Key Legal Considerations in Nonprofit Spinout Transactions

Michael Santos, Daniel Irvin, and Stefan Rajiyah wrote the article “Key Considerations in Nonprofit Spinout Transactions” that was published in Harvard Law School Forum on Corporate Governance.

The article focuses on key legal issues and considerations for transactions where a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code sells a material portion of its assets.

The authors note in the article that there has been an increase in interest in non-profit spinout transactions and many reasons why a nonprofit might seek a spinout.

Some reasons cited include:

• The business needs a significant capital infusion that cannot be provided by concessionary capital markets.
• A line of business has become disconnected from the primary charitable purpose of the nonprofit or has become extremely profitable, generating concerns about unrelated business taxable income (“UBTI”) which can jeopardize a nonprofit’s tax exemption.
• The nonprofit operates in an industry and labor market where its inability to offer equity compensation to employees places it at a competitive disadvantage as compared to its for-profit competitors.
• The nonprofit’s leadership wishes to move the nonprofit in a new strategic direction, and needs to raise capital in order to do so.

Read the full article.