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Thursday, February 16, 2012

Association Mergers (California Outline)

The process of merger or consolidation of two or more nonprofit mutual benefit corporations is simpler than one might think in many cases.  It involves relatively few steps, certain approvals by the board and sometimes the members, and filings with the Secretary of State.  If charitable assets are held by either merging corporation, approval by the Attorney General is also required, ostensibly to ensure that the charitable assets continue to be used for charitable purposes, and to prevent those assets from wrongly inuring to the benefit of any individual or entity.  The process describe here is for a California entity, but the laws are similar in most jurisdictions.

For purposes of mergers, a “survivor” or “surviving corporation” is the corporation into which other entities are merged. A “disappearing corporation” is the corporation that does not survive the merger.

The merger process is carried out approximately as follows:

1. The merging organizations meet and agree to the basic concept of exploring a merger.  At that point, the parties should enter into a written agreement (a letter of intent) obligating the parties to explore the matter in good faith, addressing confidentiality, and addressing termination of the exploration (used when one or more of the parties decides not to move forward with a merger).  At this point, a “due diligence” review process may begin.  

2. The due diligence review should be tailored to the circumstances.  With large and complex entities, the review should be much more involved than reviews necessary for merging very small entities.  I recommend that a checklist for a merger be established at the time the letter of intent is drafted, so that all of the parties will know what to expect.  I recommend that both the chief staff officer and chief elected officer sign the letter of intent, just to be sure that everyone is on the same page.

3. Upon approval of the concept and due diligence review by each organization, a detailed Merger Agreement and Certificate of Approval of Merger Agreement (for each merging corporation) is drafted and approved.  (If either corporation has members, the members of that corporation (and any other entity specified in the Articles of Incorporation) must also approve.  This is sometimes complicated when there are different classes of members.  If so, the matter should be reviewed with counsel.)

4. The surviving corporation files the Certificate of Approval of the Merger, along with the Agreement of Merger and the written consent of the Attorney General (if required), with the Secretary of State.

Upon completion of this process, the separate existence of each “disappearing” corporation ceases.  The surviving corporation succeeds to all rights and property, and is subject to all debts, liabilities and trust obligations of the disappearing corporation.  Corporations Code section 6020(a).  The surviving corporation succeeds to any bequest, devise, gift, grant, or promise in a will or other donation.

Although the merger process is not necessarily complex, it makes a lot of sense to involve your business, tax and legal advisors in your discussions of merger or consolidation.

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