Mergers and incorporations

The Law Commission published its report on Technical Issues in Charity Law in September 2017 following a public consultation which revealed that many charities struggle with a range of technical issues in the law leading to unnecessary expense and preventing charities from dedicating their full resources to the public good. On 22 March 2021, the Government published its long-awaited response to the Law Commission’s recommendations and accepted most of the recommendations.

The Law Commission recommended four key changes to the law in respect of mergers and the incorporation of charities. The key changes are:

  • Unincorporated charities will be allowed to amend their governing documents to allow them to merge with other charities;
  • The law on vesting declarations will be amended to make it easier to transfer property during a merger;
  • Merged charities will be deemed to have continued in existence for the purposes of receiving a legacy, removing the need to keep shell charities on the register;
  • It will be made easier for corporate charities to obtain trust corporation status.

Let’s have a look at this in more detail.

Power to merge
Section 268, Charities Act allows certain charities to transfer their property to another charity even if they do not have the power to do so in their governing document. This statutory power only applies to charities that are:

  • Unincorporated;
  • Have a gross income of £10,000 or less in the last financial year; and
  • Do not hold designated land.

Section 280 is used by unincorporated charities to make administrative changes to their governing document without having to apply for the Charity Commission's consent. The Law Commission’s recommendation is to expand section 280 to allow unincorporated charities to amend their governing document to include a power to merge. This would render section 268 redundant and so this will be repealed.

Vesting declarations
Section 310, Charities Act 2011 allows charities to transfer land to a new charity by way of ‘vesting declaration’. A vesting declaration acts to vest property in the receiving charity. There are some exceptions to section 310; it does not apply to 'land held by the transferor as security for money subject to the trust'. This is thought to have been taken from the Trustee Act 1925 and applies to old trusts of land. The Government has accepted that this provision does not serve any purpose in modern transactions and so should be repealed.

Legacies and shell charities
It has long been the case that when a charity incorporates or merges, the question of whether the new charity will be eligible to receive legacies that would have been due to the old charity arises. Where a merger is registered on the register of mergers, section 311 Charities Act deems gifts by will to take effect as gifts to the new charity. However, case law has highlighted that this provision is not watertight and that where a second charity is mentioned in the same will, it is possible to argue that the merged charity has ceased to exist. Because of this, many shell charities have remained registered in order to receive future legacies and so that it cannot be said that the charity has ceased to exist.

The Law Commission has recommended that when a charity merges and the merger is registered on the register of mergers, when charities amalgamate under section 235 or when a Charitable Incorporated Organisation (CIO) transfers its undertaking to another CIO under section 240, the merged charity should be deemed, for the purposes of the Act, to have continued to exist. The Government has accepted that this would remove the need to keep shell charities to receive legacies as there would be no question about the continuing existence of the charity named in the will.

The Law Commission has also recommended that the charity register should include a reference to the fact that the charity is on the register of mergers for the avoidance of doubt.

Trust corporation status
Where permanent endowment property transfers to a corporate charity on a merger, the corporate charity will hold the property on trust and must have trust corporation status so that it can give valid receipt for proceeds of sale. Obtaining trust corporation status can be time-consuming and cumbersome. There are three routes to obtaining this status. The first involves making an application to Lord Chancellor, the second is through a Charity Commission scheme, or finally (and only for CIOs) thorough use of a vesting declaration. The law will be changed such that trust corporation status will be conferred automatically on existing and future corporate charities (including companies) in respect of any charitable trust of which they are or become a trustee.

For more information

If you have any questions or would like assistance or advice regarding anything covered by this ebriefing do contact your usual contact in our charities team or Safa Murad.