When two nonprofit corporations merge, the combined entity (legally, the surviving corporation) may adopt a very different governance model than that of either corporation. Particularly where neither corporation is in crisis, the board of the combined entity may include an agreed upon percentage of directors from each corporation. But leaders of each corporation may feel a little uneasy about how the board may evolve over time and how such change might impact the programs of their respective corporations.

Selection of Directors

Directors may be selected in a few different ways: (1) election by the board, (2) election by members, (3) designation (appointment) by a designator, or (4) operation of a provision in the governing documents for ex officio directors. The director selection procedures are typically codified in the bylaws.

In merger negotiations, each party may be advocating for the combined entity’s board to include all or some number of such party’s existing directors. In some cases, the board of the combined entity might include representation from each party on a 50:50 basis. That may provide, for each party, comfort that the prior values and priorities of the party will continue to receive sufficient board representation. But what happens if a short time after the merger one director formerly affiliated with one of the parties resigns?

For example, if the board of the combined entity resulting from the merger of party A and party B includes 7 directors from each party, the resignation of 1 director will result in 7 directors from party A and 6 directors from party B. If the vacancy is filled by the board as a whole, then it’s possible that the directors from party A, who comprise a majority of the board, will cause the election of another director more aligned with advancing the party A values and priorities. That may not be a significant issue for most corporations contemplating a merger, but it could be for some.

In other cases, the board of the combined entity might include only a select number of directors from the corporation merging into the surviving corporation (legally, the disappearing corporation). The higher the number, the greater representation to protect the disappearing corporation’s interests. Of course, because each director serves in their personal capacity with a duty of independent judgment to act in the best interests of the surviving corporation, how well the disappearing corporation’s interests may be protected post-merger may be uncertain. Accordingly, it’s key to also reflect certain key interests of the disappearing corporation in the surviving corporation’s governing documents.

Committees

For the disappearing corporation, there is often a desire for some security that its programs, values, and leadership do not disappear with the legal entity. Apart from, or in lieu of, adding some or all of the disappearing corporation’s directors on the surviving corporation’s board, the merger agreement may provide for a committee consisting of the disappearing corporation’s directors to provide intermediate level governance over the activities previously operated by the disappearing corporation. However, such committee (I’ll use the term “program committee”) will generally be subject to the ultimate authority of the surviving corporation’s board of directors.

Substantial management authority may be delegated to the program committee. The program committee may have the power to dictate the hiring of a program director, approval of a program budget, and determination of the goals and activities of the program, subject to the program’s ability to fundraise sufficient amounts to support those things. Further, the program committee may have the authority to elect its own members.

Protections in the Bylaws

Because the program committee remains an internal and integral part of the surviving corporation, which is critically important for liability protection and risk management, it must be subordinate to the corporation’s board. However, the board’s delegation of authority to the program committee can be protected by provisions in the articles or bylaws (including, for example, a requirement that such delegated authority can be reversed only by supermajority board approval).

The Bylaws of the surviving corporation may also be amended to protect certain programs and priorities. For example, the Bylaws may provide that the corporation shall maintain core programs of the disappearing corporation using the same brand name. And amending such provision may require supermajority board approval or the approval of some other party.

Similarly, the merger agreement may include protective provisions to assure the continuation of programs and brand names, though the disappearing corporation may need to decide on a party that can enforce these provisions post-merger.

Additional Resources on the Blog

Nonprofit Mergers: Tips & Traps

Nonprofit Mergers: Common Risks

Nonprofit Mergers – Part 2: Step-by-Step

Nonprofit Mergers – Part 1: Basic Legal Considerations

Nonprofit Mergers – Due Diligence Items

CLE: Nonprofit M&A: Potential Benefits, Risks, and Alternatives

The post Nonprofit Mergers: Integrated Governance Models appeared first on Nonprofit Law Blog.