Q&A #25 – What’s the difference between a merger and a transfer of assets?
Question: My nonprofit organization has been in discussions for several months about merging into a larger organization, which our Board feels will be in a better position to carry on our mission and grow our programs. The larger organization recently told us that they would prefer to structure this deal as a transfer of assets instead of a merger. What is the difference, and should my organization care which option we use?
Answer: There are a variety of ways to structure a consolidation of two or more organizations, and most fall into the category of either a merger or an asset transfer (the latter is sometimes referred to as an acquisition). The key difference is that a merger generally means that the “surviving” organization takes on all of the assets and liabilities of the organization that it is absorbing, while a transfer of assets can be structured so that the surviving organization receives only the assets that it wants, without the transferor (i.e. acquired) organization’s other liabilities (except for liabilities that are attached to the specific assets that are transferred, such as a transfer of real estate that is subject to a mortgage).
As you can see, your organization’s (actual or potential) liabilities are the crux of the issue. The larger organization would prefer to limit its exposure to risk by not inheriting an undefined (and possibly unknown) set of liabilities, which may include potential lawsuits, debts, unpaid vendors, and more. Even with a robust due diligence process, it is difficult to uncover all possible liability issues ahead of time. For this reason, asset transfers have become a more common structure for this type of transaction between nonprofit organizations.
In many cases, an acquisition will serve the mission and continuity goals of the organization that is being acquired just as well as a merger. However, be aware that a transfer of assets might mean your organization has to carry the load on a bit more legwork, and this should be something that is considered throughout the negotiation process.
For example, if the vision is that your organization will cease to exist after the deal is completed, your organization will need to go through the dissolution process under state law. This will include selling or transfer any remaining assets that are not transferred to the surviving organization, as well as resolving any outstanding liabilities, if there are any. And you will likely need to set aside funds for certain final tasks like purchasing tail insurance coverage for at least a few years, storing or digitizing old records until the appropriate time for destruction, and filing the organization’s final Form 990.
Planning Tip – Due diligence is not just for the acquiring organization. This process should go both ways. Your Board should take a close look at the organization that would be carrying on your programs to make sure that they are an appropriate steward for your organization’s mission and programs. Among other items, you should plan on doing an in-depth review of the other organization’s tax and financial records, governing documents and policies, annual reports, organizational charts, list of Board members of officers, and state reports and registrations, as well as confirming that their tax-exempt status is still valid and current. Importantly, you should also take steps to confirm that the other organization’s mission, values, and culture align with yours, especially if some of your Board members or staff will have a role in this organization after the deal is completed.
Lastly, note that state law (generally the state where your organization is incorporated) will have specific requirements depending on how the agreement is structured. For a merger, there is generally a requirement to approve and submit a “plan of merger,” while an asset transfer may require notice and/or approval by the state attorney general’s office. All of these options have complications that must be considered. Working out these details requires considerable time and effort, which will directly benefit the final outcome.
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