This is the second part in a series of five blogs that outlines the process of two charities merging - before, during and after the negotiation and signing of the transfer agreement.
In part 2 of the blog series, we focus on the importance of data rooms and the role they play in streamlining the due diligence process. Part 1 discussed confidentiality agreements and NDAs.
Throughout the series we will call the charity which is transferring its assets and liabilities to the other charity the "transferor" and the charity which is receiving the assets and liabilities the "transferee".
What is "due diligence" and what does it involve?
When two charities are merging, the transferor charity will typically provide the prospective transferee with key documents and information relevant to the transferor. This allows the prospective transferee charity and it's legal and financial advisors to undertake "due diligence". Due diligence is the name given to the comprehensive review of legal, financial and business information about the transferor, essential to enable the prospective transferee charity to identify and analyse risks and prospects in relation to the proposed merger, make informed decisions and negotiate key transfer terms with the transferor charity. To facilitate the due diligence process, data rooms are often used to enable efficient sharing of information between the parties.
What is a data room?
A data room can either be physical or virtual, but it will always be some sort of secure space where information and documents relating to the transferor charity can be stored, organised, and shared among the parties and their legal and financial advisors. Nowadays, virtual data rooms are much more common due to convenience and accessibility. A virtual data room is simply a secure internet website (as opposed to a physical room under lock and key) which allows authorised users to access relevant documentation.
Setting up a data room:
Who: The transferor charity (usually via their lawyers) will typically be the one to set up and administer the data room because they will be providing access to information about their charity. This allows the transferor charity to control who has access to the data site (whether in whole or certain sections only) by sending a secure weblink invitation to identified persons only. It is important to ensure that anyone having access to the data room is first required to agree to user terms and conditions, including confidentiality undertakings.
What: Generally, the data room set up by the transferor charity is populated with documents and information in response to due diligence questionnaires issued by the prospective transferee charity and their advisors. Before uploading any information to the data room the transferor charity should be mindful of commercially sensitive or confidential information or information which should not be shared given data protection restrictions which may require to be redacted or withheld until a later stage of the transaction process. It is helpful to advisors who are to review the information if documentation is uploaded into named folders with the same types of information all together and an index of documents indicating what is in the data room and any subsequent changes/additions to the data room.
The types of information which might be uploaded may vary but common documents include:
- Constitutional and governance documents: incorporation and corporate governance documentation such as constitutions and board minutes
- Material contracts: including those between the transferor charity and key "suppliers" which would include service contracts
- Employment: employment contracts, settlement agreements, bonus arrangements, details of any pension arrangements operated by the transferor and details of any employment related issues or disputes
- Intellectual property: details of registered and licensed intellectual property e.g. trademarks and patents
- Real estate: title deeds and lease documentation
- Litigation: details of any current, pending or threatened litigation
- Financial and tax: annual and management accounts, cash flow forecasts and tax returns
- ESG: increasingly, organisations are thinking about the environmental, social and governance credentials of prospective transferors.
- Accessibility: a virtual data room is an easily accessible space whereby information can be reviewed about the transferor charity instantaneously. It can also save time and resources, as it allows a large volume of documents to be uploaded electronically (i.e. documents do not have to be printed and copied for prospective transferees and there is no requirement for the transferor to monitor access to physical data rooms).
- Confidentiality and security: maintaining confidentiality is vital in charity mergers. Virtual data rooms offer a secure environment with personalised access permissions and encryption features so that sensitive business information can be protected and only authorised users can access the documents.
- Organisation: virtual data rooms allow for the creation of a clear and systematic folder structure of a vast number of documents, which should streamline the due diligence process and make it easy for prospective transferees to review the transferor's information.
When: Setting up a data room takes time and preparation. As such, as a transferor charity it is a good idea to try and plan ahead and pull together due diligence information as early as possible, so that you are in good shape when the prospective transferee is ready to commence their investigations of the charity.
Key takeaways
In charity mergers, data rooms play a crucial role in enabling an efficient exchange of information between the transferor and prospective transferee (and their respective advisors). By providing a secure and efficient space for information sharing, they allow the parties to undertake thorough investigations and reach informed decisions throughout the due diligence process.
If you would like any advice on the issues raised in this blog, please get in touch with one of our charity law experts.
