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Legal Due Diligence

Starting the Due Diligence Process The parties contemplating merger will need to conduct a legal due diligence exercise on each other. The aim of the legal due diligence is to uncover any legal issues arising and to give the trustees information on which to base their decision about whether the merger is in the best interests of the charity and whether they can go through with it or not. It can also highlight issues that need to be rectified or resolved before a merger can take place. Before the solicitor starts the work the charities need to provide a brief. This should report on progress to date, identify any confidentiality requirements and explain what is agreed between the merger partners so far. The level of materiality and scope of the due diligence exercise should be worked through and a timetable set out for the conduct of the due diligence exercise. The output of the legal due diligence process is a Report prepared by the solicitor for the Board of the charity. The solicitors should undertake this work alongside the advisers retained to carry out the financial due diligence and operational due diligence work. The solicitor prepares a legal due diligence document which requests information about the merger partners. It is important to find out at an early stage if the charities constitutions allow them to merge with each other and whether any amendments are needed to ensure compatibility of the charities objects and charitable purposes. If these are not compatible, then changes will need to be made and this can require consents of regulators such as the Department for Social Development in Northern Ireland (and in due course the Charity Commission for Northern Ireland) and liaison with (UK) HM Revenue & Customs. It may also be necessary to convene a general meeting of the members of the charities concerned to alter the Memorandum and Articles of Association if they are charitable companies or to alter the charities governing instruments. The due diligence exercise will generally involve a wide-ranging review of information, documents and answers to specific questions and would cover a review of the types of materials set out below: (a) The capacity of the organisation to enter into a transfer of undertakings copy of governing document, copies of any members resolutions and copies of minutes of board of trustees and committee meetings. Details of all the past and present charity trustees/management committee members. Details of any associated organisations. Details of any insolvency related events such as petition for winding-up, a strike-off or threat of liquidation. Details of any guarantors for the organisation. Documents relating to guarantees, indemnities and any comfort letters given by the organisation. Details of any loans existing over assets.

(b) (c) (d)

(e) (f)



Copies of all funding agreements and documentation relating to any grants, subsistence or financial assistance. Copies of the last three years accounts (including monthly management accounts since last year end if any). Agreements with any professional fundraisers or funding consultants or affinity cards. Documents of title deeds/leases, etc. relating to any properties owned/used by the organisation. Agreements for use or licence of name or logo. Copies of agreements with organisers of funding events and details of legacy giving. Details of any lottery, street or house to house collection licences and details of promoters. Details of any funding subject to clawback or restrictions on disposal of assets. Brief details of bank accounts that are relevant. Copies of general agreements and contracts, copies of any joint venture agreements and partnering arrangements to which the organisation is a party. Copies of any agreements or arrangements which may be terminated, varied or affected by a change of control of the organisation. Copies of contracts or details or copies of any agreement or arrangement affecting the organisation. Details of any negotiations of material importance that are currently in progress. Details of any outstanding quotation or tender made by the organisation. Details of any contracts or arrangements currently operable which may be terminated or altered as a result of the proposed transfer. Details of any confidentiality undertakings given. Details of any default in relation to any agreement or contract. A list or inventory of all assets and equipment used by the organisation together with details of the ownership of same. Any valuations relating to assets. Details of any charges, floating charges or guarantees in relation to assets. Copies of any documents relating to motor vehicles. Copies of current insurance provisions. Details in relation to employees including name, date of commencement of employment, job title and job description, grade, date of birth, length of continuous


(j) (k)

(l) (m) (n)

(o) (p) (q)



(t) (u) (v)

(w) (x) (y)

(z) (aa) (bb) (cc) (dd)

employment and salary details, benefits, unresolved complaints and grievances, disciplinary action, any bonuses or incentive arrangements and notice period for termination of employment and copies of contracts of employment and policy documents. Copy of staff handbook and any procedures. (ee) Details of pension schemes applicable to the organisation and its employees and details of any pension contributions paid to employees. Details of any pension shortfall. Details of any consultancy agreements. Details of any agreements with trade unions. Details of any agreements or arrangements for volunteers. Details of any trade marks used in connection with the organisation. Details in relation to the ownership of the organisations website and its content. Copies of all agreements relating to supply, financing, maintenance and support of the computer system. Details of any litigation, whether threatened, pending or settled. Details of any licences, consents, registrations required in relation to the activities of the organisation. A schedule of all properties owned or leased by the organisation including its address, current use and copies of the title documentation and any other relevant information relating to the tenure or occupation and any recent valuations. Details of health and safety compliance documentation.

(ff) (gg) (hh) (ii) (jj) (kk)

(ll) (mm)



The solicitors assess the information and responses provided and produce a written Due Diligence Report on the outcome of the legal due diligence exercise. Their Report includes an executive summary to identify matters of concern. These include issues such as: (1) (2) Whether the charitable objects need to be amended; Whether the trustees of the charity or the corporate charity have the power to enter into the merger; Whether any additional powers need to be added to the governing document to allow the merger to take place; Whether any members meetings and/or directors meetings need to be held in relation to an amendment to the constitution; whether the consent of any third parties such as regulators or other parties such as landlords or other parties to contracts are required to enable the merger to go ahead; Whether there are any major liabilities or reasons why the merger cannot take place.





The Due Diligence Report needs to be checked by the charity before it is shared with any other party on terms that are acceptable to the solicitors.

The Due Diligence Report is important as it will be relied on by the trustees of the charity which is being investigated and by the other charity with which they are merging. It also provides a useful checklist and source of information for the merged charity after the merger.