Q&A for Elizabeth Lathlean Counsel, Gilbert + Tobin | Chambers Asia-Pacific 2025 “Associate to Watch” for Charities
Mergers and restructures are becoming more common in the NFP and charity sector. From your experience, what are the most frequent legal or governance “red flags” that arise during due diligence?
Mergers in the NFP and charity sector are not unlike for-profit mergers, with the scope of legal due diligence typically covering a broad range of areas. Before even commencing due diligence, it is important for legal advisers to understand matters such as the client’s motivations and key drivers for the merger, the nature and proposed structure of the merger, and any key focus areas (including known risks).
In addition to typical due diligence matters (such as material contracts, employment and contractor arrangements, intellectual property, data and privacy, etc), NFP and charity mergers bring unique considerations. These include:
- compliance with charity registration with the Australian Charities and Not-for-profits Commission (ACNC) and associated Commonwealth charity tax concessions, both in terms of historical compliance and any risks posed to such registrations by the merger (particularly where there is no clear alignment in registrations and associated tax concessions); and
- governance compatibility and alignment, including when the merger or acquisition involves different legal entity types with different requirements regarding minimum numbers of members and officeholders (e.g., an incorporated association to be acquired as a wholly owned subsidiary of a company limited by guarantee).
It is also essential to ensure any legal due diligence is aligned with and informed by financial due diligence outcomes. With significant changes in the regulatory landscape and varied funding models, it is increasingly common to have charity and NFP mergers prompted by cash flow issues or longer-term financial concerns. Care should be taken when planning mergers and acquisitions for charities with cash flow concerns, and specialist insolvency advice sought in order to mitigate insolvency risks for the charity and its directors.
Overall, legal advisers should ensure clients appreciate the importance of the due diligence process. There can be a tendency for charities to believe that alignment in purpose and values, and an overall commitment to serving the sector, reduces the need for comprehensive due diligence. However, this increased appetite to take on risk (both known and unknown) has the potential to disregard the charity’s own purpose and beneficiaries, and may mean directors are unable to properly discharge their duties.
When advising boards considering a merger or acquisition, what are the key steps to ensure the transaction aligns with the charity’s purpose and complies with ACNC and ATO requirements?
Alignment with ACNC charity registration and associated tax concessions must remain a priority throughout the merger or acquisition process. This should be reflected in due diligence, transaction documentation, and directors’ meeting minutes. Organisations should ensure there are key decision points at which the directors are able to consider purpose alignment and compliance with the relevant legal requirements, and determine whether or not to proceed or withdraw from the process.
In situations where a charity is acquiring a for-profit, further considerations arise regarding the prospects of successfully turning the target entity into an ACNC-registered charity structure, as well as the risks and financial impacts if this is unsuccessful.
Many NFPs are resource-constrained. What practical strategies have you seen work well to manage the legal complexity of restructures or mergers without overwhelming internal teams?
Resource-constrained charities and NFPs can employ various strategies to manage the complexity of mergers and acquisitions. However, this should not come at the cost of skipping over key steps or otherwise taking shortcuts that mean the board is not sufficiently informed to make clear decisions in the discharge of their duties, and there is not sufficient information to identify and manage risk. Ensuring alignment of expectations and outcomes between the parties, whether through negotiation of a term sheet, memorandum of understanding, or otherwise, is an important exercise that can ultimately reduce time and expense over the course of the transaction.
The practical strategies that can be taken to manage complexity and resource limitations will vary depending on the nature and structure of the transaction, as well as the specific organisations involved. However, these may include clearly scoping due diligence and determining whether any aspects can be managed internally. In some situations, efficiencies can also be achieved through structuring the acquisition in phases. For example, where one charity is seeking to acquire another but has no long-term need or desire to retain an additional entity within its structure, a phased approach to the acquisition can be utilised to reduce pressure on internal teams. That is, as a preliminary step, the target entity may be installed as a wholly owned subsidiary of the acquirer. This can facilitate the achievement of preliminary merger objectives through implementation of a group structure without immediately undertaking the significant legal and administrative work required to transfer all assets, contracts, and operations into a single entity. At a later point, or over time, the asset transfer can occur, with the subsidiary entity ultimately wound up. While the more relaxed timing of such an approach may be appealing, advice should be sought to carefully consider the consequences of the desired timeline, including in relation to tax implications and regulatory considerations.
In 2025, regulatory expectations around governance and reporting are higher than ever. How should lawyers advise boards to “future-proof” their structures to remain compliant and adaptable?
- Organisational future proofing, especially post-merger, is not a one-size-fits-all all. Organisations should take steps to:
- Schedule periodic reviews of governance documents and policies to ensure they reflect current best practice and regulatory requirements.
- Invest in ongoing board training on governance, risk management, and regulatory changes;
- ensure that purpose alignment is a core consideration in all decision-making and is reflected in governance policies;
- Adopt and implement robust reporting systems that facilitate transparent, timely, and accurate reporting to regulators and stakeholders; and
- Build and maintain strong relationships with advisers and awareness of changing legal and regulatory requirements.
Based on recent trends, what do you see as the biggest compliance or structural reform risk for NFPs over the next 12–18 months, and how can organisations proactively address it?
While there are various compliance and structural reforms in train or anticipated, one key one in the context of charity and NFP mergers is the introduction of a new, mandatory merger notification regime under the Treasury Laws Amendment (Mergers and Acquisitions Reform) Act 2024 (Cth). This reform, which becomes compulsory from January 2026, means that NFPs planning to merge, acquire another organisation, or take on significant assets (including contracts, leases, or intellectual property) may need to notify the ACCC and get approval before completing the transaction. The rules are designed to ensure mergers do not reduce competition or limit choices for the public, and they apply even to mission-driven organisations like charities and NFPs.
This new system is a significant shift from the past, where smaller NFPs and charities were rarely caught by competition law unless they were involved in very large or commercial transactions. Now, the thresholds for notification are broader, and the definition of what counts as an “acquisition” is much wider. The process will require more detailed paperwork, careful planning, and could involve substantial filing fees. The ACCC will also look at the cumulative effect of multiple deals over the past three years, so even smaller or staggered transactions could be captured.
To address this risk, NFPs should start reviewing any planned or recent deals, seek advice early, and make sure their boards and management teams understand the new requirements. Early engagement with the ACCC and updating internal processes will help organisations avoid delays, unexpected costs, and ensure they remain compliant as these new rules come into effect.
If you would like to hear more from Elizabeth, she will be speaking at our upcoming Not-For-Profits and Charities: Compliance, Governance and Structural Reform in 2025 Seminar.
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