From time to time registered charities may find themselves in situations, often driven by economic considerations, where they are considering whether to cease carrying on certain elements of their operations. While a straightforward wind-down may be possible in some circumstances, often a charity will look to sell the assets, property or business (referred to collectively as the “assets”) in question and realize whatever it can from a financial perspective from the sale. A charity might also decide to transfer the asset(s) to another charity by way of a gift rather than by sale, particularly if the recipient charity is in a position to continue to carry on the operations associated with those assets.
For example, a charitable organization that operates a school or summer camp might decide, for any number of reasons, to cease operating the program and to gift it to another charity with similar operations so as to ensure the continued operation of the school or summer camp.
In a traditional for-profit transaction scenario where an asset, property or business is being sold by a charity, the selling charity and the buyer (which need not be a charity) would look to negotiate a purchase and sale agreement which would typically contain provisions on such matters as:
- the purchase price to be paid by the buyer
- the terms of payment for the purchase price (e.g., cash on closing vs. payments over time)
- representations and warranties of the selling charity regarding the assets, property or business being sold (e.g., details regarding the condition of the assets)
- covenants of the buyer and selling charity regarding a variety of matters (e.g., who will be responsible for liabilities associated with the assets)
- indemnification by the selling charity to the buyer in the case of any breach of representations and warranties (e.g., circumstances in which a party can look to the other party in the event there is a lawsuit related to the ownership or use of the assets)
When an asset, property or business is gifted by one charity to another, many of the matters that would normally be dealt with in a for-profit transaction are either inapplicable (e.g. purchase price) or need to be reconsidered in light of the lack of exchange of financial consideration (e.g., representations, warranties and indemnifications). That said, for the protection of both parties, a formal written legal agreement documenting the terms and conditions upon which the asset, property or business is being gifted by the transferring charity to the recipient charity is still required.
There are numerous considerations both a transferring and recipient charity will want to see addressed in the transfer agreement, including:
- What exactly is being gifted and what is excluded from the gift?
- What obligations and liabilities will be assumed by the recipient charity and are there any obligations and liabilities that will be excluded from the transfer and remain with the transferring charity?
- If there are employees connected with the operation, how will their continued employment be handled? Will the recipient charity offer employment to all or some of the transferring charities employees? Who will be responsible for severance obligations to employees no longer required after the transfer?
- How will transitional issues be dealt with? A clear process needs to be set-out detailing how the parties will handle matters such as employees, (payroll, benefits, pension), supplier contracts, ‘customer’ agreements etc.
- What approvals are needed in order to complete the transfer? Are contracts being transferred where a third party’s consent to the transfer is required? How will this impact the timeline to complete the transfer?
- Is any donor information related to the operation being transferred? If so, what is the process for the transfer of the donor information?
- Are bequests, restricted funds, gifts and donations being gifted as part of the transfer? Are there restrictions on the transfer that need to be adhered to?
While such an asset transfer agreement will closely resemble a purchase and sale agreement that would be used in a for-profit transaction, there are some elements that will be different. Most notably perhaps is the manner in which disclosure regarding the assets is handled in the asset transfer agreement. Many transferring charities take the position that since they are giving away their assets for no consideration (despite the fact that they may have significant value) they are not prepared to provide any (or perhaps minimal) representations or warranties regarding the condition of the assets, and instead will often take the position that the transfer should be structured on an ‘as is where is’ basis – in other words the recipient charity will simply step into the shoes of the transferring charity with regards to the assets, for better or worse.
If the recipient charity is uncomfortable with this approach, one option is to not accept the gift from the transferring charity. Of course, as the recipient charity generally wants to conclude a transfer and ultimately receive a valuable asset, the recipient charity will want to work very hard to find a way to be comfortable with the fact that it will not get the benefit of full disclosure from the transferring charity.
The starting point for the recipient charity is to have a solid dialogue with the transferring charity and to conduct appropriate due diligence on the assets being gifted so as to be in the best position possible in terms of knowing what liabilities a recipient charity will be taking on in connection with the transfer. That said, where a recipient charity’s due diligence provides inadequate results or where due diligence will simply not reveal a complete and accurate picture, a recipient charity should attempt to negotiate representations and warranties regarding the state of affairs of the assets from the transferring charity. This is so that the recipient charity can obtain sufficient disclosure to know what it is getting into as well as some ability to perhaps seek some recourse as against the gifting charity in the event that any of the major representations and warranties turn out to be false or inaccurate.
In many cases, the dollar value that the transferring charity would realize on the sale of the assets could be significant, making the transfer for no consideration all the more charitable. Thus, in situations where the transferring charity and recipient charity are truly committed to ensuring that the asset, property or business finds a home for its continued operation, an appropriate balance can usually be found to ensure that a transferring charity can walk away without worries once the transfer is complete and that the recipient charity’s needs are met in order to enable it to receive the asset(s) and continue the operations associated with them.
Charities, both transferring and recipient, are cautioned to take sufficient time to review their respective objectives when it comes to a major asset transfer and to make sure that any concerns they may have are properly addressed in a transfer agreement that has had the benefit of input from a their respective accounting, operational and legal advisors.