Commentary on Provisions Charity mergers Section 13 – Recording of charity mergers and treatment of legacies
78.Historically, where a charity wound up, this could result in legacies to that charity failing. Sometimes, a professionally prepared will provides that if a charity winds up in favour of another charity before the testator’s death, the legacy is to go to the successor charity instead. However, not all wills include such provision (and sometimes the drafter of the will fails to do so unknowingly rather than intentionally). Where no such provision was included, legacies could sometimes end up being distributed in accordance with the laws of intestacy despite the testator having left a will. As a result, when one charity merges with another, a “shell” charity was previously often kept in existence to receive and pass on any legacies which might otherwise have been lost.
79.This section of the Act inserts a new Chapter 7A into the 2005 Act which will negate the need for such shell charities to be kept in existence following a merger.
80.New section 64A sets out various definitions which apply for the purpose of the chapter. The term “merger” covers an amalgamation where two or more charities wind up in favour of a newly established charity as well as situations which might more typically be thought of as a “takeover” whereby one charity is subsumed into another existing charity. The term will also cover things which fit within this criteria but which might not typically be thought of as a merger – most notably changes in legal form where a charity winds up in favour of a new entity it has set up in order to benefit from a different legal form but where, to the outside world, the charity might continue its activities with no discernible change.
81.New section 64B allows OSCR to be given notification of any merger. This notice may be given by the transferee charity (i.e. the charity which receives the transfer of assets) at any time after the merger is complete (i.e. the transfer of all the property, rights and liabilities is complete). In the case of heritable property, this will usually mean once it is transferred in accordance with sections 37(2) and 50(2) of the Land Registration etc. (Scotland) Act 2012. Although there are already notification requirements which can apply to mergers under section 17 of the 2005 Act, this notification provision is separate. The Scottish Ministers may by regulations (subject to the negative procedure) make provision to clarify when notice will be treated as having been given.
82.New section 64C then requires OSCR to keep a record of all charity mergers which are so notified to it. The record must contain a separate entry for each charity merger. That entry must contain the date notice of the merger was given to OSCR (as section 64D only applies if the merger has been notified). It is also to contain any other information OSCR considers appropriate. OSCR is given the same information-gathering powers in relation to the record of mergers as it has in relation to the Register. It is the giving of notice by the transferee to OSCR, and not the recording of the merger in the record, that triggers the rules in section 64D. However, the record of charity mergers will provide a reference point for executors as to what mergers have completed and been properly notified to OSCR. Entries in the record will also set out the date notice of the merger was given. There is a possibility of a small time lag between the date the merger was notified and the date that it is recorded on the record. However, this is unlikely to cause any issues in practice since executors do not distribute the estate immediately after the testator’s death. Therefore, if executors check the record at the point at which they start to pay out legacies, the record should accurately reflect the mergers which have been completed and properly notified.
83.New section 64D provides for the effect of a merger being notified to OSCR in accordance with section 64B. The rules apply where a person has left a legacy to a charity but that charity has been involved in a charity merger and the charity either (i) acquires a vested right in the legacy after the merger is complete (i.e. the transfer of all the property, rights and liabilities is complete) but before it has formally wound up or dissolved in connection with that merger or (ii) the charity does not acquire a vested right to the legacy (by reason only of it having wound up or dissolved as part of the merger). In such cases, as long as the merger was notified to OSCR in accordance with section 64B and that notification happens before the date on which the charity acquires the legacy (or would but for it winding up or dissolving, have acquired a vested right in the legacy), the legacy is to be treated as having vested in the charity which benefited from or resulted from the merger (i.e. the transferee) under section 64D(2) – unless the will made clear that the testator did not intend for that to happen.
84.The date on which a legacy vests in a charity will normally be the date of the testator’s death (although it is possible, for example, that vesting might be postponed by a condition in the testator’s will).
85.For the purpose of assessing what the testator did or did not intend, section 64D(3) sets out some rules that are to be applied (although there may also be other means by which the intention is made clear in the will). A general statement that a legacy is given “to Charity A, which failing to Charity B” will not be enough to oust the rule about the charity merger (as that provision may have been written with a view to ensuring that if Charity A expended all its assets and wound up, the legacy did not fail). However, it will be possible to oust the default statutory rule and the clearest route for doing so will be to specify that the legacy is not to be paid to a transferee in the event of a charity merger.
86.These rules about a legacy transferring on a charity merger apply equally where the original legacy is to a share of something (for example, a percentage of the residue of the testator’s estate).
87.Where there is more than one merger (for example, A and B merge to become C, but there is then later a merger of C with D to become E), new section 64D also provides that the rule applies to further mergers too. As such, a legacy that has vested (or would have vested) in Charity A would be treated as having vested in Charity E.
88.New section 64E provides for a right of public access to the record of charity mergers. This is made available on broadly the same basis as the Register is made available under section 21 of the 2005 Act.
89.This section of the Act also provides that for the purpose of this change in the law, it does not matter if the will which gave rise to the legacy pre-dates the date of the change. It is possible that further transitional provision could be made by regulations in conjunction with the commencement of this section.