If your nonprofit has gone through a merger, or is currently merging with another nonprofit, one question comes up all the time: Can we undo this if we change our minds? What happens if this merger isn’t as beneficial as we thought it would be?
The short answer is yes, you can “separate” two nonprofits that have been joined together. But the way in which that “separation” is done varies on what your state allows. If you’re unsure of what’s allowed in your state, or which option is right for your nonprofit, please contact us for a consultation with one of our attorneys who work with nonprofits every day.
Option #1: Statutory Division
Some states, like Pennsylvania and California, have a process called statutory division for nonprofits, which involves taking one entity and dividing it into two or more separate entities. Simply put, these states allow you to divide a nonprofit back into two entities. When people ask if you can go back to having the two original entities, this is the process they’re referencing.
Option #2: The Unwind Provision
Even if your state doesn’t allow this process, there are other ways to “undo” a merger. During a merger, provisions can be built into your merger agreement that allow for this. Often called an “unwind provision,” this provision usually outlines the circumstances that could warrant separating the entities, along with what the process would be to do so. For example, if your nonprofit has members, part of the unwinding process might likely be approval by the board of directors, along with taking a vote from the members. Even with an unwind provision, there does come a point of no return after which the merger is “final” and a different method of separation would become necessary.
Option #3: Creating and Transferring
If the merger agreement does not include an unwind provision, there is one more avenue that can accomplish a similar goal. Essentially, you could create one new legal entity and transfer the appropriate assets and programs to that entity. By the end, there would be two separate legal entities with their own assets, essentially “undoing” the merger.
If you need assistance in discovering which option is right for your unique circumstance, request a consultation with one of our nonprofit attorneys. We’re happy to help you explore your options and find the right path forward for your organization.