This brief guide concentrates on the main legal issues involved in collaborating with other organisations and refers you to guidance from others on other practical matters.
If you are considering collaborative working, here are the things you need to think about:
Why should we collaborate?
Aside from the potential financial savings a collaboration may give you through, for example sharing resources and overhead costs, collaborative working can increase expertise, skills and knowledge across organisations, bring better, more joined up services for beneficiaries, and increase the funding opportunities available. It can also be a first step to a successful merger.
What can collaboration look like?
Various collaboration options are available including informal arrangements, which may or may not be documented, to joint ventures established by contract by setting up a special purpose vehicle (such as a limited company, community interest company or limited liability partnership), to full mergers. Mergers are covered in a separate guide here.
What is the appropriate structure?
This depends on a number of factors including:
- What is the purpose of the collaboration? Is it long term? Are there obligations to a funder to deliver a project together?
- What is the size and complexity of the venture? In particular, what are the risks?
- Who is involved? If it is a mixture of charities and non-charities, the charity members must ensure that any private benefit to non-charity parties is incidental to the public benefit provided by the project.
- What are the tax considerations? Cross charges between collaborators must be considered and factored into the structure.
Taking the above factors in to account:
- Informal joint working is often used when simply sharing knowledge or expertise and is often a stepping stone to a more formal relationship. It may be documented under a memorandum of understanding or similarly named document, often with the intention that the document does not create contractual obligations. You should note, however, that the existence of a contract is dependent on the facts of the situation and not on the name of the document; MOUs frequently contain contractual obligations.
- Contract based collaboration is appropriate for projects which involve risk (such as obligations under funding agreements, liabilities to staff, liabilities to other contracting parties, high-risk activities). This could be a multi-party collaboration, where all parties have an equal contribution to the project, or a lead party collaboration, where one organisation is the lead body, perhaps to an external funder, with other parties sub-contracted to deliver certain elements of the project.
- Joint venture vehicles are an alternative to simple contract based collaborations. A joint venture has some advantages over a simple contractual arrangement, ring fencing the risk in a separate legal entity, which can own the brand, employ the staff, enter into contracts and formalise involvement of the parties. However, the new entity will have no track record and will need start-up financing and ongoing administration and regulation as well as recruiting and maintaining a board. It will usually also need an agreement (it may be called a shareholders’ agreement, a members’ agreement or a collaboration agreement, for example) to cover each party’s obligations and contributions (including any services or staff they must provide to the joint venture entity).
What should we consider at the outset?
A successful collaboration requires preparation, planning and ongoing effort. This should include considering how the collaboration fits within your organisation’s purposes and how compatible the other organisation’s objects are with yours. You should also consider the risks involved, the potential cost and resource implications, each party’s roles and responsibilities and contributions (financial and other resources) at the outset and during the collaboration. These will help determine what the agreement between the parties should include and, prior to entering into any agreement, what due diligence you carry out.
You should also consider whether the activity carries with it any particular regulatory compliance issues, such as care services compliance, financial services compliance and the like.
It is important to address any tax and VAT liabilities that might arise as a result of services between the collaborating organisations and / or goods or services supplied to others.
What checks should we be doing on potential collaboration parties?
Where there is potential financial, contractual or reputational risk you should carry out due diligence on the other organisation or organisations. As well as assessing their financial position and solvency (current and longer-term), also consider their governance record (board and management), experience of delivering similar services and reputation in the relevant field. The extent of the due diligence you carry out and the detail of any agreement you enter into will depend on the risks involved and how satisfied you are with the due diligence responses you receive.
What should we include in a collaboration agreement?
This is a key document underpinning the relationship between the parties. Some important provisions it should include are:
- A specification/project plan with a clear and measurable set of deliverables setting out who will do what, with appropriate deadlines
- Compliance with the terms of any funding agreement or ‘head agreement’
- Non-disclosure provisions to ensure that any information disclosed during negotiations will be kept confidential by the other parties, whether or not the collaboration goes ahead
- Intellectual property provisions setting out how intellectual property developed under the agreement is owned and used by the parties
- Data privacy provisions setting out how any personal data will be collected, by whom and for what purposes; how that data will be shared between the parties and each party’s data privacy compliance obligations
- Joint-working mechanisms detailing the composition and powers of any steering committee or project group and the frequency and structure of meetings and decision making between the parties
- Staff provisions setting out who employs and who supervises/disciplines any employees
- Liability and indemnities provisions determining how liability is shared between the parties (particularly important in these uncertain times)
- Exclusivity provisions setting the extent (if at all) that other parties can work with other organisations on similar/competing projects
- Termination provisions dealing with how the collaboration can be brought to an end, when, by whom and for what reasons
- Exit strategy dealing with any conditions attached to parties when leaving the collaboration
- Consequences of termination setting out what happens to assets (such as property and intellectual property, data and staff) after termination
What are the steps we should take for successful collaboration?
After initial exploratory discussions, you might want to put a confidentiality agreement in place before moving to negotiating some heads of terms (which could be based on the list of provisions above). Alongside these negotiations the due diligence process can be carried out, following which the parties can move towards negotiating and agreeing the final documentation and then delivering the project.
Can we transfer some of our activities to another organisation?
For some organisations, a partial transfer of some services might be an option. Organisations are acknowledging that programmes can be saved and their beneficiaries therefore continue to be served if they are able to transfer activities which are loss-making to them to another charity that may be able to make them profitable. For example, a care home provider might find another similar provider with other homes in the region which can absorb the homes into its portfolio.
Can we share services with another charity or outsource to a third party?
Organisations are increasingly looking to share certain services with other organisations as a way to reduce costs, such as back-office services like finance, IT and payroll services. This could be by way of one organisation providing services to others, a number of organisations forming a shared service company or outsourcing to a third party provider. Any such arrangement should of course be underpinned with an appropriate agreement, including a sufficiently detailed service specification. There may be redundancy considerations and the Transfer of Undertakings (Protection of Employment) Regulations 2006 will need to be complied with.
Should we review any existing collaborations?
With an increasing number of organisations facing financial difficulties as a result of the Covid-19 pandemic, if you are already in existing collaborations now would be a good time to review those arrangements to check they cover situations where a collaboration organisation can no longer perform their part and/or goes insolvent (such as the exit provisions and consequences of termination) and consider carrying out due diligence on other parties.
You can find further guidance on collaborating in the Charity Commission publications Collaboration and Mergers. NCVO has guidance on collaboration here. The Institute for Voluntary Action Research (IVAR) has a section of its website devoted to mergers and collaborations, which has been updated in light of the COVID-19 pandemic, here, and a new edition of its downloadable guide Thinking about…merger, during Covid-19 which includes a section on collaboration.
If you would like to explore collaborative working further or find out how we can help, please get in touch with your usual Bates Wells advisor.
This note has focused on collaborative working only. If you are considering merging with other organisations see our brief guide to mergers.