16 April 2020

Will The Impact of Coronavirus (COVID-19) Increase Merger Activity in Not For Profit Sector?

Greg Moroney
Greg Moroney Commercial Lawyer

If the answer is not an immediate “yes”, coronavirus is likely to at least provoke discussion of the topic at NFP Board meetings.

In each year from 2016 to 2019:

  • 6% of NFP’s completed a merger in the last 12 months;
  • No fewer than 30% of all NFP directors discussed mergers; and
  • Between 7% and 9% discussed winding up.¹

What will the figures be in 2020 and 2021?

COVID-19 has been a wake-up call to not only NFP organisations but to the mainstream business community. We read daily of sporting codes living beyond their means with the cost of business disproportionate to its revenue; public companies needing to raise capital to strengthen their balance sheets; companies having to be bailed out by the government; and businesses which are unlikely to survive the pandemic.

Many NFP’s live hand to mouth and survive only on volunteer labour and/or government grants. They may survive, but the days of government grants at pre-COVID-19 levels are likely to be numbered particularly in an economic environment where the government can no longer afford to be generous post-pandemic.

So what should your NFP organisation do at this time?

  1. if your organisation is financially stressed “survival” is the only game in town. Your external accountants should be immediately consulted to ensure that you are not trading while insolvent after which a way forward may be planned. We have previously published articles on insolvency which can be viewed here. We can also put you in touch with accountants with the requisite skills if you do not have an existing relationship with an accountant;
  2. a merger for merger’s sake at this time is unlikely to be productive of survival. A merger by whatever means (they may take a number of forms) requires careful initial evaluation at the Board level and subsequent planning with professional input. Due diligence from afar is first required and then formally undertaken as a condition precedent to the merger. In the merger scenario, due diligence is a two-way street and you may expect to have your organisation critically analysed. Accordingly, early legal advice in this process is essential;
  3. the scope of this article does not permit the space to flesh out the criteria for merging but the reasons revealed in the study referenced below are instructive¹. It will be interesting to see the results of a post-pandemic survey.
      • we are not financially sustainable – 14%
      • we were encouraged by government to merge – 9%
      • to increase the number of people we serve – 18%
      • to broaden our range of services to existing users – 24%
      • to develop or maintain market share – 22%
      • to better meet our mission – 35%
      • to increase our size – 12%
      • to improve efficiency – 18%.
  4. the merger may be affected in a number of ways:
      • transfer of assets
      • transfer of membership
      • creation of a new legal entity while retaining the “merging” entities
      • creation of a new legal entity following which the “merging” entities are deregistered or wound up.
  5. while there is a degree of permanency with a merger (what can be done by the pen can be undone by pen except for the last mentioned method above) your organisation may find other business relationships more attractive and permitting your organisation to retain its own identity and culture. Some of those other means are:
      • Collaboration – sharing resources and/or space; referring less profitable work to an organisation which can undertake the work more profitably in the expectation of reciprocity; shared service delivery et cetera;
      • Strategic alliance – an arrangement between two organisations for a common purpose beneficial to both while each retains its independence;
      • Auspicing – generally used in one-off events where an organisation uses its business standing and attributes to assist or support another organisation lacking that standing or those attributes to be awarded and/or undertake a project;
      • Partnership – each organisation retains its own legal identity while agreeing upon the terms upon which they will conduct a common business.

Whichever way forward is being considered, two matters are extremely important:

      • is your organisation legally permitted to enter into the proposed business arrangement with the party contemplated; and
      • the arrangement should be reduced to writing so that both parties to the arrangement fully understand their rights and obligations.

If coronavirus is adversely affecting your organisation or it has enlivened dormant thoughts of mergers or how your business may look in 12 to 24 months’ time we are happy to discuss your objectives with you and to assist in your near-term planning.

 

¹ Australian Institute of Company Directors, Not-for-Profit Governance and Performance Study  – Key findings from the 10th edition, 2019.


Individual liability limited by a scheme approved under professional standards legislation (personal injury work exempted).

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