Getting together: What Alberta nonprofits need to know about the legal aspects of amalgamation, merger, and consolidation

The past few months have been a period of rapid change for nonprofits and charities. The COVID-19 pandemic has required massive changes in how we work and how we serve.

As organizations move from the initial response to the crisis to begin to visualize and plan strategically for the future, after assessing their capacity, some may decide that they want to seek out other organizations to “get together with” to maximize impact on the communities they serve and the resources that are available.

Sometimes one plus one really is more than two. For example, a combined organization may have more capacity in vital resources like knowledge, programming, staffing, volunteers, and service ability. Private funding, government grants, volunteer resources etc. may be efficiently used in a combined organization.

Merging organizations is the norm in the business world and there is no reason why it cannot happen in the nonprofit world. Indeed, post COVID-19, mergers may occur more often in the nonprofit world out of necessity.

If two or more organizations consider combining, the process is likely to involve in-depth discussion and plans around mission, vision, communities served, programs and services, finances and more that involve board, staff, funders, donors, sponsors, volunteers, and other stakeholders. In addition to this aspect of the process, there are legal considerations and planning that must take place – and it is the legal aspects of amalgamation, merger, or consolidation that the information below focuses on.

Even though there are some similarities with the steps required to merge in the business world, there are some very specific considerations that nonprofit organizations need to be aware of, especially if a registered charity under the Income Tax Act is involved.

The Legalese

The language is not consistent between legal jurisdictions but, simply put, in Alberta, nonprofit organizations generally either amalgamate, merge, or consolidate with other organizations.

In an amalgamation, two or more organizations join together by bringing their assets and liabilities and members into the new organization that they become. The original organizations do not cease to exist or dissolve, they simply flow into and continue to exist within the new amalgamated organization.

In a merger, one organization winds up its affairs and transfer its assets to another already existing organization. No new entity needs to be created (but the old one is dissolved.)

In a consolidation, all the nonprofit organizations involved transfer assets to a newly created entity. This new forward-looking entity can be whatever the founding organizations agree it should be. The old organizations may dissolve or carry on some other way.

Whether the best way to proceed is by amalgamation, merger, or consolidation, depends on a few things, including legal considerations such as the legislation that the nonprofits involved were incorporated under and whether any registered charities are involved.

The Getting Together Process

Regardless of the legal and any charitable status considerations, most merger situations start with a general discussion between representatives of the nonprofit organizations involved. If there is a desire to move the discussion beyond the initial stages, a non-disclosure agreement is often entered into so the nonprofit organizations can talk to each other and share information without breaching any confidentiality obligations of their respective organizations. Then the due diligence investigation and real discussions can begin that will cover such things as what the new structure will look like, any financial transactions that have to occur between the parties, the timing of the transactions, human resource considerations, etc. Basically, anything to do with the special needs of each nonprofit needs to be explored and discussed so the new organization will be able to acquire anything it needs, and the old organizations will be able to terminate operations, without any issues.

A successful discussion often leads to a letter of intent to amalgamate or merge or some other document that would be the predecessor to and cornerstone of the binding agreement between the parties to follow. That final legal agreement would be an amalgamation or merger or consolidation agreement, whatever is the relevant structure that is chosen. As each nonprofit organization has different considerations, this process may be abbreviated or expanded. More or less documentation and due diligence may be required. There may or may not be an extended negotiation process.

Legal Things to Consider (always)

In any getting together process there are many legal considerations. Each organization involved needs to understand their own fundamental governing documents, bylaws, policies, existing agreements such as funding agreements or gift agreements, or any other kind of historical transaction that may affect their ability to transfer assets or amalgamate or merge in any way with other organizations.  

It is also important to know what legislation each organization was incorporated under as that will dictate whether an amalgamation is legally possible or if a merger or consolidation is necessary.

Simply put, in Alberta, a Society incorporated under the Alberta Societies Act, can only amalgamate with another Society incorporated under that Act. Alberta Non-Profit Companies incorporated under Part 9 of the Companies Act can only amalgamate with other Part 9 Companies. Similarly, a Canada Not-for-Profit Corporation incorporated under the Canada Not-for-Profit Corporations Act can only amalgamate with another Corporation incorporated under that Act.

So, a merger or a consolidation would have to occur if two organizations could not amalgamate because of their statutory limitations. There are some situations where fancy reorganizations can be done for organizations to bring them all under the same statute for an amalgamation but that would only need to happen if there are special reasons to maintain something important from the original entities involved.

The Legal Process (generally)

For any Alberta nonprofit organization, an amalgamation, merger, or consolidation would generally involve a fundamental change because either the corporate structure would be affected, or the majority of assets would be transferred. Each incorporating statute and the bylaws of the organization dictates the specifics, but the process is generally as follows:

1. A special resolution of the members of the nonprofit organization would have to be obtained to approve any fundamental change. This would involve a vote of at least 75% of the members at a duly called meeting or a unanimous resolution in writing of all of the members.  
2. If any of the organizations are Part 9 Alberta Companies, a court order would be necessary.  
3. If a new name will be used for the organization, then a NUANS or name reservation report is required and any name would have to comply with the regulations under the statute that the ultimate organization, or new organization will be incorporated or amalgamated under.

Special Requirements if a Charity is Involved (and lots of time)

Often, one of the main considerations involved in the process is a desire not to disturb any existing registered charity status involved. This takes careful planning because the organization that results from the amalgamation, merger, or consolidation process has the same requirements to fulfill as any other new organization applying for charitable status i.e. its purposes must be charitable at law and its activities must occur in furtherance of those charitable purposes.

The Canada Revenue Agency Charities Directorate, the regulator of charities under the Income Tax Act of Canada, has said that if a charity amalgamates, merges, or consolidates with another organization without informing the Charities Directorate, this could result in non-compliance with other requirements of the Income Tax Act that could lead to penalties or revocation of its charitable status.

Accordingly, Charities are encouraged to contact Canada Revenue Agency Charities Directorate before entering into an amalgamation, merger, or consolidation and provide the following information:

• the type of reorganization that is taking place (amalgamation, merger, or consolidation)
• the names and charitable registration numbers of the organizations involved
• the charitable registration number that the charity wishes to retain, if applicable
• the proposed effective date of the amalgamation, merger, or consolidation
• any other documentation the charity has that refers to the reorganization

Also be prepared to provide a detailed description of activities showing how and where the remaining charity intends to carry out its activities. The CRA may ask for additional documents to process the request and approve the transaction. This process does not take place very quickly so planning well in advance (a year or more) is best practice.

A note about Business numbers (BN) 

The CRA Charites Directorate deals with business numbers of the new entities in these transactions as follows: The amalgamated body retains and uses one BN and the other BNs will be terminated. In a merger, since all the assets are transferred to the remaining organization, the BN of the remaining organization is not affected. In any consolidation the new consolidated body needs to apply for registration and, if accepted, will typically be given a new BN. This all takes time!

Role of the Board

Any organization considering such a fundamental change needs their governing board’s oversight and approval. During any process of merger, amalgamation, or consolidation, the directors of the organization have to keep in mind their duty of care and duty of loyalty to the organization and act in the best interest of the organization. Each director must do their due diligence so they must be kept informed throughout the process. Unlike senior management, which may have a conflict of interest throughout the process of merger, amalgamation, or consolidating of their organization into a new organization where staff will be affected, the volunteer board of directors would not have the same conflicts of interest. Additionally, not everyone can be on the board of the newly formed organization as the new board, whether it be the result of an amalgamation, merger, or consolidation, will generally not have twice or three times the number of directors than the original organization had.

Conclusion

Getting together can be beneficial, but to do it right, in a way that protects all parties and starts the new entity off on a solid foundation, takes careful planning and execution. The planning needs to take place not only on the vision/programming/service side, but the legal side as well.

IntegralOrg, a nonprofit charitable organization created to help other nonprofits and charities, is here to help. Your mission is ours. 

• If your organization would like to understand its current strengths and weaknesses as it considers amalgamation, merger, or consolidation, IntegralOrg offers an organizational assessment survey and one-on-one consultations.
• If you would like to more know more about the legal or financial aspects of amalgamation, merger, or consolidation, book a free clinic with us.
• If your organization would like assistance as it moves through the process of responding to the current realities through refocusing operating models or reforming organizational structures, IntegralOrg has programs and services that can help.

Resources

Societies Act, RSA 2000, c S-14, <http://canlii.ca/t/53j53>

Companies Act, RSA 2000, c C-21, <http://canlii.ca/t/53j3f>

Canada Not-for-Profit Corporations Act, SC 2009, c 23, <http://canlii.ca/t/535b0>

https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/operating-a-registered-charity/making-changes/amalgamations-mergers-consolidations.html

https://www.cpacanada.ca/en/business-and-accounting-resources/strategy-risk-and-governance/not-for-profit-governance/publications/nfp-directors-20-questions-about-mergers

Yvonne Chenier, QC, is a lawyer and philanthropy consultant – and co-founder of IntegralOrg. Yvonne brings more than 35 years of experience helping those in the philanthropic, nonprofit, and social enterprise sectors as general legal counsel and as an advisor on planning, organizational, regulatory and governance matters.