This is the third part of a series of five blogs that outlines the charity merger process – before, during and after the negotiation and signing of the asset transfer agreement. In this part 3 of the series, we focus on what is needed to implement the transfer, including obtaining any consents required and the preparation of the transfer documentation – that is, the asset transfer agreement ("Transfer Agreement") and the accompanying ancillary documentation.

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".

Regulator and Third Party Consents

Before the transfer can take place, various consents may have to be sought. In the type of merger we are focussing on in this series, where one charity is transferring its assets and liabilities to the other charity and then winding up, advance consent will have to be sought from the Office of the Scottish Charity Regulator ("OSCR"). Consents may also have to be obtained from other regulators and, third parties, for example, if any contracts are being transferred, consent to the transfer may have to be sought from the other party to the contract.

We recommend starting the process of obtaining any consents required at the earliest possible opportunity following the formal decision to merge. No transfer documentation should be entered into until the necessary consents are obtained.

1. OSCR

As the transferor charity will be winding up, an application must be submitted to OSCR in advance for consent to wind up. As part of this application, OSCR requests a list of all assets and liabilities of the transferor charity and details of any organisations to which the remaining assets will be distributed. The details of the transferee charity is given at this point.

Although there is now no statutory period within which the application must be submitted to OSCR, we would recommend submitting the application at least one month in advance of the proposed transfer date.

2. Other regulators

If the transferor charity is regulated by any other bodies, then consent may also have to be obtained from those regulators before the transfer can take effect. The regulators from whom consent is required will vary from charity to charity and be dependent on the activities of the transferor charity. For example, a charity which provides social care will need to obtain consent from the Care Inspectorate.

3. Contracts and Leases

Any contracts which are to be transferred to the transferee charity should be reviewed to determine whether the other party's consent to the novation of the transferor's interest in the contract to the transferee is required. This applies to a wide range of contracts, for example, hire purchase contracts relating to equipment and contracts for services. Landlords consent will likely be required to assign any lease agreements. That in particular can be complex and we recommend the process is begun as early as possible.

The Transfer Agreement

Although there is no legal requirement to have a Transfer Agreement, it is usually recommended that parties do enter into a written contractual agreement for the transfer of assets and liabilities from one charity to another charity, for several reasons, including:

  • Documenting the terms of the transfer: the Transfer Agreement provides a legal framework that details the transfer process, setting out what assets and liabilities are being transferred, by whom and to whom and the parties' respective obligations in relation to the transfer.

  • Transparency: by setting out the agreed terms of the transfer, the Transfer Agreement aims to ensure that both parties understand their respective rights and obligations, helping to reduce the risk of any misunderstandings and the possibility of post-completion issues.

The Transfer Agreement provisions

Although charity mergers differ in size and complexity, a Transfer Agreement is often extensive and detailed. Some of the key provisions typically covered include:

1. Conditions "precedent" or "pre-transfer" conditions

With charity mergers it tends to be the case that the Transfer Agreement is entered into on or around the date on which the transfer is to take effect. However, if there is a desire to enter into the Transfer Agreement in advance of the proposed transfer date, it may be necessary for completion of the transfer to be made conditional on certain matters occurring first. For example, obtaining regulatory approval to a change in the provider of a service or receiving landlord's consent to the assignation of any leasehold interests. The terms of the conditionality of the transfer will be detailed in the Transfer Agreement.

2. Assets to be transferred

The assets of a charity can vary widely, and could include cash, property, stock, employees, intellectual property, leasehold agreements and the charity's interest in other contracts, such as grant agreements. The Transfer Agreement should set out the assets to be transferred and, if applicable, any assets that are to be specifically excluded. Further detail will be provided in the Transfer Agreement in terms of the arrangements in respect of the assets being transferred.

3. Designated and restricted funds

If the transferor charity has any designated or restricted funds which can only be used for specific purposes, the Transfer Agreement will often set out the terms of those funds and provide that the transferee charity will use these funds in accordance with their terms.

4. TUPE provisions

Where the transferor charity employs staff, the Transfer Agreement will include provisions regarding the transfer of employees under the Transfer of Undertakings (Protection of Employment) ("TUPE") regulations. TUPE ensures that employees of the transferor charity will be protected, with their existing employment terms and conditions preserved by the transferee charity.

5. Consideration, warranties and indemnities

The main driver in a charity merger is different from that of a commercial transaction as charity mergers are typically concerned with improving or preserving the delivery of services, rather than financial gain. As such, there is usually no consideration payable in a charity merger. Instead, the consideration is typically viewed as being the assumption by the transferee charity of the liabilities of the transferor charity.

As no consideration is payable, and as it is typically the case that the transferor charity will cease to exist following the transfer, no warranties are typically given by the transferor charity as regards the charity's legal, financial and operational affairs and assets. Further, unlike in a commercial transaction, no indemnities tend be given by the transferor charity to the transferee charity. Instead, it is common for the transferee charity to indemnify the transferor charity against any losses, liabilities or claims which exist at the transfer date or arise thereafter.

6. Completion

The specifics of completion of the transfer will be detailed within the Transfer Agreement. These will include the date of completion, any steps to be taken to complete, such as the resignation of the existing charity trustees and members of the transferor charity, and any documentation required to be delivered to the transferee charity by the transferor charity at completion. Deliverables may include items such as the ancillary documentation listed below, the Companies House filing code (if the transferor charity is a company) and other passwords required.

Ancillary documentation

The Transfer Agreement will also invariably require a number of other documents to be entered into and delivered at completion. The exact documentation required will depend on the nature of the assets being transferred, but could include:

1. Board approvals

Each party should hold a board meeting to approve the transfer and execution of the transfer documents, including the Transfer Agreement and ancillary documents. Minutes of the meetings should be prepared and copies delivered to the other parties at completion.

2. Novation agreements

The transferor charity will likely be a party to a number of contracts, some of which will need to be transferred to the transferee charity. In order to effect the transfer of the transferor charity's interest in such contracts to the transferee charity, novation agreements will need to be entered into and signed on behalf of each of the original parties to the contact and the transferee charity.

3. Property documents

If the transferor charity owns property, a disposition must be drafted, agreed between the solicitors acting for both parties and signed by or on behalf of the transferor charity.

Additionally, if the transferor charity leases property and its interest in the lease is to be transferred to the transferee charity, lease assignations will need to be entered into and signed on behalf of the transferor charity, the landlord and the transferee charity.

Key takeaways

Ensuring that any necessary consents are obtained in good time and that the appropriate documentation to transfer the assets and liabilities of the transferor charity are key steps in the merger of two charities.

Our charity law team has experience advising on all steps of a charity merger, including the preparing of the Transfer Agreement and any ancillary documentation required. If you would like any advice on the issues raised in this blog, please get in touch with one of our charity law specialists.

Contributors

Alexandra Peddie

Senior Solicitor

Kenneth Pinkerton

Partner

Lesley Wisely

Practice Development Lawyer

Paul Breen

Legal Director