In recent years we have seen a number of mergers in the not-for-profit sector; particularly in the disability services area as organisations better align their strategy with NDIS funding implications in mind.
Usually, a merger will involve one party (the transferring entity) transferring its assets and liabilities to the other entity with which it is merging. Thereafter the transferring entity would normally wind up once outstanding liabilities had been dealt with.
The ultimate winding up or cancellation of the transferring entity can have implications down the track in the situation where someone dies leaving a bequest to the transferring entity. Careful planning and drafting of documentation is required to mitigate this risk.
A recent decision of the Queensland Supreme Court had to deal with the situation where a bequest had been left to a charity, structured as an incorporated association under the Associations Incorporation Act, that existed at the date of death, but which subsequently had its registration cancelled by the Office of Fair Trading before the bequest could take effect. The issue was whether the successor organisation was entitled to the bequest.
Mr Graham died on 21 June 2016 and, in his will, left a legacy to the Stroke Association of Queensland Inc (Stroke Association).
The Stroke Association was in existence at the time the will was made and also at Mr Graham’s death. Its registration was subsequently cancelled later that year on 23 September 2016.
Prior to the Stroke Association’s cancellation, it had come to an arrangement with Synapse Australia Ltd that certain of its assets should be transferred to Synapse Australia. Minutes and some correspondence of the Stroke Association indicated that it was intending to merge with Synapse Australia.
The issue for the Court was whether Synapse Australia was the successor of the Stroke Association. If it was not, then the gift would need to be applied cy prés i.e. to another charity whose purposes were substantially the same as those of the Stroke Association. If, however, Synapse Australia was in fact the successor to the Stroke Association, then the bequest would be payable to it. This brought into play other potential beneficiaries of the legacy.
Two other charities, the Stroke Recovery Trial Fund and the National Stroke Foundation, joined in the proceedings proposing themselves as appropriate objects if the Court decided to apply the bequest cy prés.
The Court found that the Stroke Association had had a prior association with Synapse Australia. They shared premises and other services; particularly after Stroke Association lost State government funding in 2013 in favour of the stroke-related charity that had joined the proceedings, National Stroke Foundation.
Because of funding difficulties, a general meeting of the Stroke Association was held to resolve that assets and liabilities of the Stroke Association be transferred to Synapse Australia. At the general meeting, the Stroke Association resolved to wind up.
However, the Stroke Association was not actually wound up but rather, after assets were transferred to Synapse Australia, its registration was cancelled.
The relevant deed of gift that was prepared to give effect to the special resolution of members of Stroke Association did not transfer all the assets and liabilities of the Stroke Association but rather, transferred specific assets and liabilities that were identified by way of schedule to the deed of gift.
The Court made the point that if the Stroke Association had ceased to exist after Mr Graham’s death because there was no successor to it, then the legacy could not be paid to Synapse Australia but rather would have to be dealt with cy pres. On the other hand, if Stroke Association had not ceased to exist (because its activities had effectively been taken over by Synapse Australia), then cy prés was not required.
After posing the legal question, the Court said that on the evidence provided it was not satisfied that the Stroke Association continued to exist in the form of Synapse Australia. This was notwithstanding that there had been minutes and other internal documents of Stroke Association and Synapse Australia making mention of merger between the 2 organisations. The Court said that Stroke Association had ceased to exist from the date of cancellation of its incorporation in September 2016. Importantly and critical to the decision, the Court said that the deed of gift did not involve the transfer of the entire undertaking or work of Stroke Association but only particular identified assets and this was inconsistent with the concept of continuation/succession in favour of Synapse Australia.
The Court said that this was not a case of a charitable institution, namely Stroke Association, continuing to conduct its charitable work continuously with change only being made to its legal form. Synapse Australia was not the successor of Stroke Association.
The effect of this was that Mr Graham’s gift had to be applied cy prés and could not go directly to Synapse Australia. The Court said that it would hear further argument on who was entitled to the benefit of the gift. That part of the case has still to be determined.
Lessons for mergers
Some of the lessons from this case are:
- The wording of merger resolutions that are put to a general meeting of members of a transferring charity must be carefully drafted to make it clear that the transferring entity is transferring all its assets, undertaking and liabilities if the entities concerned want to ensure that the merged entity is seen as the successor.
- If an incorporated association which is charitable is going to cease operations, then consideration should be given as to how it effects that intention. Where there is a possibility of bequests being made to it in the future, then clarity around a successor charitable institution should be considered e.g. website statements as well as the terms of the merger documents.
- Getting bequest in wills right is very important. Even if a beneficiary ceases to exist before death, a gift to a charity will still be upheld if a general charitable intent is evident in the terms of the bequest.
 Re Graham (Deceased) 2020 QSC 27