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14 July 2010 0 Comments
Posted in Corporate & Commercial, Opinion

‘More charity mergers ahead?’

Author headshot image Posted by , Partner

Recently, Third Sector magazine reported that City Parochial Foundation and Trust for London were merging in an effort to become more flexible and to end confusion for grant applications.

When people think about charity mergers, it is usually with regards to the really large ones – for example, when Cancer Research UK was formed in 2001 through the merger of Cancer Research Campaign and Imperial Cancer Research Fund to create the biggest cancer research charity in the world. Or more recently in 2008, when Help the Aged and Age Concern combined to form Age UK.

Impact of the recession

In March 2009, the BBC reported on Charity Commission research that showed 52% of those charities questioned had been affected by the economic downturn which was an increase from 38% the previous year. Almost two thirds of charities within incomes over £1m said at that time that they were worried their work would be hit. At that time only 3% said they had considered collaborating with or merging with a charity.

In March 2010, The Charity Commission’s fourth Economic Survey of Charities demonstrated the continuing effect of the recession on charities in England and Wales. The key findings of the survey of 1,010 charities showed 59% of charities reported having been affected by the downturn, up from 38% in September 2008 and 56% in September 2009. Of those affected, 62% had experienced a drop in income. The research also found that larger charities were hit hardest, with 79% feeling the impact of the downturn and a third seeing an increase in demand for services. This disparity is also reflected when looking at the steps that charities took in response to the downturn, with 79% of the largest charities putting measures in place, compared to 31% of small charities.

Charity Commission encourages mergers

However, the Charity Commission actively encourages mergers – particularly amongst the smaller charities. As the regulatory burden has increased for charities who must grapple with both company law and charity law a merger can be an attractive way to reduce the cost of administration, save money on premises, facilities, marketing, legal and accountancy costs and improve governance. It published two toolkits for charities in September 2009 – Choosing to Collaborate and Making Mergers Work.

Charity merger issues

Sometimes there is considerable restructuring to do within a charity before it can consider a merger – and this can be demanding work where a charity has grown organically and rapidly over many years in response to demand for its services without a more strategic overview of the charity’s structure and tax efficiency.

Aligning charitable organisations requires careful consideration of complex legal issues regarding objects, operations and governance as well as obtaining permission from the Charity Commission for the new entity assuming a new entity is being formed and then registering the new organisation. Some of the old style trusts don’t even have the power to merge.

Yet in addition to the legal and financial work involved in a charity merger there are a host of personality and political issues to contend with that require careful attention by professional advisers who must be sensitive to the issues involved in aligning the vision and values of the range of stakeholders involved in each charity – its management, trustees, patrons, staff, volunteers and the groups it aims to help. There may also be major interest (and opposition) on any talk of mergers by the media and the public where the detail and complexity are not fully understood.

There is likely to be considerable concern about how the new trustee and management teams will be selected. Typically, there needs to be a key individual at each of the potential merging charities who can see the big picture benefits (and the likely stumbling blocks) and who can drive the merger discussions at a sensible pace – in a corporate environment this would be the chairman’s role. Even in a straightforward situation a charity merger is likely to take six months, so it is not a quick fix.

However, as the cost of the Government’s crackdown on public sector spending and the public further tighten their belts to deal with the austerity measures there is likely to be further pressure on charities with increased demand for services and further reduction in funds from the public purse and donations. I expect to see an increase in interest in mergers as a way for charities to reduce administrative costs and pool resources to achieve their goals.

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