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How can 501(c)(3) unwind merger?

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How can 501(c)(3) unwind merger?

How can a 501(c)(3) that previously merged with another 501(c)(3) unwind that merger for the purpose of re-establishing the separate existence of the entity that merged out of existence?

Assuming that there was no unwind provision in the original merger agreement, there are basically two ways it can be done.  If you are lucky enough to be in a state (such as Pennsylvania) that permits “divisions” of nonprofit corporations, you could go through a statutory division.  It is the opposite of a merger.  Instead of taking two or more entities and merging them into a single surviving entity as in a merger, you take a single entity and divide it into two or more separate entities in the division.  Like a merger, all of the rights and obligations of the dividing entity pass by operation of law to the divided entities as set forth in the division agreement.

If you don’t have this opportunity available to you, you could create a new nonprofit and transfer all of the assets, rights and liabilities that you want to go to the new separate entity.  It is not as clean as a division, but it can have essentially the same practical effect.

In either case, if you have no right to undo the merger, it will take the consent of the governing body (and possibly the membership if there are members) of the survivor of the merger to cause it to happen.  You might need to get approval of the state Attorney General.  Because you are creating a new entity in either case, you will need to file with the IRS for a new federal tax exemption.

Because of this kind of problem, we seldom recommend an outright merger when there are a number of other procedures to accomplish a similar purpose while allowing a change of heart at a later point in time.  (See Ready Reference Page:  “Mergers and Acquisitions Can Take Many Forms”

Tuesday, January 6, 2015
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