Credit Counselors Corporation

Merger and transfer of assets and liabilities of credit advisory companies

The number of tax-exempt credit advisory firms ("CCAs") that consolidate and liquidate their business has increased significantly in recent years. There are a number of Accredited Community Companies (CCAs) that have enjoyed robust years due to residential advice and other related activity, along with the associated revenues, but there are many other agents who have felt that their capacity to achieve success is less in terms of business and new regulation.

There are several ways for an agent interested in joining with another company to consider, among which mergers and acquisitions of a company's property. Non-profit organizations can fully and fully incorporate their programmes, features and asset values through mergers. If two non-profit organizations amalgamate, a company becomes a legal part of the company that survives and disintegrates.

It acquires ownership of all property and assumed all liability of the non-surviving unit. Combining them enables a CCA to consolidate asset data, lower cost by removing duplicate management process, and deliver more comprehensive service and resource to its members. Concentrating CAAs may be able to grow the number of customers they serve, broaden the range of education programmes on offer and be able to offer service through subsidies from governments and lenders.

Fusions between two corporate groups are complicated procedures that need the consent of the board of trustees and memberships, if any, in each company. In addition, the loyalty of members, officials and professionals often comes into the picture, especially when the companies considering a fusion or even consolidated entity are of different sizes and resource sizes.

In order to effect a CCA amalgamation with another CCA, each agent must comply with the procedure required under the non-profit corporate legislation of its State of formation, as well as any special procedure in its administrative document, provided that such procedure is in accordance with the non-profit corporate bylaws. Whilst the articles of association of non-profit organisations vary from state to state, the legislation on the fusion and concentration of non-profit organisations usually lays down certain basic process rules.

Normally, the transaction between the two companies is specified in a "merger agreement", which does not have to be submitted under the Non-Profit Status Act, although the state supervisory authorities may well ask for a copy. As a rule, this paper deals with issues such as employee and volunteer management involvement, changes in management and programme consolidations.

In addition, all participants in the post-merger operation must inform the Internal Revenue Service ("IRS") of the proposed concentration and submit supportive regulatory documents. The IRS will normally give accelerated authorisation on a pro forma basis if the restructured unit carries out substantially the same activity as its predecessor and there will be no loss of tax-exempt treatment.

A further regulatory instrument for "absorption" is the resolution and allocation of the asset value of a targeted KCA. Usually, this process includes the acceptance of a liquidation and asset allocation scheme, the settlement of debt, the transferring of the residual asset to another charity and the liquidation. If the liquidating Non-Profit Profits are excluded under Section 501(c)(3) of the Internal Revenue Code, the Treasury Regulations requires the Company to allocate its net worth for one or more exempted uses under Section 501(c)(3) of Code 501(3).

Whilst the company being dissolved must comply with certain legal requirements, a liquidation and assignment of property is theoretically much less burdensome for the company acquiring the liquidating company's property (the "successor company") than a fusion or an amalgamation. However, as the succession unit only takes over the property of another organisation, company registrations are generally not necessary for that company.

In addition, the preservation of the wealth of a disbanding CCA usually has no influence on the tax-exempt status of the succession organisation. Nevertheless, just as in a case of a business combination, a tax-exempt company must be careful when acquiring programmes or operations to make sure that they serve the specified tax-exempt purpose. Transferring and liquidating wealth can be a strategic option for merging businesses when one CCA is much smaller than the other.

Furthermore, this kind of deal is particularly useful when a CCA wants to purchase the asset of another CCA with significant contingencies in the event that the succession organisation does not legally take over the liability of the liquidating company. Furthermore, the succession company may attempt to mitigate the obligations it will incur in a writing arrangement.

As a rule, the arrangements can be very complicated and detailled, according to the installations concerned. Although a succession organisation does not take over the obligations of a disbanding organisation by virtue of statute, a capital assignment always entails a certain degree of responsibility for determining a succession obligation, especially if insufficient reserves have been formed for already existent obligations.

A succession arrangement may arise, for example, if a judge finds that a company that has purchased the property of a liquidated company has implicitly consented to take over the obligations of the liquidated company. As an alternative, a tribunal may also find that the succession company acts as a "mere continuation" of the liquidated company, that the assignment of property is equivalent to a de facto fusion, or that the deal was indeed a deceptive effort to avoid responsibility.

As with a business combination, the law of the state applying to non-profit bodies and the relevant documentation of each company must be observed when transferring and dissolving property. This process of liquidation and allocation of property is quite straightforward for the succession company as it will only enter into a single acquisition operation, albeit a significant one, to purchase property and, if any, to admit members.

However, the procedure is more complex for the resolving unit. For the most part, the charitable charter of the resolving CCA places a number of explicit demands on the implementation of a delegation and resolution that must be respected. Within the framework of the allocation procedure, the contracting partners usually conclude a letter of intent setting out their understandings of the assignment of the assets of the company being dissolved.

Beneficiaries may avail themselves of such an arrangement if they wish to obtain guarantees as to the lack of indebtedness to be incurred by the company being dissolved; if they wish to take into consideration pending commitments of the company being dissolved; if necessary, to obtain the consent of third persons to assign commitments to the company being dissolved (e.g. DMPs); or if they wish to lay down detailed conditions for the incorporation of the members of the company being dissolved.

Please be aware that in the case of a violation of guarantees by the disbanding company, there is generally no remedy for the disbanding company unless the arrangement expressly requires a third person to release the disbanding company because the disbanding company no longer exists. In this sense, it is also important that they should be able to publically and coherently communicating these objectives within their organisation, so that both companies are well placed to prevent above-average control by supervisors, lenders and other interest groups with whom they collaborate to offer their consumer service.

There will always be a query for those considering organisational changes as to whether and at what levels counsellors will remain available to minister to the fellowship. These are sometimes topics that require careful consideration, as the identity and strength of both companies may be linked to certain core individuals and their relations with related interest groups (e.g. creditors, public relations and non-paid recommendation networks).

There are also several important stages that should be taken when designing a winning formula to increase the chances that a deal will be executed. Firstly, companies should consider the appointment of a group of transactions agents. The group of select employees and directors from each company will have two roles:

To ( 1 ) formulate a business combination planning (e.g. fusion or assignment of assets) and share this planning with each company's stakeholder groups such as directors, officers and employees; and ( 2 ) clarify the inevitable questions that will arise as part of the due-diligence and business combination processes. Duty of care is a crucial part of any business combination and usually includes collecting enough information for the board of each organisation to determine the other organisation's or a particular asset's economic and regulatory situation.

Because due diligence may be the biggest engagement of any CCA and require a variety of analyses, but it makes the distinction between a game of chance and an informed assumption when deciding to complete the transactions. They must also carefully analyse the authorisation requirement for the operation, as well as that of the regulatory authorities concerned in relation to the service provided, such as DMPs and related licences.

Because of the high level of government regulatory activity in the CCA's operations, it is important for the notifying party to closely monitor government legislation and rules to make sure that it is complied with. Importantly, it is also important to recognize that government license legislation and commercial practice are not always consistent, and that a delegation of a DPMP does not release the resolving CCA from regulatory requirements and may create new requirements for the recipient unit.

Next, the agents must agree on difficult issues such as the role of the employees and others after the completion of the deal. Of course, one of the efficiency benefits of a fusion is the elimination of duplication of role, and both companies should be aware of what the final organigram will look like and how to consolidate it in a case of effective business transformation.

When transferring equipment, it is possible that no personnel will be moved at all. It is also necessary in a fusion context that agents should draw up a general fusion agenda which should contain an overview of the common management architecture, mandate, core activity and a comprehensive human resources schedule. Similarly, in a relocation scenario, it may be necessary to carefully design the equipment to be relocated.

In addition, the notifying party should work together to establish an appropriate communication policy, both internally and externally, to inform employees, directors, customers, supervisors and the general audience about the deal. In the case of a CCA, the choice to either consolidate or close a significant operation should strongly depend on whether the objectives of the operation and the possible effects for both groups are fully determined.

Initially featured in the April 2011 issue of The Independent Counselor, the e-newsletter of the Association of Independent Consumer Credit Counseling Agencies (AICCCA).