corporation, how to best effectuate the merger, and if the merger makes sense in light of the circumstances of both nonprofits.
The process will also identify certain assets which may require additional steps to effectuate a transfer to the surviving corporation. For example, encumbered real property may require permission from the lienholder, or a new loan may need to be negotiated with the surviving entity. Some endowments and grants may have been given based on specific performance criteria that the surviving entity may be unable to fulfill. Due diligence is a solid strategy to analyze assets and liabilities, and resolve issues before negotiating a merger; the merger process runs smoother, the surviving entity has a solid idea of its commitments, and the disappearing entity is better able to answer questions presented by interested stakeholders.
Once both parties agree that a merger is in their mutual best interest, they can proceed to negotiate a plan of merger which will be set forth in the merger agreement. California Corporations Code requires that the merger agreement include certain specific terms. Section 6011. To meet the statutory requirements, the merger agreement must contain the following provisions: the terms and conditions of the merger; the amendments to the articles of the surviving corporation, if any; the amendments to the bylaws of the surviving corporation, if any; the name and place of incorporation of both parties and which party shall be the surviving corporation; and if the parties have members, the manner that the disappearing corporation's membership will convert to membership in the surviving corporation. Id.
The secretary of state provides a sample short-form merger agreement which contains only the terms necessary to meet the statutory requirements. Unfortunately, the sample provided by the secretary of state is designed specifically for corporations with members. Given that a practitioner dealing with this type of merger is most likely to encounter a public benefit corporation without members, the secretary of state form is slightly less beneficial.
The structure of the merger agreement will vary depending on the nature and complexity of the transaction. For example, if the merging corporations are related, or share members of their board of directors and/or executives, the short-form merger agreement may satisfy both parties and a more detailed, long-form merger agreement will be unnecessary.
However, if the merger arises between unrelated corporations, it is likely to the parties benefit to draft two merger agreements. The first being the short-form merger agreement -- designed specifically to be filed with the secretary of state and in turn made publicly available. The second, a longer agreement detailing specific representations and warranties, organizational matters, how the party's respective missions will align and be continued moving forward and any post-merger leadership and board structures.
The merger agreement(s) must be executed by the chairperson, president or vice president and the secretary or assistant secretary of both corporations. Section 6013.
Approval by Boards of Directors and Officers
With the merger agreement(s) drafted and agreed upon, the boards and officers of each corporation must approve the merger agreement and terms of the merger. Depending on the bylaws, the membership of one, or both nonprofits, may also need to approve of the transaction. The board approval should be documented by a written resolution. The officers' approval will be documented in two certificates of approval signed by the president and secretary of each party.
Notice to the Attorney General
With all documents fully executed, the next step is for the surviving corporation to notify the attorney general's office of the pending merger. Such notice must be provided at least 20 days prior to the close date of the merger. In certain cases, the parties may be required to obtain the prior written consent of the attorney general prior to the closing date of the merger.
If a public benefit corporation is merging with another public benefit corporation, religious or foreign corporation, or an unincorporated association with assets irrevocably dedicated to charitable, religious or public purposes -- then notice alone is all that is required. Section 6010(a). Notice should be provided to the "Registry of Charitable Trusts" and should enclose copies of the board resolutions of both boards of directors; the agreement of merger; and officers' certificates of approval.
If the surviving corporation is merging with any other entity, the corporation is required to receive approval from the attorney general. Id. In order to receive such approval, the surviving corporation should send a letter to the attorney general's office, signed by the attorney or director for the surviving corporation containing: factual basis and rationale for the merger, the terms of the proposed merger including the agreement and summary of the effect of the merger, the anticipated close date (typically as soon as possible following the expiration of the 20-day notice period) and enclosing the following: copies of the merger agreement(s); copies of the board resolutions approving the proposed merger; copies of the articles of incorporation of both parties (as amended); and the current financial statement for each organization.
Filing with the Secretary of State
After the 20-day notice period expires, or upon receipt of written consent, the surviving corporation must file the following with the secretary of state: approved merger agreement (only the short-form, if two merger agreements have been executed); and officers' certificate from each corporation.
The merger is deemed to be effective upon the filing of the above identified documents with the secretary of state.
Final Acts: Filing Taxes and Periodic Report
Although the merger is consummated when filed with the secretary of state, there are two important post-merger tasks necessary. First, the disappearing corporation will need to file a final year tax return. Although the surviving entity assumes the California tax liability of the disappearing entity, informational returns to the IRS and California Franchise Tax Board must be filed for disappearing entity for final tax year. (Written assurances set forth in the merger agreement may shift this duty onto the surviving corporation).
Second, the disappearing company must file a closing periodic report with the Registry of Charitable Trusts no later than four months and 15 days after the closing date of the merger.