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Mergers with California Nonprofit Corporations

This article discusses the basic steps and considerations in mergers involving California nonprofit public benefit corporations.  Although this background is helpful, it is not a substitute for retaining competent counsel to assist with the analysis of alternatives and the preparation of the required resolutions, minutes, forms, notices and letters.  This article does not cover mutual benefit corporations, private foundations, freestanding charitable trusts, political action committees or religious corporations, although there are many similarities.

Dissolution Alternative If financial distress is a motivating factor, consider winding up and dissolving the entity.  If a dissolution is warranted, it should be planned and commenced promptly in order to avoid drifting into insolvency or wasting assets, which course of conduct could expose directors to liability.  California Corporations Code ("Corp. C.") §§ 5232, 5233 & 5240.

The Role of the Attorney General A key distinction from mergers involving an ordinary corporation is that the Attorney General of the State of California (the "AG") must receive notice and may play a role. The AG considers public benefit corporations to hold assets in a charitable trust by their very nature, over which the AG has broad powers of supervision. California Government Code ("Gov't C.") Sections 12598 through 12599.7; Holt v. College of Osteopathic Physicians & Surgeons (1964) 61 Cal.2d 7590; People v. Cogswell (1896) 113 Cal. 129, 136

Forms of Entity A public benefit corporation may merge with any type of business entity, including a for-profit entity. Corp. C. § 6010(a). However, without the prior written consent of the AG, a public benefit corporation may only merge with another public benefit corporation (or a religious corporation or a foreign nonprofit corporation or an unincorporated association), the governing documents of which provide that its assets are irrevocably dedicated to charitable, religious, or public purposes. Corp. C. § 6010(a).

Factors to Consider Among other things, the following factors particular to the merger of a public benefit corporation should be considered before undertaking a merger.

1. Bequests. The surviving entity will succeed to and receive the bequests, devises, gifts, grants and other promises in a will or other instrument of donation, subscription or conveyance of the disappearing entity. Corp. C. §§ 6022, 8022 & 9640(a). If the subject entity has significant pending bequests, a merger presents an advantage because such bequests will not be received after a dissolution.

2. Continued Oversight. Some of the existing directors may serve in the resulting new corporation and continue their oversight of the assets of the original enterprise. If the subject nonprofit elects to merge with another entity, consider requiring seats on the surviving entity's board of directors and discuss the terms of maintaining the seats.

3. Effect of Merger. The surviving entity succeeds to all rights and property, and is subject to all debts, liabilities and trust obligations, of the disappearing entity. Corp. C. §§ 6020(a), 8020(a) & 9040(a). The surviving entity assumes the California tax liability of the disappearing entity. All creditors' rights, liens and trusts on the merging entities' property (only to the extent of property subject to the lien immediately before the merger is effective) are preserved unimpaired as if the surviving party had incurred them itself. Corp. C. §§ 6020(b), 8020(b) & 96540(a). The surviving party's record ownership of the disappearing party's real property may be evidenced by recording a certified copy of the merger agreement, or a certificate in the form prescribed by the Secretary of State, in the appropriate county recorder's office.

4. Choice of Entity The choice of which entity will be the surviving entity should be made carefully. The board should obtain information on, and consider, the tax exempt status of each entity, the history of each entity, the employees and existing employment benefits as well as the preservation of bequests and opportunities for continuing oversight.

Notice to Attorney General The AG must be provided with a copy of the proposed merger agreement at least 20 days prior to consummation of the merger. Corp. C. § 6010(b). However, the AG's affirmative consent is not required unless members receive consideration other than membership in the surviving entity. Corp. C. § 6010(c). Many public benefit corporations have no members, in which case a merger appears not to require the consent of the AG. Note that a merger of two California public benefit corporations does not require a determination of fairness by the Corporations Commissioner. A tax clearance certificate from the Franchise Tax Board was once required, but it is no longer required.

Approval of Boards A merger must be approved by each entity's board of directors, members (if any), any other person entitled to approve amendments to the entity's articles and anyone authorized or required to approve the merger according to the laws under which each entity is organized. Corp. C. §§ 6011-6012 & 6019.1. Member approval (if the other entity has members) may be obtained before or after board approval.

Merger Agreement The merger agreement document itself, and not just its terms, must be approved by the board and signed by authorized officers of each corporation. Corp. C. §§ 6011, 6013, 6019.1(e), 8011, 8013, 8019.1(f) & 9640. The merger agreement must contain:

(1) the terms of the merger;

(2) any amendments to the articles or bylaws of the surviving corporation required by the merger;

(3) the name, place of incorporation and status of each party;

(4) the identity of the surviving party;

(5) the manner of converting memberships of one entity into the other (if applicable);

(6) any other desirable provisions; and

(7) any provisions or details required by the laws under which any party to the merger is organized

Taxes

The surviving entity is deemed to have assumed the California tax liability of the disappearing entity. After filing the aforesaid certificates, the Secretary of State will notify the Franchise Tax Board of the merger. Corp. C. §§ 6020.5(b), 8020.5(b) & 9640(a).

The final Form 990 return must be filed four months and 15 days after the date of the organization's termination. The organization must also file Schedule N, which includes:

(1) a description of the assets and any transaction fee, the date of distribution, the fair market value of the assets and information about the recipients of the assets;

(2) a disclosure of whether an officer, director, trustee or key employee is or is expected to be involved in the successor entity; and

(3) a certified copy of the articles of dissolution or merger, resolutions and plans of liquidation or merger. Only a certified public accountant or other properly licensed tax professional can advise you on the tax implications and reporting requirements of a merger.

Filing with Secretary of State The merging corporations prepare certificates of approval of the merger, which the surviving entity attaches to a copy of the merger agreement and any amendments to the surviving entity's articles required by the merger, all of which is filed with the Secretary of State. The surviving entity files the disappearing corporation's officers' certificate with the Secretary of State.

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