Organizations may decide to merge for multiple reasons, including to better advance a common purpose or to expand the range of services offered to common beneficiaries. In a merger of two nonprofit corporations, the surviving corporation assumes all of the assets and liabilities of the disappearing (merged out) corporation. But there is an alternative way for an organization to acquire the assets of a dissolving corporation – agreeing to be the recipient of certain remaining assets of the dissolving corporation upon its dissolution.
Merging allows two corporations to fully integrate their programs, functions, and assets. Generally, in a merger between A (the surviving corporation) and B (the disappearing corporation), A automatically assumes all of the assets and liabilities of B upon the merger. Thus, the debts of B become the debts of A, and A is automatically substituted for B in any lawsuit or legal proceeding. This may be problematic if B’s liabilities cannot be identified or if B’s liabilities are more than the value its assets.
Dissolution and Transfer
Alternatively, an organization may want to consider dissolving and transferring its assets to another entity. In this scenario, when B dissolves and distributes its remaining assets to A, A generally does not automatically assume B’s liabilities. Essentially, A is able to limit the risk it takes on when acquiring B’s assets. It is important to note that although the surviving organization does not automatically assume the dissolving organization’s liabilities, there is always some risk associated with a full transfer of assets. For example, in California, successor liability could extend to A if a court determines that A impliedly agreed to assume B’s liabilities when it acquired B’s assets, the transfer amounted to a consolidation or merger of the two organizations (de facto merger), A is “merely a continuation” of B, or if the transfer was entered into fraudulently to escape liability for debts (fraudulent transfer).
Here are some factors that would create risk of the assumption of the dissolving corporation’s liabilities:
- The boards of the dissolving corporation and the acquiring corporation (post-transfer) are substantially similar.
- The acquiring corporation carries on the same programs as the dissolving corporation with the same employees and pursuant to the same policies, practices, and procedures.
- The acquiring corporation acquires an operation involving the sale of products and continues to sell them under the same trade name, pursuant to the same processes, and benefiting from the goodwill created by the dissolving corporation.
- An agreement between the dissolving corporation and acquiring corporation refers to the transaction as a merger and/or evidences their mutual intention to have the acquiring corporation assume the dissolving corporation’s debts and obligations.
- The result of the transfer is exactly that which would occur in a statutory merger, including (1) assumption of certain obligations of the dissolving corporation that allow for the acquiring corporation to continue operating the dissolving corporation’s programs/businesses; and (2) continuity of the management, personnel, locations and operations of the dissolving corporation.
Co-authored with Gene Takagi