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Association mergers and consolidations can result in an organization that almost inevitably is more cost-effective than the former two or more associations operating separately, because duplicative administrative costs can be eliminated or reduced. Combining two or more existing associations is not without challenges, however. From a practical standpoint, institutional loyalty by memberships, volunteer leaderships, executive staffs, consultants, vendors, and others may hamper the merger process. When the associations considering such action are of unequal size, resources, or scope, anxiety that one will overwhelm the other is a predictable reaction. In most states, a merger, consolidation, or dissolution cannot legally take place without the approval of the voting members of each corporation that is actually merging, consolidating, or dissolving. State nonprofit corporation law dictates the voting requirement; a two-thirds vote of members entitled to vote is typical.

Association mergers and consolidations can result in an organization that almost inevitably is more cost-effective than the former two or more associations operating separately, because duplicative administrative costs can be eliminated or reduced. The combined entity also holds the strong promise of being more effective because it can benefit from greater membership and dues bases, represent a larger constituency in public and government affairs advocacy, and reduce competition for educational programming, publications, and other services. Members enjoy the elimination of dues payments and volunteer service to two or more associations, which is often the most important driving force for combining associations.

Combining two or more existing associations is not without challenges, however. From a practical standpoint, institutional loyalty by memberships, volunteer leaderships, executive staffs, consultants, vendors, and others may hamper the merger process. When the associations considering such action are of unequal size, resources, or scope, anxiety that one will overwhelm the other is a predictable reaction. When considering a potential merger or consolidation, it is useful to understand some of the strategic issues involved in the process.

Consolidation versus merger

Although the terms consolidation and merger are often used interchangeably by nonlawyers, in fact, each implies a different way to combine corporations, including nonprofit corporations such as associations.

Consolidations. In a consolidation, both entities are legally dissolved, and their respective organizations are combined to form a new, separate entity. Many associations that decide to combine strongly prefer the consolidation route, because it tends to emphasize that neither partner to the transaction has an advantage-both are dissolved by virtue of a consolidation. A consolidation also suggests a new beginning for both entities, because a new corporation is formed in the process.

Mergers. Sometimes, however, a merger-in which one entity is legally dissolved and the other legally survives and succeeds to the assets and liabilities of both-is seen as more advantageous. For example, when two combining associations share the same federal income tax-exempt status, the new organization may only need to notify the Internal Revenue Service of a merger, not file a new exemption determination application. In some situations, employee benefit plans or other contracts or relationships are more easily transitioned using a merger than a consolidation.

As with the initial incorporation of a not-for-profit corporation-or its dissolution-in a merger or consolidation of nonprofit corporations, state law dictates what steps to follow to ensure that the rights of the two associations' memberships, their creditors, and others who deal with both entities are protected. The steps tend to be quite similar whether the merger or consolidation approach is used. But unless the proper steps have been followed, the state government will not accept and approve the merger or consolidation filings.

A third alternative

Another, less-common approach to combining two or more associations is to initially dissolve one association and transfer any remaining assets to the other, when it is strategically advantageous. Because state law typically requires that creditors of a nonprofit corporation be satisfied before a dissolution filing is accepted, that must be accomplished before any transfer of assets occurs. Dissolution and transfer of assets may be the best approach in a number of situations. Some of the more common reasons for selecting this option include

* one association in the combination has unknown future contingent liabilities;

* one association is of much smaller size that the other; or

* one of the organizations has a different tax-exempt status than the other.

Board responsibilities

In most cases, when nonprofit corporations intend to merge or consolidate, they must prepare a plan for the merger or consolidation according to a recipe outlined in the statutes of the state, or states, in which the associations are incorporated. In addition, the governing bodies must approve the plan; recommend it to the memberships of all organizations involved; and then file the plan with the respective state governments.

Board members may be individually liable. Corporate case law imposes a serious responsibility on members of the governing boards of associations that decide to merge or consolidate. Directors, governors, or trustees may incur personal and individual liability should they recommend that members vote to merge or consolidate without the leadership adequately examining the legal and financial condition of the merger or consolidation partners to the extent that negative legal or financial issues are significant.

Due diligence offers protection. To avoid personal liability, members of the governing boards typically conduct due diligence reviews to effect full disclosure and objective evaluation of any financial or legal risks of each combining association. To avoid personal liability, governing boards are permitted to rely upon experts to assist in these due diligence reviews-and to ensure that they are as comprehensive and accurate as possible. Consequently, it is usually advisable to work with legal counsel and certified public accountants who are familiar with these processes.

Ultimately, the boards deciding whether to proceed with a merger or consolidation receive and review candid summaries of any important legal or financial factors. The presence of adverse findings in the due diligence reviews is not necessarily cause for a board to reject the planned combination. However, it is prudent for board members to be sure that they understand the implications of the adverse findings and create a strategy to effectively deal with those realities.

Member matters

In most states, a merger, consolidation, or dissolution cannot legally take place without the approval of the voting members of each corporation that is actually merging, consolidating, or dissolving. State nonprofit corporation law dictates the voting requirement; a two-thirds vote of members entitled to vote is typical. From the earliest planning stages, therefore, it is important to focus on a plan that the memberships of all involved organizations will be likely to accept.

Often public relations or membership experts play an important role in presenting the plan to the memberships in ways that maximize the likelihood of approval. Print and e-mail messages, town hall meetings, Web postings, and other communication vehicles are elements of an integrated strategy of getting the plan details out to members. In the end, membership organizations exist to serve members. If the members can't be sold on a merger or consolidation, it simply won't happen.