When Two Become One: Legal Considerations of a Church Merger

Article
06.20.2017

A merger between churches is like a marriage between people. Two independent entities come together under a unifying covenant and witnesses. Though the union is ultimately spiritual, there are still legal issues that have to be settled before the two become one in the eyes of the state. This article outlines the legal considerations of a church merger. It’s not a recipe for the success of the marriage, but a roadmap for blending families. It’s not very romantic, but it’s necessary.

First comes love, then comes contracts, then comes marriage.

MEMORANDUM OF UNDERSTANDING

Once the preliminary discussions about the intent to merge have happened, the paperwork begins. The first document you need to draft is the Memorandum of Understanding. This is your “just so we’re clear on everything” document. It will guide you though the whole merger process and protect both parties from misunderstandings that can take you off course and compromise your reputation. Think of it as the somewhat awkward DTR (define the relationship) conversation you have after a couple dates. This document does not require a lawyer, but should include the following sections.

1. A few paragraphs outlining the history of how both churches arrived at this point. It helps to give an honest description of the factors that led to the decision. In the early years, it’s common for the stronger church to be accused of a hostile takeover. The best answer is to produce the record of why merging was considered a good thing for everyone involved.

2. A statement of purpose follows, detailing how the process and details of the merger would be adopted by each congregation. Since the bylaws and practices usually differ, it’s essential to clarify how each church will execute the terms of the agreement should the merger be completed.

3. An overview of the process should be included to clarify each step along the way. This includes where the new church will be physically located, what staff changes will occur, what votes and thresholds will be required, and how the transfer of church membership, property, assets, and liabilities will take place. It’s helpful to propose a timeline beginning with the approval of the memorandum of understanding, and concluding with the first joint service as a merged body.

4. The specific entity is described next, namely which corporation will remain, which will dissolve, and what will happen to the assets of the dissolving entity. It’s also important to make sure the officers of the surviving corporation are made up of people the new church approves. Contact the secretary of state for the legal (and fictitious) name(s) of both corporations. These change sometimes and don’t always reflect the name on the sign out front. Often, an amendment to the articles of incorporation has been filed with the secretary of state, and the name is legally changed. Identify the officers of each corporation, usually a President/CEO, Secretary, and Treasurer. State law dictates how this is registered and recorded, but if officers are no longer at the church, it’s imperative to sort this out prior to the merger.

5. The next section contains the proposed personnel structure, including the names and positions of all staff members who will be serving the new church. This will usually include at least the following positions: Senior Pastor, Associate Pastor(s), and Bookkeeper/Office Personnel.

6. Governance is also an important consideration, so this section should be clear. In short, it should describe the polity of the new church. Upon completion of the merger, the Constitution and Bylaws of the surviving entity will be in force. If the leadership of the surviving entity will not be retained in full, or augmented with others, then this needs to be spelled out in detail. There needs to be a clear explanation of who will comprise the new governing body, and when this will take effect.

7. Accounting considerations are mentioned next. It should be clear that the new church will own all assets and liabilities. Furthermore, the paragraph should contain information regarding the fiscal year, the need for an annual review or audit of the financials, and a commitment to maintaining Generally Accepted Accounting Principles (GAAP). Finally, the document should outline an allocation of costs associated with the merger. These will likely be shared by the churches and involve the cost of consulting, legal, and accounting services. There will also be an assortment of filing fees and banking expenses.

8. Ministries in both churches will be affected by the merge. A paragraph about which ones will continue, be added, or be removed is essential. Missionaries or other non-profits currently being supported by either church need to be given notice if their funding will change, and it should be clearly spelled out who will be included in the new church budget.

9. One last consideration is dissolution. Certainly no one plans on the merger failing, but that doesn’t mean it’s risk-free. With all the prayer, meetings, effort, and money involved, proper stewardship demands a clear strategy if the endeavor collapses. This includes what will happen regarding employee severance, real property, and assets. It should also stipulate what conditions would be placed on the sale of the property.

AGREEMENT OF MERGER

Once the Memorandum of Understanding has been signed by the governing body of each church, an Agreement of Merger can be drafted for the whole congregation to approve. It’s important to remember that if you’re a church, you’re a corporation. In the eyes of the state, a church is simply a non-profit corporation with all the benefits and obligation that come with that.

The Agreement of Merger is what will be approved or rejected by the church. Except in rare cases, most corporate bylaws related to churches require some kind of congregational vote to approve a merger, accusation, or dissolution of the corporation. So this document is what the two churches will use as the terms and conditions of their new relationship. It’s like a prenuptial agreement intended to protect each other in the unlikely event of a breakup.

This legal document is usually drafted by a lawyer and based off the memorandum of understanding. It’s the legal document that will be filed with the Secretary of State in compliance with individual state law, along with the document mentioned below.

CERTIFICATE OF APPROVAL OF AGREEMENT OF MERGER

Assuming the measure passes, attached to theAgreement of Merger will be a Certificate of Approval of Agreement of Merger for each church. This is a one-page document, signed by the officers of the corporation, that certifies each congregation voted in favor of the merger. It explains that on a certain date the Agreement of Merger was finalized, approved by the governing board, and then approved by the congregation in keeping with the Constitution and bylaws of each church. It should show that there is only one class of voting member, and the total number of eligible members. It should also mention that the Attorney General is not required to consent to the merger if that’s the case in your state.

CERTIFICATE OF CORPORATE VOTE

When the time comes for each church’s membership to vote on the merger, a special meeting should be called in which a ballot containing all the general conditions of the merger is presented for a vote. After it’s been completed, a Certificate of Corporate Vote is produced. This document, to be completed within 90 days of the vote, certifies that the vote took place at a certain place and time, a quorum of members was present, and the measure was approved by a margin in keeping with the bylaws of the church. It is signed and dated by the Secretary/Clerk of the corporation. It ultimately functions as a record for the church so it’s not submitted to the Secretary of State.

HOW LONG WILL IT TAKE?

The steps outlined here don’t need to take a long time to execute. In the merger I was a part of, both elder boards approved the memorandum of understanding, an agreement of merger was drafted by an attorney, both congregations voted on the merge, paperwork was certified by the Secretary of State, staff transitions occurred, a new elder board was established, and the first joint service was held—all within six weeks.

That may sound like a shotgun wedding, but it isn’t. When all the particulars of the merger are out in the open and on paper, the interested parties can arrive at a conclusion with relative ease. It will also provide answers to opponents who may surface in the weeks or years following the merger.