Mergers and Acquisitions (M&A) are a niche in the law that have special rules, procedures, and requirements. There are lots of reasons why churches would engage in M&A activities - church revitalization, pastorless churches, homeless churches, the economy of scale that a larger church can provide to a smaller congregation in a multi-site model. But in this post, let's take a look at the legal requirements to make it happen, which if followed precisely and thoroughly with the advice of a qualified attorney can help ensure a successful merger or acquisition.
1. Preliminary Negotiations
These discussions center around theological and ministry philosophy alignment. You'll talk about the history, recent pastoral leadership, polity, church health, facilities, and other options of the church to be acquired or merged. You'll brainstorm obstacles to the merger or acquisition, such as theological differences that you've discovered, debt, property, or opinionated and quarrelsome members. You'll discuss generally how decisions will be made in the merged or acquired church, and talk through things like how deacons, members, small group leaders, and the like will be transferred. Even at this stage, you should have an attorney (or attorneys) involved, because from these discussions a legal-ish document needs to be drafted. Although not a legal requirement, prayer should be a part of or precede this process.
2. Letter of Intent
Attorneys will need to draft this non-binding letter or Memorandum of Understanding that outlines the discussions that took place in preliminary negotiations, assuming that the leaders involved agreed that the merger or acquisition should go forward in the process. It is also beneficial to sign confidentiality agreements at this point in the process, as the next phases of the M&A process will involve financial disclosures that should remain confidential. Such agreements help give both parties a sense of security that in the event that God forecloses the transaction, neither will disclose the other party's financial situation.
3. LEgal Due Diligence
This is where attorneys and accountants get more heavily involved in the transaction. At minimum, it is important to have an accountant prepare three documents based on a review of the merged or acquired church's financial books: an income or profit and loss statement, a balance sheet, and a cash flow statement. Depending on the assets involved, a full blown audit may be more advisable. This should involve a review of the foundational documents of both churches to determine the proper procedure of obtaining approval from boards of directors, elders, committees, congregations, and others who must approve the merger. Contracts, deeds, leases, insurance policies, and other legal documents that the merged or acquired church is subject to should be gathered and reviewed by attorneys to determine the ongoing liability of the remaining church after the transaction is complete. This needs to be a very open, full disclosure of all legal and financial obligations and benefits of the church to be merged or acquired. From this process of due diligence, all other aspects of the transaction flow.
4. Final Negotiations
Leaders from both churches should then meet for final negotiations to hammer out the last details of the merger or acquisition based on all that was learned. An attorney must be involved in these negotiations to draft the final merger agreement, also known as a Plan of Merger. The topics to be covered in these final negotiations are covered in step 5 below.
5. Plan of Merger or Acquisition
The result of the legal due diligence and final negotiations is a Plan of Merger. This is a contract that will eventually be filed with the Secretary of State in the state in which the primary office of the remaining church will reside. It will specify each church's representations and warranties that were made in the legal due diligence process. It will specify what each church promises to do. It will set forth the next steps in terms of getting the approval of elders or congregations, depending on the polity of the churches involved. It will set a "closing date" by which time approval must have been obtained in order to move forward (see step 7 below). While this is a binding contract, it does not bind either party to merge, acquire, or be acquired. It only binds each church to proceed in getting approval for the transaction. If one of the churches cannot get that approval, the contract is void. Do not try to draft this on your own - please get an attorney to do it.
6. Church Approval
Once the Plan of Merger is signed by the pastors or leaders of each church, both churches will proceed to seek approval of the deal, depending on the polity of the church. Some churches will seek approval of the congregation by a vote. Some will require the approval of an elder board and the congregation. Some will require the approval of a denominational office at the state, regional, or national level. Some may even require approval of several committees and the church as a whole. This all depends on the articles of incorporation and/or bylaws of each church, as well as the rules in place in your state. Get the counsel of an attorney to determine what votes are required, as in most cases the final Articles of Merger or Acquisition will require specifics as to vote totals and approval processes before the merger or acquisition will stand.
7. Closing Date
Once both churches have obtained the necessary approval to close the deal by the date set in the Plan of Merger or Acquisition, the closing date will come. Although not a legal requirement, by now it is a good idea to have already had a joint service, fellowship, or other event to build relationships and celebrate God's activity in your churches. On this day, property is legally transferred from one church to the other or to the newly merged church. The final documents will be signed that effectuates the merger or acquisition. Once this date passes, all that remains is the official filing of the necessary paperwork to make the transaction a matter of public record.
8. Articles of Merger or Acquisition
The paperwork that must be filed is called Articles of Merger or Articles of Acquisition. This dissolves the appropriate legal entities, creates the appropriate new legal entities, and finalizes the transaction in the eyes of the state government which oversees the formation, merging, acquisition, and termination of legal business entities, including churches and non-profits. The Articles will include the plan your churches put together in step 5 and statements of voting procedures and outcomes obtained in step 6. Once filed, the process is complete and two distinct legal entities have become one.
At first glance, this seems like a burdensome process. In some cases, you'll blow through 2-3 of these steps in one meeting. In other cases where two larger churches merge, it may take more time. However, these are steps necessary to ensure that both sides are fully informed of what they are getting into administratively and financially. It provides a clear process for both churches to obtain the approvals and buy in necessary to ensure that the merger or acquisition is successful. It provides time for prayer and consideration of the Spirit's guidance. With the assistance of an attorney, it provides the certainty that the transaction meets all of the law's requirements, and that God's church comes out of the deal stable and secure.
If Church General Counsel can be of any assistance as your church goes through this process, please contact us!
Church General Counsel Managing Attorney Josh Bryant, J.D., M.Div., authors most of the posts in this section. From time to time, he will post articles from others in the field of church growth, administration, and operations.