MERGER AND DISSOLUTION
Most law school clinics rarely take on the merger and acquisition or dissolution of nonprofits, as these are infrequent occurrences and also very complicated, so they will not be discussed in detail. Any law school clinic that wants to handle these types of matters should first check with the IRS, including reading the specific publication dealing with mergers and dissolutions, the termination of a nonexempt corporation, and dissolution under state law.
Mergers can include one nonprofit absorbing another, or two organizations merging to create a brand new organization. Regardless of the reason for the merger, these transactions are extremely complex, often involving several parties, including financial institutions. Thus, it is very important to review the particular state law related to them, and perhaps even consult with an attorney expert in these types of transactions. Often, there are restrictions placed upon the types of organizations that can merge, and additional conditions placed on those mergers. Mergers become even more complex when they are between organizations residing in different states, since there are potentially federal, state and local tax issues involved.
Any legal clinic undertaking a merger should work from a detailed checklist to ensure all necessary steps are completed. One important step is a detailed plan for merger, which should include at the very least specific goals and outcomes for the client, and which spells out specific tasks that must be performed, which party will be responsible for such tasks, and deadlines. Perhaps one of the most important parts of process is undertaking thorough and complete due diligence that at the very least reviews all operational aspects of the other entity or entities, including the financials. At some point, the parties will need to sign a memorandum of understanding which spells out each party’s intent and responsibilities. Once the parties have completed due diligence and other tasks outlined in the memorandum of understanding, the organization must inform the IRS and usually must file the merger plan with the appropriate state agency.
A nonprofit corporation can be dissolved voluntarily or involuntarily for a variety of reasons. It is important that the practitioner be aware that board members of a dissolved corporation may be held personally liable for any number of issues if a nonprofit is dissolved inappropriately, including unpaid debts, unpaid payroll taxes, and unpaid wages or contracts. Therefore, before undertaking a dissolution, the attorney should set up a formal plan, and carefully review the following to ensure full compliance with each: Articles of Incorporation, bylaws, all relevant policy manuals, and federal, state, and local regulations relating to reporting and filing of taxes. Most importantly, if there are any remaining assets, those must be distributed for an exempt purpose as defined by the IRS, and the IRS must be notified of the dissolution.