Strategic and Legal Considerations of Non-Profit Integrations

Corporate Bylaws Form - Strategic and Legal Considerations of Non-Profit Integrations

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Corporate Bylaws Form

The proliferation of nonprofit organizations in new years, combined with the current economic climate, has impacted many charities and resulted in the elimination of vital programs or the closure of operations. Specifically, the current tough economic times have come after years of continued increase in the amount of nonprofit organizations in the United States - according to the Urban create and the National town for Charitable Statistics, as of 2006 there were over 2.3 million 501(c)(3) nonprofit organizations in the United States (this amount is up over 36 percent from the data available in 1996).

Like for profit organizations and individuals, however, nonprofits must also adapt their functioning and thought-processes to survive in these hard economic times. In a December 2009 article, the spin of Philanthropy (citing a new Bridgespan Group description surveying practically one hundred nonprofit leaders) noted that "54 percent of respondents are scaling back or eliminating some programs to free resources for other programs, up slightly from a year ago...[and that] [n]early two-thirds of the respondents (63 percent) said they were involving staff members to preserve core programs." (Ben Gose, As the Economy's Pain Continues, More Charities Abolish Programs, The spin Of Philanthropy, Dec. 10, 2009)

While many organizations have decided to cut back on programming, there is another viable option for charities to continue to serve their constituents while meeting the bottom line - merger or integration. Once generally concept of as transactions reserved for the for profit community, mergers and acquisitions in the nonprofit commerce are not only possible, but can be a vital element of survival. In fact, another new research description conducted by The Bridgespan Group champions the possibility of nonprofit integrations not only as a means of survival in a tough economic climate, but also as a strategic tool for success. In its report, The Bridgespan Group cited a new poll of nonprofit executive directors that found that nonprofit leaders reconsider "mergers and acquisitions (M&A) reactively, a way to shore up finances, to make their organizations appear more involving to funders or to address a succession vacuum [but that the time] is also ripe for leaders of healthy organizations to reconsider M&A proactively - as a way to improve effectiveness, spread best practices, improve reach and - yes -t o do all of this more cost-effectively, development best use of scarce resources." (Alexander Cortex, William sustain and Katie Smith Milway, "Nonprofit M&A: More Than a Tool for Tough Times," The Bridgespan Group, February 2009). As such, although this description discusses the benefits of mergers in light of this difficult economy, organizations can all the time reconsider integration as a needful tool for success.

One of the first important precursors to considering a merger is the club insight and appreciating that no man is an island, and in order to better the continent, you have to build bridges. This may sound obvious; however, many small nonprofits are nothing else but small by core groups of leaders who are passionate about their cause and the constituency they serve. While this zeal and diligence can be a true asset to a charity, it can also be a hindrance as it can potentially limit the perspective of organizational leadership. This phenomena is sometimes referred to as "founder's syndrome," which Wikipedia defines as "a label commonly used to refer to a pattern of behavior on the part of the founder(s) of an club that, over time, becomes maladaptive to the thriving accomplishment of the organizational mission." Accordingly, a important hurdle for small organizations curious in integration is overcoming the dominant voice of leadership with tunnel vision. Once this is accomplished, the club is better-suited to approach inherent relationships with an open-mind.

Another important consideration for nonprofit mergers is the culture and environment within each club as well as the governance structure linked therewith. Although two organizations may serve nearly identical purposes, they can diverge on many governance issues, such as amount of board seats, board option process, board carrying out evaluations and relationships with staff. For example, an club with sub-par board participation and low meeting attendance will likely have a remarkably dissimilar supervision style from an club with fifty active and engaged board members. This variable will not only influence the corporate governance of the respective organizations, but will also have an impact on the functioning of basic staff and programs. Similarly, the organizations must evaluate and reconsider their respective corporate image, core values, work environment and leadership style in deciphering the feasibility of integrating the cultures of the two organizations.

Aside from the above internal factors, agenda services, facilities and tool are also vital components to the permissible appraisal of a merger. Examples of these variables consist of the amount of individuals served by the program, the geographic coverage and "client" demographic, the utilization of technology, "competitors" in the market, assistance locations, real asset arrangements, major tool inventory, maintenance contracts and technology systems. Moreover, one of the remaining major factors that organizations should reconsider in light of a inherent merger is human resources, including paid staff and volunteers. The subparts to this component consist of salaries, benefits, charge reimbursement, expert development, liability insurance, carrying out evaluation, volunteer agenda structure and training/orientation, recruitment and evaluation/recognition.

Once the club has carefully these core issues, the remaining legal considerations concerning a merger or integration are governed by applicable state and federal law. Depending upon the structure of the transaction, i.e. A true merger versus an outsourcing of supervision re-composition of the board of directors or asset transfer, the organizations will likely be required to get determined governmental approvals before consummating the transaction. Further, in a true merger, it is advisable that the organizations engage in in-depth due diligence enough to satisfy themselves that they are aware of the other's status (and in the case of the surviving corporation, that it is fully apprised of the assets and liabilities it is assuming through said merger).

In California, specifically, in order to engage in a statutory merger, the Attorney general must be notified and determined filings must be completed with the Secretary of State as added set forth in Sections 6010, et. Seq. Of the California Corporations Code. Under these sections, the legislature has set forth assorted logistical requirements that must be met in order for an club to engage in such a transaction. Specifically, without first obtaining written consent from the California Attorney General, a collective advantage corporation (which is generally how most non-religious 501(c)(3) organizations are organized in the State of California) is only permitted to merge with another collective advantage or religious corporation with exact dedication of assets language in its charter. Cal. Corp. Code §6010(a). Further, the Attorney general must be furnished with a copy of the proposed deal of merger, which must consist of specified terms and conditions, including but not small to the general terms thereof, the amendments, if any, to the articles of incorporation and bylaws of the surviving corporation, and a detailed description of how memberships will be transferred from the disappearing corporation to the surviving entity. Cal. Corp. Code §6010(b); Cal. Corp. Code §6011. There are also many other provisions that should be clearly and accurately set forth in an deal of merger in the middle of two organization, which consist of but are nothing else but not small to the medicine of employees of the disappearing corporation (i.e. Will they be hired on by the surviving corporation, and if so, what happens to accrued benefits, vacation, etc.), warranties and representations concerning the accuracy and completeness of documents in case,granted by each respective club while the due diligence process (for determined reasons, this warranty will help protect an club that is relying on documents in case,granted to it by the other, such as financial statements and every year reports), and the obligations of the parties after the "closing" of the merger transaction. The merger deal must then be stylish by the board of each club (as well as the members, if applicable) and the surviving corporation is required to file a copy of the deal with an officer's certificate.

As referenced above, with merger transactions, the amount of due diligence that is advisable to achieve is increased, namely because the surviving corporation is not only acquiring the assets of the other organization, but also assuming its liabilities. It is well-established that "[w]hen a merger of nonprofit collective advantage corporations becomes effective, 'the cut off existences of the disappearing parties to the merger cease and the surviving party to the merger shall succeed, without other transfer, to all the possession and asset of each of the disappearing parties to the merger and shall be branch to all the debts and liabilities of each..." Catholic Healthcare West v. California guarnatee guarantee Associated, 178 Cal.App.4th 15, 28 (2009) (citing Cal. Corp. Code §6020(a)). As such, documents and data that should be reviewed and analyzed in a merger transaction consist of organizational documents (e.g. Articles of incorporation, bylaws, minutes, permits and list of current board members and terms), financials (e.g. Balance sheets, budgetary projections, every year reports, copies of letters from auditors and list of accounts receivable and payable), tax matters (e.g. Forms 990 and 199, Attorney general registrations and renewals, copy of Irs Form 1023 and copy of Irs measurement letter), donor and grant data (e.g. List of restricted donations and grants, list of pending grant applications, copies of donor materials and list of expert fundraisers), employee matters e.g. (list of all employees, documents relating to benefits, copies of personnel policies and handbooks and organizational chart), company contracts and commitments (e.g. Copies of all material contracts such as leases, joint ventures, buy agreements and tool and merchandise contracts), guarnatee (e.g. List of all guarnatee policies with a description of risks, coverage limits and premiums and copy of directors and officers indemnity/liability guarnatee coverage), litigation (e.g. Listing of all pending and inherent litigation and contractual disputes and any memoranda of counsel with respect to pending or threatened litigation) and other data or details relating to any and all actual or inherent liabilities of the dissolving entity. (Please note that this is meant to be exemplary of the documents that organizations should be reviewing and is by no means exhaustive)

In other types of integration transactions, such as an asset transfer, the assuming corporation can pick and pick the assets it is acquiring, while limiting exposure by choosing not to assume any liabilities. That being said, however, even in this type of transaction, the transferring club is required to give written consideration to the Attorney general at least twenty days before it "sells, leases, conveys, exchanges, transfers or otherwise disposes of all or substantially all of its assets unless the transaction is in the quarterly procedure of activities or unless the Attorney general has given the corporation a written waiver of this section as to the proposed transaction." Cal. Corp. Code §5913.

As such, care must be taken in such a transaction to ensure that each club has a competent and knowledgeable tax and legal consultant available to answer questions and contribute guidance concerning the structure of the transaction and due diligence strategy and guidance, as well as counsel concerning the preparation of the needful documents and filings with applicable state agencies.

As can be seen, although there are clearly many variables complicated in a thriving merger or integration, the inherent benefits can be invaluable to nonprofit organizations. Not only can entities achieve economies of scale while increasing their donor bases and geographic reach, but more importantly, perhaps, they can heighten the capability and efficiency of programming while also tapping into the skills and talents of a greater pool of inherent board members.

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