An initial step in any business combination is determining whether such combination will advance the nonprofit’s mission. The factors that a nonprofit board needs to take into consideration in such evaluation are very similar to those factors a for-profit board considers, including the prospects for future growth, enhancements to service quality, opportunities for cost savings and other efficiencies to be obtained through the combination, and work force issues. Moreover, the fiduciary duties imposed on nonprofit directors in acting on business combinations are very similar to the fiduciary duties imposed on for-profit directors. Still, there are some important differences between for-profit and nonprofit business combinations because nonprofit trustees do not have an ownership interest in the nonprofit. The differences between for-profits and nonprofits lead to other unique factors that need to be considered by a nonprofit board when evaluating a possible business combination.

While nonprofit corporations differ from for-profit entities in that nonprofits have no owners, a parent-subsidiary structure can still be structured with nonprofits. The main difference is that the “parent” nonprofit does not own any shares or other interest in the nonprofit. Instead, it is treated as the parent because of the control it has over the other nonprofit. This is typically accomplished as a result of the “parent” nonprofit becoming the sole voting member of the “subsidiary” nonprofit, with the right to determine the directors of the subsidiary nonprofit.

The arrangement, typically referred to as an affiliation, can be accomplished by amending the articles of incorporation and bylaws of the “subsidiary” nonprofit.  Because this type of combination or affiliation is similar to a merger or acquisition of assets, parties often enter into an affiliation agreement that covers similar topics addressed in other business combination agreements. For instance, an affiliation agreement might address any change in activities of the subsidiary nonprofit as well as the composition of the parent’s board of directors as well as certain representations and warranties about the parties and their operations.

One of the main advantages of a parent-subsidiary type structure is that the corporate existence of the subsidiary is maintained, the subsidiary board continues to function, and there is typically no need to relicense existing services or to pursue assignment of the subsidiary’s contracts.

Similar to business combinations involving for-profits, due diligence activities are important for business combinations involving nonprofit corporations. Many of the considerations for a for-profit business combination are important in due diligence reviews involving a nonprofit business combination. These include reviewing various information and documents relating to the other entity, including its governance documents (such as articles of incorporation, bylaws, and board policies), financial information (including audited financial statements and any audit reports), contractual arrangements, real and personal property, litigation, insurance coverages, and workforce/employees (and employee benefits).

The governing body of a nonprofit corporation defines the organization’s mission, establishes its goals, approves strategic plans, and authorizes major transactions.  Fundamental corporate transactions such as affiliation present trustees with the possibility of a new and more effective path to mission fulfillment.  While requiring committed effort to form and sustain, successful affiliations can increase the availability or types of programming, strengthen organizational capacity and quality, expand knowledge and connections, and enhance effectiveness through collaborative leadership, com­bined staff and volunteers, joint fundraising, and shared technology and facilities.