Due diligence

Actions to ensure a planned merger is in the best interests of your organisations and beneficiaries

Due diligence is the mutual, legal and financial exercise which uncovers information an organisation would need to:

• assess the feasability of the other party to merge
• provide detail about the other organisation’s assets and liabilities
• identify any obstacles which might stop or delay merger.

This exercise helps to assure trustees that a merger is in the best interests of their organisation.

Due diligence looks at areas including:

• current financial position and future viability of the merged organisation
• property ownership and occupation
• assets, for example, restricted funds or permanent endowment
• income sources, for example, committed giving, grant funding, contracts held or under negotiation
• employment and pensions arrangements of staff
• policies and procedures
• third party consents required (for example, banks, contractors, funders, landlords). 

The scope of due diligence varies according to the size and complexity of the organisations involved. Some organisations may want to carry out some or all of the due diligence themselves.

For smaller or simpler mergers this may be appropriate, particularly if your trustees or senior management team have relevant experience. Where outside support is required, organisations often engage consultancy support.  

For more complex mergers, it is common to have specialist financial and legal assistance for some or all of the due diligence exercise. Although this has a cost, there are advantages:

• Professional advisers can assist in:
  • framing and gathering the relevant responses and information
  • interpreting the responses and information received
  • identifying risks, liabilities or other issues
  • taking steps to resolve such issues.
• A due diligence report on the other party is often prepared by the organisation’s professional advisers.The trustees can review this when making the decision to make the transfer, and comply with their duty to make sure it is in the best interests of the organisation to make the transfer.
• The due diligence gathered can provide some legal certainty for the trustees of each organisation. For example, by requiring the other party to make assurances on the accuracy and completeness of the information given.

Sometimes mergers take place to allow for an organisation in financial difficulties to survive so its services continue.

However, many mergers of this sort do not continue once the scale of the financial problems are known.

It is vital that due diligence uncovers the scale of any financial problems, both historic (such as pension deficits) and future liabilities (such as pending claims) and whether they are:

• the result of an unexpected or historic and non-recurring problem
• suggestive of long-term problems such as inadequate funding or high costs
• uncertain and potentially more extensive than initially shown. 

Where an organisation has a pension deficit or complex pensions arrangements, this is a liability which could mean a major cost for the merged organisation. Specialist pensions advice should be taken.

It may be possible to structure the merger to overcome such problems, For example through a merger by change of control, keeping the assets and liabilities where they are.

This would avoid financial risk to the other party but the reputational risk of being linked to an organisation that has ongoing financial difficulties would remain.